The Insurance Act 2015 – the risky business of commercial insurance contractsPrint publication
The Insurance Act 2015 (the Act) received Royal Assent on 12 February 2015. Whilst the Act does not come into force until August 2016 it does introduce key changes to commercial insurance contracts, covering the duty of disclosure, warranties and the remedies that insurers have for fraudulent claims. The explanatory notes to the Insurance Bill which preceded the Act confirmed that its purposes was to update the statutory basis for commercial insurance contracts to bring it in line with best practice in the insurance market. The Act brings about changes in the following three areas:
- Disclosure and misrepresentation in non-consumer insurance contracts. The Act changes the duty on the insured and introduces a requirement of ‘fair presentation’ of the risk to be insured. It also provides and insurer with a number of proportionate remedies in the event of a breach of the insured’s duty.
- Insurance warranties and other terms. The Act does away with ‘basis of contract’ clauses (which converted information supplied to an insurer pre-contract into warranties). Under the Act, should a warranty be breached, the liability of the insurer is suspended rather than discharged so that if a breach is remedied then the insurance cover will be restored. It also provides that a breach of a warranty or similar term would not allow an insurer to avoid paying a claim if the insured can show that the breach was not relevant to the loss suffered.
- Insurers’ remedies for fraudulent claims. The Act sets out a number of remedies which would apply if a fraudulent claim was submitted by a policyholder.
The provisions of the Act are intended to provide a default position but parties to non-consumer insurance contracts will be able to contract out of the Act and instead put in place their own terms provided that certain transparency requirements, which ensure that the terms of a policy do not put an insured in a worse position that it would be under the Act, are met by the insurer
‘Fair presentation’ of risk
Under the law as it stands until the Act comes into force, a party requiring insurance has a duty to disclose every material circumstances known (or which ought to be known) to the insurer. This will be replaced by a duty to make a ‘fair presentation’ of the risk to the insurer. This duty will require an insured to either disclose all material circumstances of which it is, or ought to be, aware or, in the alternative, to give to the insurer enough information to put a prudent insurer on notice that further enquiries should be raised. Disclosures will need to be made in a way that would be reasonably clear to a prudent insurer and representations regarding material facts will need to be substantially correct.
Where the insured is not an individual the level of knowledge implied will be that of members of the senior management team or whoever is responsible for its insurance.
A breach of the duty to make a fair presentation where the misrepresentation or failure to disclose is wilful or reckless will allow the insured to avoid the contract and retain the premium. In cases where the non-disclosure or misrepresentation is not deliberate or reckless then a schedule of proportionate remedies will apply. The remedy will, in these cases, depend on what action the insurer would have taken if a fair presentation of the risk had actually be made (i.e. if the insurer can prove that it would not have entered into the contract then it will be able to avoid the contract and refuse to pay any claim but it will have to, in this case, return the premium to the insured). It is thought by commentators that, whilst insurers will clearly try and use the new remedies to reduce claims payments, they will actually result in more payments being made and lead to a downturn in the number of claims resulting in litigation.
The Act amends the effect of warranties in insurance contracts in the following ways:
- ‘Basis of contract’ clauses, which, as mentioned above, convert pre-contract information it warranties are to be abolished for non-consumer policyholders (thereby bringing the law for non-consumer insureds into line with the existing law for consumer insureds under the Consumer Insurance (Disclosure and Representations) Act 2012.
- Any breach of a warranty by an insured will suspend any liability of the insurer as opposed to discharging it. If the breach in question can be remedied then the insurer will be liable for claims that arise after the breach (and will still be liable for any loss before the breach as is currently the case).
- There must be a causal link between the breach and the loss (e.g. if a policy contains a warranty that new locks must be fitted in doors in a property but the insured fails to fix a subsequent fault with one of the locks, a claim for losses arising from a break in at the property would fail due to the breach of warranty but a claim for fire damage at the property would be successful. It should be noted though that there does not need to be such a causal link when the warranty applies to the whole of the policy.
As mentioned above, a policy can only be avoided by an insurer if any non-disclosure or misrepresentation is deliberate or reckless, in other circumstances proportionate remedies will apply. For example if, but for the non-disclosure the insurer might have charged an increased premium for the policy then it can reduce the payment of the claim by a proportionate amount.
Third Party (Rights Against Insurers) Act 2010
The Act also makes amendments to the Third Party (Rights Against Insurers) Act 2010 (the 2010 Act) which permits that act to be bought into force. The 2010 Act replaces the previous Third Party (Rights Against Insurers) Act 1930 and implementation will simplify the position of a creditor of either a company or individual which is the subject of formal insolvency proceedings where that company or individual has insured against the creditor’s claim. The 2010 Act will transfer to the creditor the rights of the insolvent party to receive the proceeds of an insurance policy and will allow a person with a claim against an insolvent person to proceed against the insurer directly without having to first establish the liability of that person.
Whilst the provisions of the Act will not apply until August next year and as such no immediate action is required, once in force the Act will require that all pertinent information is presented to an insurer at the outset. It is likely that the Act will increase the due diligence burden on businesses when entering into insurance policies as they will need to search for information available to them to allow it to be presented to an insurer prior to the policy being put in place. A failure to do this could permit the insurer to use the provisions of the Act to avoid a policy if a claim is made at a later date.