On 12 February 2015 the Insurance Act 2015 received Royal Assent and was therefore officially law.
The following summary is for ‘guidance’of what you need to know and what you should consider doing next.
Current commercial insurance law is founded on the Marine insurance Act 1906, a statute comprised of eighteenth and nineteenth century case law. The rules in this statute have been described as “out-of-touch” with modern practice and have been long overdue for a review and over-haul, thus creating the Insurance Act 2015.
So it became ‘law’ on the 12th February 2015 and seeks to amend the rules to reflect modern business practice. In particular it addresses the imbalance in rights and remedies, currently in favour of insurers. It will govern the placement of all commercial insurance in the UK, and will apply to policies incepted or renewed from 12 August 2016.
Despite this 18-month lag time, industry has encouraged both brokers and the industry as a whole to prepare for and implement the reforms as soon as possible.
Implications for policyholders/clients:
Below we have summarised the key changes in the law covering disclosure, warranties and fraudulent claims.
Disclosure: “Duty of Fair Presentation of Risk”
The Act amends the existing duty on the insured to disclose any fact material to the risk.
Considerations for policyholders:
- The duty applies to both pre-inception disclosure and where changes in risk are relevant to a proposed variation in the insurance contract;
- The insured must disclose every material circumstance they know or ought to know including:
- what is known by senior management of the insured;
- what is known by those persons responsible for organising the insurance for the organisation;
- what ought to be known in the ordinary course of business;
- what can be revealed by a reasonable search of information available to the insured.
- Where material information is not known by the insured, sufficient information for a prudent insurer to know to make further enquiries must be provided;
- Information must be presented in a reasonably clear and accessible manner, to include a relevant structuring of information;
- The insured has a duty to not make misrepresentations;
- A range of proportionate remedies are available to the insurer in the event of a breach of disclosure:
- Deliberate or reckless breach:The insurer can avoid the contract, refuse all claims and retain the premium;
- Careless breach (not deliberate or reckless):If the insurer would not have entered into the contract, the insurer may avoid the contract, refuse all claims and return the premiums paid. If the insurer would have entered into the contract, but on different terms, the contract is to be treated as if on those terms from the outset. If the insurer would have entered into the contract at a higher premium, the insurer may proportionately reduce the amount to be paid on a claim.
Warranties: “Suspensive conditions”
The Act amends the existing rules where even minor breaches of warranties can provide insurers with a defence to a claim.
Considerations for Policyholders/Clients:
- Warranties will become “suspensive conditions” meaning insurers will only be able to avoid liability if the insured was in breach of the warranty at the time of loss;
- Once the breach is remedied (including where an insured takes an action later than a time limit stated in a warranty), liability will be restored;
- Basis of contract clauses will be abolished. Therefore, any warranties in the policy must be expressly agreed as a warranty between the insured and the insurer;
- In the event of a claim, an insurer cannot avoid liability based on the breach of any warranty or term where the breach could not have increased the risk of the loss. However, this does not apply to terms which define the risk as a whole.
The Act provides clarity over the remedies for insurers in the event of a fraudulent claim by the insured.
Considerations for members:
- Where the insured has committed a fraud in relation to a claim:
- the insurer will have no liability to pay the claim;
- the insurer can recover any payments already made in relation to the fraudulent claim;
- the insurer can terminate the contract from the time of fraud, and refuse to pay claims for losses occurring after the fraud;
- the insurer does remain liable for all claims for losses suffered before the fraud;
- the insurer can retain premiums already paid.
- In group policies the above applies, but only with regards to the fraudulent claimant, therefore innocent members of the group policy are not prejudiced.
Next steps for clients
There has been an 18-month implementation period so the law will not come into force until 12 August 2016. However, this means there is just one renewal cycle left before the Act becomes the default regime for placement of commercial contracts in the UK. Clients must therefore start preparing now to ensure they are ready for the implementation date.