There is a new dawn for construction insurance following introduction of two Acts of Parliament in August 2016. With the introduction of the Insurance Act 2015 ("IA 2015") and Third Parties (Rights against Insurers) Act 2010 ("TPRAIA 2010"), English insurance law has undergone the most significant development since the inaugural Marine Insurance Act 1906 ("MIA 1906").
Insurance Act 2015
Historically, English insurance law developed in the context of servicing the marine industry at a time when insurers required protection and thus the law, partially codified by the MIA 1906, was strongly weighed in favour of insurers. As the insurance industry expanded in the next century, there has been increasing recognition of the need for rebalancing, which culminated in a Law Commission review in 2006. The Law Commission recommended a number of important changes to insurance law and lead to the enactment of the IA 2015.
Duty of fair presentation
Most notably, the IA 2015 replaces the duty of utmost good faith with a duty of fair presentation of the risk which is to be incepted. The IA 2015 indicates that this duty requires disclosure of all material circumstances which the insured knows or ought to know. Much like the MIA 1906, materiality is determined in accordance with whether a non-disclosure would influence the judgement of a prudent insurer in determining whether to take the risk and if so, on what terms.
Importantly, under the IA 2015, breaches of the duty of fair presentation, such as non-disclosure, shall be treated as follows:
- If the breach was deliberate or reckless, the insurer may avoid cover and keep the premium
- If the insurer would not have insured at all, it may avoid cover but must return premium.
- If the insurer would have insured on different terms, the contract of insurance is treated as being on those terms;
- If the insurer would have insured with a different premium, the amount paid on the claim is reduced commensurately i.e. in proportion to the difference between the actual premium and the premium that would have been applicable.
Remedies for breach of warranty and breach of condition
Under the MIA 1906 an insurer could decline cover as a result of a breach of warranty, such as a basis of contract clause in an insurance proposal, as well as for a breach of condition and this was irrespective of whether the breach related to or was causative of the insured's claim. Unsurprisingly, this was considered to be unfair to insureds and third parties who would otherwise benefit from the proceeds of an insurance claim.
Under the IA 2015, basis clauses are now ineffective in converting all representations into warranties. While it nevertheless remains permissible to include warranties in insurance contracts, the IA 2015 introduces a number of significant protections to insureds. Firstly, that a breach of warranty no longer automatically discharges an insurer's liability. Secondly, that an insurer shall remain liable in circumstances where there is a temporary breach which is capable of remedy before the occurrence of an event giving rise to a notifiable claim.
In addition, where an insured can show that breaches of warranty (and other terms) are irrelevant to the risk covered, such breach will not be capable of discharging the insurer's liability under the policy. This will apply in circumstances where a policy term is breached which is designed to reduce the risk of (a) loss of a particular kind, (b) loss at a particular location, (c) loss at a particular time. Where such a policy term has not been complied with, an insurer may not rely on the non-compliance to exclude, limit or discharge its liability where the non-compliance has not increased the risk of the loss occurring in the circumstances in which it in fact occurred. For example, breach of a term relating to night time security arrangements would not invalidate cover in respect of a loss arising from a theft during the day.
While the above changes will be welcomed by insureds and third parties, the insurance market has been afforded some flexibility in enabling insurers to contract out of some of the above statutory requirements.
It remains permissible for insurers to include policy terms which are less advantageous than the IA's default regime, such as in relation to remedies for breach of the duty of fair presentation or breach of warranty1, provided the term is clear and unambiguous and where the insurer has taken sufficient steps to draw the disadvantageous term to the insured's attention,. As such, it cannot be assumed that all construction insurance arrangements will incorporate these protections provided by the IA 2015.
Third Parties (Rights against Insurers) Act 2010
The Third Parties (Rights against Insurers) Act 2010 replaces the Third Parties (Rights against Insurers) Act 1930, an important piece of legislation which introduced important changes to common law insolvency rules. In particular, the TPRAIA 1930 provides for the automatic transfer of an insured's rights against an insurer to a third party in the event of the insured's insolvency.
The TPRAIA 1930 was a powerful tool for third parties in the context of insolvency, insofar as it enables third parties to pursue claims directly against an insurer where the insured's liability had been established and for the policy proceeds to be preserved from assets generally available to the insured's creditors. Despite these advantages, a Law Commission review in 2001 concluded that the Act was not fit for purpose, which then lead to the introduction of the TPRAIA 2010 and which finally came into force on 1 August 2016.
Establishing the insured's liability
One of the Law Commission's principal concerns with the TPRAIA 1930 was the requirement for the third party to 'establish' the insured's liability before it could commence proceedings against the insurer directly. By section 1 of the TPRAIA 2010, a third party may bring an action against the insurer directly without having first established the insured's liability. As a result, a third party may seek declarations as to the insured's liability to the third party and the insurer's liability under the policy.
However, it must be remembered Be that as it may, the transfer of rights under TPRAIA 2010 does not provide the third party with greater protections than are afforded to the insured under the policy. As such, in any claim against the insurer, a third party will be subject to the same policy terms, indemnity limit and excess as would have applied to the insured and the insurer will have the same policy defences against the third party as it would have had against the insured, such as declinature on the basis of breach of notification conditions.
Information and disclosure
A further difficulty under the TPRAIA 1930 was associated with obtaining information about an insolvent entity's insurance policies. The TPRAIA 2010 seeks attempts to remove these problems by empowering third parties to request information from the insured or from any person who is able to provide it (which will typically be insurers, brokers and company officers). Under Schedule 1 to the TPRAIA 2010, a third party may request information in relation to:
- the insurer's identity;
- the terms of the insurance contract are;
- whether the insured has been informed that the insurer has claimed not to be liable under the contract;
- whether there are or have been any proceedings between the insurer and the insured in relation to policy coverage and, if so, relevant details of those proceedings; and
- how much of the limit of indemnity, if any, has been paid out in respect of other liabilities.
A person receiving a request for information under the TPRAIA 2010 is required to respond within 28 days providing the information available to it, or explaining why he is not able to provide it and (in the case of documents no longer in his control) who he knows or believes has the information. The TPRAIA 2010 entitles a third party to obtain a court order for requiring disclosure in the event of non-compliance with a qualifying request for information.
The IA 2015 will enhance an insured's ability to maintain insurance cover in circumstances where it has breached its duty of fair presentation. This is particularly the case in the context of the abolition of the insurer's remedy of avoidance in circumstances where it would have covered the risk in any event albeit on different terms.
The abolition of basis of contract clauses together with the introduction of limits on an insurer's ability to decline cover will be welcomed by many insureds in the construction industry given that insurers will no longer be able to rely on a breach of warranty or condition where the non-compliance could not have increased the risk of loss that occurred.
While the ability to contract out of some of the requirements of the IA 2015 is necessary in a sophisticated insurance market, clients and funders of construction works will be keen to ensure that contractors and consultants do not maintain PI insurance that is less advantageous than provided for by the IA 2015.
Turning then to the TPRAIA 2010, it is clear that the third parties will be able to pursue insurance claims in a much more efficient manner than previously. Firstly, due to the introduction of powers to request information but also as a result of their ability to pursue insurers directly without having first established the insured's liability. Perhaps most significantly, the TPRAIA 2010 will enable third parties to circumvent potential notification and ensure compliance with the insured's policy conditions by allowing notifications to be made by a third party directly to an insurer in the place of an insured.
1 Excluding the prohibition against avoidance for breach of the duly of utmost good faith and the abolition of basis of contract clauses.
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