The Insurance Act 2015 (the Act) came into force on 12 August this year, representing the most significant reform of UK insurance law since the Marine Insurance Act of 1906. All contracts of insurance, reinsurance and retrocession made after 12 August (or variations to contracts which are made after that date) are governed by the Act. This is important beyond the UK. Local insurers worldwide often re-insure into the London market and many insurance policies that are governed by local laws incorporate standard clauses to which English law and practice apply. This article examines some of the key changes and assesses the practical implications of the Act in the marine business.
Fair presentation of the risk
The duty of utmost good faith under the previous law, specifically the pre-contractual duty on an insured to disclose all material circumstances, has been re-characterised as a duty to make a fair presentation of the risk.
The insured must (i) disclose all material circumstances about the risk or, failing that, (ii) give the insurer sufficient information to put it on notice that it needs to make further enquiries for the purposes of revealing all the material circumstances about the risk.
The Act will also bring in a new regime of proportionate remedies for breach of the duty of fair presentation instead of the current sole remedy of avoidance ab initio.
An example of this impact can be illustrated by considering the High Court judgment in Involnert Management Inc v Aprilgrange Limited (2015). In this case, the vessel was insured for €13 million and the insured made a claim following a fire. The judge held that the insurers were entitled to avoid the policy on grounds of the insured failing to disclose to the insurers (i) that it had obtained a professional valuation which valued the vessel at €7 million and; (ii) that the vessel had been advertised for sale at an €8 million asking price. As a result, the insurers were able to avoid liability altogether.
The judge found that the non-disclosure was an accidental rather than deliberate non-disclosure. Under the Act and the proportionate remedy scheme, it will be for insurers to demonstrate what they would have done had a fair presentation of the risk been made. This creates an evidential burden for insurers – how, in practical terms, do insurers demonstrate what they would have done had they been given the full picture? Keeping thorough underwriting notes and records will be even more important since these may often indicate which matters particularly influenced the underwriting decision.
Under the previous rules, insurers often did not seek to rely on a non-disclosure defence in part because the remedy of avoidance is draconian. With the more nuanced remedies, it is possible insurers may be more willing to rely on insureds' breaches of the duty of fair presentation.
Warranties and other policy terms
A warranty in an insurance policy was previously a term, which, if breached, permanently discharged the insurer's liability from the moment of breach, even if the breach of warranty was later remedied by the insured. With warranties now 'suspensory' under the Act, an insurer has no liability for a loss occurring or attributable to something happening after a breach of warranty but before the breach has been remedied. If, however, the insured remedies its breach of warranty, the insurer will be liable for subsequent losses.
Section 11 of the Act provides that an insurer may not rely on a risk mitigation term (i.e. one that tends to reduce the risk of loss of a particular kind, at a particular location or at a particular time) if the insured can show the breach "could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred". Section 11 does not apply to a term "defining the risk as a whole". That phrase is not defined in the Act.
An obvious example of a "term defining the risk as a whole" in a hull context is the "class and class maintained" warranty that one regularly sees. On this basis, insurers may argue that they are only prepared to provide insurance on the basis that a vessel is "class and class maintained". If, therefore, a vessel sinks whilst the insured is in breach of the class warranty, insurers may well claim that they are not liable for the loss without having to prove that the loss was caused, or contributed to, by that breach.
The Act bans "basis of contract" clauses, which are clauses that convert pre-contractual representations of the insured into warranties. It is not possible to contract out of this prohibition but this provision has little relevance to marine insurance where "basis of contract" clauses are not generally used and where any "information" is commonly marked "information not limited or warranted".
In non-consumer contracts, the parties may generally contract out of the Act subject to its specific requirements. International Group P&I clubs trading under English law have already indicated their clear intention to contract out of significant parts of the Act. How widespread contracting out will be in other commercial contexts remains to be seen.
*This article first featured in Tanker Shipping & Trade on Monday 16 August 2016
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.