UK: The Insurance Act 2015

The Insurance Act 2015 received Royal Assent on 12 February 2015 and will come into force in August 2016. It applies to business insurance and, together with the consumer insurance reforms that came into effect in 2013, represents the greatest change to English insurance contract law in over 100 years.

We set out below some of the key changes to impact on the property and liability market.

Utmost good faith/non-disclosure

Under the Act, the insured will remain subject to a duty to volunteer information however, the scope of that duty will be limited to what is necessary to make a "fair" presentation to insurers.

When making disclosure, the insured must carry out a reasonable search for information. What is reasonable will be a question of fact in each case and will take into account factors such as the size, nature and complexity of the business. It is in the insured's interests to carry out a thorough search because it will, regardless of its actual knowledge, be deemed to know what "should reasonably have been revealed by a reasonable search" (section 4(6) of the Act).

When making disclosure, the insured must disclose information in "a manner which would be reasonably clear and accessible to a prudent underwriter" (section 3(3)(b) of the Act).

An insured is not, however, obliged to disclose information an insurer knows, ought to know or is presumed to know (section 3(5)b to d of the Act).

Remedies

Where an insured has made a deliberate or reckless misrepresentation or non-disclosure, insurers may avoid the policy and keep the premium. In all other cases (i.e. innocent misrepresentation and/or non-disclosure), a system of proportionate remedies will apply as follows (schedule 1 of the Act):

  • Where the insurer would have declined the risk altogether, the policy can be avoided, with a return of premium.
  • Where the insurer would have accepted the risk but included a contractual term, the contract should be treated as if it included that term (irrespective of whether the insured would have accepted that term).
  • Where the insurer would have charged a greater premium, the claim should be scaled down proportionately (for example, if the insurer would have charged double the premium, it need only pay half the claim).

Warranties and other policy terms

The Act seeks to move away from situations where what could be perceived by the insured as a "technical" breach deprives it of cover for a loss unconnected to the breach. To achieve this, the Act has introduced the following significant changes to the way that policy terms are classified and the effect of non-compliance.

  • Basis of the contract clauses will be prohibited and it will not be possible for business insurers to contract out of this particular change (section 9 of the Act).
  • All warranties* will become "suspensive conditions" (section 10 of the Act). This means that an insurer will not be liable for loss occurring during a period of non-compliance, but will be liable for loss occurring after the breach has been remedied (assuming this is possible).
  • Where there is non-compliance with a term (not just a warranty) designed to reduce the risk of a particular type of loss, or of loss at a particular time or in a particular place (section 11 of the Act) insurers will not be able to rely on that non-compliance as a defence if the insured can demonstrate that it could not potentially have increased the risk of the loss which actually occurred in the circumstances in which it occurred.

*NB: all other types of condition will continue to operate as before.

Fraudulent claims

Currently, an insurer is not liable to pay a fraudulent claim and can recover any sums already paid in respect of it. It is not clear whether an insurer can refuse to pay genuine claims for losses suffered after the fraudulent act but before discovery/termination of the policy.

Under the Act (section 12), an insurer will also have the option of terminating the contract from the date of the fraudulent act (not the discovery of it), without any return of premium.

Contracting out

An insurer is free to contract out of most provisions of the Act, subject to strict requirements of clarity and transparency. Wordings will require careful drafting to achieve this.

Going forwards

It is now, more than ever, crucial that underwriters and claims professionals understand that rationale behind policy terms and the nature of the risk(s) they are intended to address so that breach may be assessed and dealt with appropriately. In those cases where basis of contract clauses are relied upon, underwriters may wish to review their wordings with a view to reclassifying policy terms.

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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