Guest Publication: Rob Crossingham, Partner, Weightmans LLP
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The Insurance Act 2015: a refresher 5 years on
By Rob Crossingham, Partner, Weightmans LLP
“An Act to make new provision about insurance contracts”, the Insurance Act 2015 came into force on 12 August 2016, and gave effect to the reforms recommended in the Law Commission’s 2014 report on Insurance Contract Law, seeking to address what were perceived to be anachronistic remedies available to insurers under the Marine Insurance Act 1906. The 2015 Act can be viewed as addressing three issues: disclosure and misrepresentation; remedies; warranties and breach of policy terms.
Disclosure & Misrepresentation
Part 2 of the Act, which applies to non-consumer insurance contracts, introduced a new statutory “duty of fair presentation”. The key elements of the duty are as follows:
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- The insured is required to present the risk to insurers in a manner which would be reasonably clear and accessible to a prudent insurer, substantially correct on the facts presented, and made in good faith on matters of the insured’s belief or expectation (Section 3(3)).
- The insured should give disclosure of every material circumstance which it knows or ought to know or, failing that, disclosure which gives the insurer sufficient information to put a prudent insurer on notice that it needs to make further enquiries (Section 3(4)).
- There is no duty to disclose facts or matters which might diminish the risk or of which insurers are (or should be) already aware, and the Act expressly provides that an insured is not expected to disclose matters in respect of which insurers have waived their right to information, effectively by indicating that they do not consider a particular matter to be material (Section 3(5)).
- As to the question of materiality, Section 7 confirms that a fact, matter or circumstance is material if it would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms. Examples of material facts are given, including any special or unusual facts relating to the risk, any particular concerns which led the insured to take out the insurance, or “anything which those concerned with the class of insurance and field of activity in question would generally understand as being something that should be dealt with in a fair presentation of risks of the type in question”.
- For the purposes of the disclosure requirements under the duty of fair presentation, the issue of what the insured knows or ought to know (attribution of knowledge) is important, and is addressed in some detail in Section 4 of the Act. In the case of a corporate insured, the insured is deemed to know what is known to its senior management or, significantly, those “responsible for the insured’s insurance” which includes all those who participate in the process of procuring the insured’s insurance either as an employee of the insured or, significantly, an external agent (i.e. a broker). Knowledge includes not only actual knowledge but also constructive knowledge, so that an insured will not get away with turning a blind eye (i.e. deliberately refraining from confirming facts which it suspects or refraining from enquiring about them (Section 6(1)).
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Remedies
Schedule 1 of the Act introduced proportionate remedies for breach of the duty of fair presentation. Where a breach is deliberate or reckless, insurers may still avoid the policy and retain the premium. However, in the case of an innocent breach, (a) if insurers would not have written the policy at all, they may avoid the policy and refuse all claims, but should return the premium; (b) if they would have applied different terms, they are entitled to amend the policy retrospectively to insert/delete/alter the relevant terms; (c) if they would have charged a higher premium, insurers are entitled to reduce proportionately the amount payable on a claim in the same proportion as the increased premium bears to that originally charged.
It will be appreciated that most of the remedies available under the Act are dictated by what underwriters can show they would have done had fair presentation been given: it is generally accepted that the Act’s introduction of these remedies led to a greater emphasis on underwriters’ ability to document and evidence their decision-making both on particular risks and also as a matter of their general underwriting process.
Warranties, Basis Clauses & Breach of Terms
Many of us will remember “basis clauses” which were usually found at the beginning of a policy, and effectively converted representations in the insured’s proposal form into warranties of the policy: the significance being that, if any such representation turned out to be incorrect, it would entitle insurers to avoid the policy irrespective of whether the misrepresentation was innocent or deliberate. It was a Draconian remedy introduced into many policies by a common, and seemingly innocuous, catch-all clause. Such basis clauses are now outlawed and, under Section 9 of the Act, deemed to have no effect.
The remainder of Part 3 of the Act, being Sections 10 and 11, introduced a more proportionate approach to insurers’ remedies for an insured’s breach of a warranty in the policy, abolishing the principle that a breach of warranty would automatically result in policy avoidance. Instead, the Act introduced a new approach which effectively suspends policy cover where a warranty has been breached until it has been remedied. But a breach of warranty will have no effect on the availability of cover for the period before the breach occurred, or after it was remedied. Some warranty breaches, for instance where the insured fails to comply with a warranty before a set time, may not be capable of remedy.
Section 11 of the Act effectively prevents insurers from relying on an insured’s breach of a policy term where the relevant breach was not relevant to the loss incurred: the insured would need to show that its breach of the policy could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred. So for instance, where an insured failed to comply with a term requiring routine maintenance of a burglar alarm at its premises, insurers would be unable to decline a claim for losses arising from a flood or falling tree: whether or not the burglar alarm was in full working order would have had no effect on the damage that eventuated. Admittedly, Section 11 leaves some room for argument around the inter-relationship between the loss and the insured’s breach of policy term, but the position should usually be fairly clear and tenuous arguments by either insured or insurer are likely to be short-lived.
3 March 2021
A special thank you to Rob for this valuable contribution to this Quarter’s Risk Bulletin. If you have any thoughts you would like to share in the next edition, please get in touch.
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