The UK has historically been an insurer-friendly jurisdiction, with remedies available to insurers and potentially onerous duties on would-be policyholders which can lead to cover being unexpectedly lost. The default regime introduced by the Act is intended to redress, to some extent, that imbalance.
When advising a party purchasing insurance after 12 August 2016, a key point to note is that it is possible to contract out of many of the Act’s provisions. Whilst it remains to be seen how the industry reacts to the changes, it is possible that insurers will seek to include terms limiting the effect of the Act and/or reinstating some, or all, of the pro-insurer imbalance. Whilst the Act requires such contracting-out terms to be clear as to their effect and requires insurers to take sufficient steps to draw such terms to the attention of policyholders, it remains to be seen how this will work in practice. We anticipate that brokers will play a key role in explaining the impact of any such clauses.
The Act is mostly relevant to commercial (i.e. non consumer) insurance. Key features include the following:
- The new "duty of fair presentation". The Act sets out a new “duty of fair presentation” defining what is required of both parties during the pre-contract disclosure process. This re-casts the current disclosure duty often referred to as the “duty of utmost good faith”. As was the case before the Act came into force, a would-be policyholder must disclose every material circumstance which it knows or ought to know would influence the judgment of a prudent insurer in deciding whether to provide the insurance and on what terms. However, the Act provides helpful guidance on whose knowledge is relevant to satisfying the test (where the policyholder is a corporation this was not always clear pre Act). In addition, going forward it will be sufficient for the policyholder to disclose information which would put a prudent insurer on notice that further enquiries are needed. This encourages the insurer to take a more active role in the disclosure process. However, redressing the balance (a little) back in favour of insurers, the duty will not be satisfied by the policyholder ‘data dumping’ large amounts of unsorted information onto the insurer.
- Proportionate remedies. In arguably the most significant reform under the Act, avoidance will no longer be the sole remedy for breach of the disclosure duty and a focus on proportionate remedies is introduced. Where the insured breaches its duty of fair presentation deliberately or recklessly then the insurer will still be entitled to avoid the contract and retain any premium received. In other cases, however, the insurer will be entitled to a proportionate remedy based on what action it would have taken had the duty of fair presentation been complied with. For example, if the insurer would have accepted the risk but charged a higher premium, then it will remain liable under the policy, but it will be able to reduce the value of claims it pays accordingly.
- Breach of warranties. Before the Act came into force, warranties in insurance contracts provided powerful protections for insurers. Unlike commercial contracts generally, a breach of a warranty by a policyholder would discharge the insurer from all liability, regardless of whether the breach was trivial or irrelevant to any loss which actually occurred. This remained true even where a breach of warranty had been remedied in full before any insured event actually occurred. Under the Act, a breach of warranty no longer automatically discharges the insurer’s liability but instead suspends it, allowing the policyholder the opportunity to remedy the breach. Where loss occurs before the warranty breach is remedied, the insurer’s liability will still be discharged, subject to an additional protection where the policyholder can show that the breach “could not have increased the risk of the loss which actually occurred”.
- Prohibition of ‘basis of contract’ clauses. Pre Act, anything stated to form the “basis” of an insurance contract was automatically treated as having been warranted by the policyholder (whether or not an express warranty to that effect was actually set out). So, for example, where a policyholder had been asked to complete a pre-contract proposal form which was referenced in the policy terms as forming the “basis” of the policy, all statements in the form were automatically treated as warranted. So any inaccuracies – however irrelevant or immaterial – constituted breaches of warranty allowing the insurer potentially to avoid the cover. These clauses are effectively outlawed by the Act.
- Damages for late payment by the insurer. There is a provision in the Act which implies a term into insurance contracts that the insurer will pay all sums due within a reasonable time. Breach of this entitles the policyholder to a claim in damages.
If you have any queries please contact Andrew Barton.
For further information see:
- Insurance Act 2015: http://www.legislation.gov.uk/ukpga/2015/4/contents/enacted
- The Law Commission and The Scottish Law Commission Report: http://www.lawcom.gov.uk/wp-content/uploads/2015/03/lc353_insurance-contract-law.pdf
- The Law Commission and The Scottish Law Commission Report (Executive Summary): http://www.scotlawcom.gov.uk/files/3714/0603/4706/Insurance_Contract_Law_-_Executive_Summary.pdf