UK: Insurance Contract Law Reform – Are We On The Home Straight?

Last Updated: 1 August 2014
Article by Nigel Brook and Jon Turnbull

Following the conclusion of HM Treasury's consultation on the latest proposed bill drafted by the Law Commissions of England, Wales and Scotland, an amended bill has now been presented to Parliament.

The bill will be following the special Parliamentary procedure for uncontroversial Law Commission bills and it is therefore possible that it will now be passed before the end of the current parliamentary session (30 March 2015). If royal assent is obtained, the Insurance Act 2014 will apply to every insurance policy and reinsurance contract written in England and Wales, Scotland and Northern Ireland and (with certain exceptions set out below) will come into force 18 months after the date it is passed. This will allow time for policy wordings to be amended, where necessary. It should be noted that the bill may be amended further during its passage through Parliament.

We set out below the current form of the bill.

1) Clauses which have been omitted from the Insurance Bill

The following two substantial changes to the bill were made before it was presented to Parliament:

a) Damages for late payment.

The draft bill had provided for the payment of damages once insurers had had a reasonable amount of time to investigate a claim and could not show reasonable grounds for disputing a claim. Business insurers would not have been able to contract out of this reform where they were "deliberate or reckless" in delaying payment.

Following some criticisms of these provisions, the proposals for late payment damages have now been dropped in their entirety (and not just in relation to deliberate or reckless late payment).

b) Terms designed to reduce the risk of a particular loss.

The previous draft bill had also proposed that, where a term (eg a warranty or a condition precedent) was designed to reduce the risk of a particular type of loss, or the risk of loss at a particular time or in a particular place, a breach would entitle an insurer to refuse claims for losses falling within that category of risk. That proposal has also been omitted from the bill presented to Parliament. Accordingly, where, for example, an insured breaches a warranty to install a burglar alarm, the insurer will still be able to refuse cover (subject to the other incoming reforms on warranties - see further below) where loss is caused by a flood. This is a significant change of position.

Although HM Treasury decided to drop these two provisions, the Law Commissions have not given up: they say they will continue their efforts to find a "workable solution" regarding these two areas. As mentioned further below, work will continue into next year on further possible reforms.

2) A summary of the main clauses which remain in the bill

The following clauses are still currently included in the bill:

a) Warranties.

All "basis of the contract" clauses will be prohibited. A basis of the contract clause in a proposal form has the effect of converting all answers in the proposal form (no matter how trivial) into warranties. In addition, all warranties will become "suspensive conditions", allowing an insured to remedy a breach and thus come back "on cover" thereafter (and insurers will also still be liable for losses prior to the breach, as is currently the case).

b) Utmost good faith/non-disclosure.

These reforms will apply to business insurers only (consumer insurance having been dealt with in the 2012 Act). Insureds will still have a duty to volunteer information and will have to make a fair presentation to insurers (making disclosure in a manner which would be reasonably clear and accessible to a prudent insurer). The knowledge of an insured company will be what is known to its senior management or those responsible for the company's insurance. They will also be required to carry out a reasonable search for information within the entity, but an insurer will be presumed to know things which are common knowledge, or which an insurer offering insurance of the class in question to be insured in the field of activity in question would be expected to know in the ordinary course of business.

Previously, the bill provided that the knowledge of an insured would not include confidential information which it had acquired through a business relationship with a third party. That has now been amended to refer to confidential information acquired by the insured's agent (eg broker) or an employee of the agent through a business relationship with a third party.

The remedies for a misrepresentation or non-disclosure remain unchanged from the earlier draft bill. Broadly, avoidance (without a return of premium) will be available if the insured has been deliberate or reckless and in all other cases a scheme of proportionate remedies will apply (designed to reflect the situation as it would have been had full disclosure been made).

c) Good faith.

It is still proposed that the remedy of avoidance for the breach of the duty of utmost good faith will be abolished (the Law Commissions having previously pointed out that, where an insurer breaches its own duty of good faith, an insured would not want the policy avoided because that would prevent its claiming under the policy). The Law Commissions have instead indicated that insurers may be prevented from exercising a right if it has not been exercised in good faith (although it is perhaps difficult to see how a legitimate right could be exercised in a manner amounting to bad faith in all but the most extreme of circumstances. In any event, there is no provision to this effect included in the bill). Damages are not proposed as an alternative remedy (and so an argument that late payment by an insurer amounts to a breach of the duty of good faith, thus attracting damages for late payment via an alternative route, would not work).

d) Fraudulent claims.

It is proposed that insurers will now have an option of terminating the policy with effect from the date of a fraudulent act, without a return of premium (thus allowing insurers to refuse to pay any genuine claims thereafter, although they would still be liable for legitimate losses before the fraud).

3) Contracting out of these changes

There has been no change to the proposal that the Insurance Act will represent only a "default regime" for business insurers (although it will not be possible to contract out of the basis of the contract clause prohibition). Where insurers intend to opt out and include a "disadvantageous term", sufficient steps must be taken to draw that to the insured's attention before the contract is entered into. A boiler-plate opting out clause will therefore not suffice: each and every departure from the default position will have to be flagged up. Furthermore, an alternative remedy or position will have to be specified, otherwise there will be a void (and the courts are likely to imply back into the policy the position set out in the Act).

It is also worth noting that the changes to the duty of fair presentation and good faith apply to contracts or variations entered into after 18 months after the Act is passed. However, the changes to warranties and fraudulent claims will apply only to contracts entered into after 18 months after the Act is passed, or variations to those contracts (ie variations to contracts written before the end of the 18 month period will be governed by the previous law).

4) Third parties (Rights against Insurers) Act 2010

One surprising feature of the published bill is the inclusion of various minor provisions relating to this Act, which received royal assent on 25 March 2010, but which is still awaiting a further statutory instrument to bring it into force. A review of the main provisions of this Act is beyond the scope of this update, but the Act is, broadly, intended to make it easier for third party claimants to bring direct actions against insurers where an insured has become insolvent. The changes included in the Insurance Bill allow the Secretary of State for Justice greater scope to make further regulations and amend the definition of an "insured" (and, more specifically the type of insolvency event which the insured must undergo in order to trigger the application of the Act). Although no deadline to bring the 2010 Act into force is set out in the draft Insurance Act, it is worth noting that the powers being passed to the Secretary of State come into force two months after the bill receives royal assent. Accordingly, it might be anticipated that the aim is to bring the 2010 Act into force at some point during 2015.

5) Further reform?

In addition to continuing to work on a possible implementation of the two areas deleted from the bill (see above), the Law Commissions have indicated that they are aiming to produce a third and final report in 2015 on various issues which were not addressed in the bill but which have been the subject of review and proposals in earlier papers. These include the proposed abolition of the need for a formal marine policy (section 22 of the Marine Insurance Act 1906) and reform of section 53(1) of the 1906 Act, which makes a broker liable to pay premiums to the insurer and applies only to marine insurance policies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Nigel Brook
Jon Turnbull
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