The Insurance Act 2015 (the "Act") has come into force on 12 August 2016, marking the most significant reform of the UK insurance law. This Act applies to all insurance policies entered into on or after 12 August 2016, including renewals, and to variations to existing policies made on or after that date.
The past century has witnessed apparent injustice created by some rigorous rules in the outdated insurance law, and its incompatibility with the modern commercial practice. This article summarizes the major changes to the UK insurance law regime brought about by the Act that readers may find useful.
1. Duty of Fair Presentation
The Act replaces the duty of "utmost good faith" ("Uberrima fides") by the duty of "fair presentation" of the insured. This requires the insured to (i) disclose "every material circumstance" which the insured knows or ought to know, and (ii) provide the insurer with "sufficient information" to put a prudent insurer on notice that it needs to make further enquiries. The requirement of "ought to know" requires the insured to know what should reasonably have been revealed by a "reasonable search of information" available to the insured, including a search for information held within the insured's organization, by its agent or by person covered by the insurance policy.
This change justifies a more active role of insurers to assess the risks they underwrite, including directing the insured's "reasonable search of information", or outline particular or potential risks to the insured, who would then be aware of what the insurer considers to be material to the relevant risk.
Notwithstanding the interpretation of "ought to know", there may be issues between parties to the insurance policy as to the extent of a "reasonable search for information", which may create disputes in future.
2. New Remedies for Breach of the Duty of Fair Presentation
Insurers are no longer entitled to avoid the entire policy where there is a failure by the insured to disclose all material information.
An insurer will only be entitled to avoid the entire policy and refuse all claims without returning the premiums paid where the breach of the duty of fair presentation is deliberate or reckless. Where the insurer is unable to show any deliberate or reckless intent, but can show that it would not have entered into the contract on any terms in the absence of such breach, it can avoid the entire policy and refuse all claims, but the premium paid must be returned in any event. Where the breach is neither reckless nor deliberate, the remedies are less draconian to reflect what the insurer would have done if it had known the undisclosed information before entering into the contract. For instance, if the insurer would have entered into the contract, but would have charged a higher premium, the insurer may reduce proportionately the amount to be paid on a claim by way of a specific mathematic formula.
This would create uncertainty in the insurance industry. Due to vagueness of the extent of a "reasonable search of information" as discussed above, from the insured's perspective, there is always a risk that the claims would not be covered by a policy on such ground. In addition, it is questionable whether the brokerage fees will be affected in view of these changes.
Upon breach of a warranty by an insured, the insurer's liability under the policy will be suspended until the breach is remedied, rather than being entirely discharged. During the suspension, the insurer will have no liability for any claim arising from the policy. Once the breach is remedied, the insurance policy resumes in full force. An insurer is also prevented from avoiding an insurance policy if a warranty ceases to be applicable due to change of circumstances, unlawfulness or waiver by the insurer.
Furthermore, an insurer should not be entitled to avoid a claim if the insured's breach of a term, including a warranty, is not related to a loss; there must be a nexus between the loss and the breach of a term. If the breach of a term, which is not relevant to the actual loss, could not have increased the risk of the loss, the policy cannot be avoided. This can be illustrated by an example of a household policy containing a warranty that the insured must have a working sprinkler system. A burglar breaks into the household where the sprinkler system is not operative. In such circumstances the insured can argue that even if there had been a working sprinkler system, the theft would still have occurred. In other words, the risk of loss would not have been increased by a failure of having a working sprinkler system.
To determine whether or not a breach of a term is relevant to the actual loss, the test is whether the term "defines the risk as a whole". This again brings uncertainty in the drafting and application of warranties and other terms regarding a particular loss, which will create disputes in the future.
4. Abolishment of "Basis of the Contract" Clause
The Act abolishes the "basis of the contract" clause in non-consumer contracts. It will not be possible to contract out this provision. Prior UK insurance law allowed an insurer to rely on the answers of the insured in the proposal form to be the basis of the insurance policy, regardless of its materiality. The effect of this clause is to incorporate the answers of the insured into the policy even though they are not set out in the insurance policy. This would be fatal to the insured if the answers in the proposal form is incorrect, whether deliberate or not, and the insurer is entitled to deny coverage. The position now is that any such "basis of the contract" clause in relation to an insurance policy will be deemed invalid.
5. Fraudulent Claims
If the insured makes a fraudulent claim, the insurer is not liable to pay the claim, may recover sums paid in respect of the loss and may give notice terminating the insurance as from the date of the fraudulent act without returning the premium. Claims arising from an event before the fraud would, however, continue to be payable.
6. Contracting Out Provisions in this Act
Parties to a non-consumer contract will be entitled to agree terms which are less favorable to the insured than those set out in the Act, except for "basis of the contract" clauses. Such contracting out is subject to certain transparency requirements that (i) the insurer should take sufficient steps to draw disadvantageous terms to the insured's attention, and (ii) the disadvantageous term must be clear and unambiguous. In determining whether "sufficient steps" have been taken, one has to take into account the characteristics of the insured and the circumstances of the transaction. These requirements may cause uncertainties.
The Act does not go further to define what amounts to "sufficient steps". Does the principle of "reasonable measures" to draw onerous terms to the attention of the signing party established in the leading British case Tilden-Rent-A-Car1, such as making the provision bold in a written agreement or giving sufficient time to read, satisfies this requirement? If satisfied, that does not change the current position of the common law. This will be left to the court to decide when disputes arise. Besides, it is always open to parties to argue whether a provision is "clear and unambiguous" or not. The requirement of "clear and unambiguous" may depend on factors including, but not limited to, wording of the provision, knowledge and experience of the insured, explanation by the insurer and other circumstances of the negotiation and transaction.
The Insurance Act 2015 has made far reaching changes to the existing UK insurance law regime. It enhances the protection of the insured by putting the burden on the insurers in actively obtaining information from the insured, rather than passively relying on the insured and its broker to provide all relevant information. On the other hand, this Act imposes severe penalties on the insured who makes insurance claims in bad faith. This Act also creates uncertainties.
1 Tilden Rent-A-Car Co v Clendenning (1978) 83 DLR (3d) 400 (CA, Ontario)
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.