Insurance Act 2015 Reforms

Since 2006, the Law Commission of England and Wales and the Scottish Law Commission have been engaged in a joint project to reform commercial insurance contract law.

Issues had been raised with the current law as it enables insurers to take severe action (such as cancelling the policy from inception) for minor non-disclosures or un-related breaches of warranty.

The current rules and subsequent remedy available to insurers is codified in the Marine Insurance Act 1906 and apply to commercial insurance.

The 1906 Act imposed a duty to disclose every material circumstance which would influence the ‘prudent underwriter’ and this potentially gave insurers the opportunity to decline claims where there may be no material impact on the claim, for example intruder alarm failings on a flood claim.

The opinion is that the law is now out of date and does not apply to modern-day insurance practices.

Where are insurers looking to make changes?

Following on from the Consumer Insurance (Disclosure and Representations) Act 2012, the latest Bill reforms commercial contracts in the following main areas:

Non-disclosure and misrepresentation in non-consumer insurance contracts (fair presentation)
The law of insurance warranties

Although the proposed Act largely codifies current industry best practice and has yet to be passed, it is believed that the core principles should be implemented right away to benefit customers.

A leading insurer has put together a high level overview covering the changes that they will be making relating to the business insurance contract law reform Bill.

What changes is one leading insurer making?

Change 1: Non deliberate or non-reckless non-disclosure / misrepresentation

There remains a responsibility for full disclosure of material circumstances by customers to enable the insurer to make an informed decision when it comes to offering insurance cover and the premium required. Currently, failure to disclose any material circumstances can lead to the avoiding of the policy as though it did not exist.

The law is moving to a ‘fair presentation of risk’ basis which still requires customers to undertake a disclosure of material circumstances which you know or ought to know. This provides the insurer with sufficient information to make further inquiries as required to make an informed decision.

Prior to the Bill becoming effective, the leading insurer will be operating as follows:

Where they would have charged a higher premium, they will charge you (the insured) the additional premium straight away when the non-disclosure or misrepresentation becomes known to them (not offsetting at the claims stage), with your agreement.
Where the insurer would NOT have written the risk, or they would have written with imposed terms:                                                                                                                                                                                                   
If the insurer would not have written the cover, they can treat the insurance as if coverage was never attached but must return the premium.
If the insurer would have imposed terms, they can treat the insurance as if it had been entered into on those different terms (from the date of the breach).

Change 2: Deliberate or reckless non-disclosure / misrepresentation

Where non-disclosure or misrepresentation is deliberate or reckless, the insurer has the right to avoid the policy, refuse claims and retain the premium, which is set out in the proposed insurance Bill.

Change 3: Warranties

A warranty is a condition of the policy which must be complied with literally. It is an undertaking that is stated in a policy which must be either done (eg. maintenance of equipment) or not done (eg. introducing a hazardous process such as hot work for a building contractor).

Warranties can currently be used to void the policy (so no insurance cover at all is in place) even when the breach is unrelated to the loss, as in the intruder alarm failings on a flood claim example.

Also, warranties are not suspensive which means that even if the burglar alarm was broken (so breaching the warranty) and was then fixed, a subsequent claim can be avoided as there has been a breach during the period of insurance.

The leading insurer has for some time been removing the phrase ‘it is warranted that‘ from their range of policies and they will remove all warranties from their policies and replace with Conditions Precedent to Liability and Conditions, if appropriate and linked to damage or liability. A Condition Precedent to Liability will only be applied in specific circumstances to reflect the risks presented and will be agreed with the customer before commencing cover. An example might be a high security cash or fine art risk where it is not insurable without an agreed alarm or guarding in place, therefore, such provisions would be a condition precedent to liability attaching.
Whilst the insurer envisages most policies will be ‘warranty free’, they may apply by exception. In those instances they will explain the rationale to the customer.

Change 4: Basis Clause

The Basis Clause converts a proposal form and declaration in to the whole basis of the contract and in doing so turns the insured’s pre-contractual representations (including answers to questions on a proposal form) into warranties. At this stage, any non-disclosure or misrepresentation will impact on the basis of the contract, even when they are believed to be true and accurate. They can be used to decline a claim, regardless of whether the statement is material to the loss, which highlights the importance of full disclosure.

Under the changes, the Basis Clause will be removed from the leading insurers’ wordings. The Basis Clause occurs in the policy preamble which states ‘you have made a proposal to us which is the basis of and forms part of this contract’.

How will the insurer be implementing these changes and how will this affect you?

Following these changes in legislation, this leading insurer will be amending customer documentation. 

In practice this means:

They will treat the basis of contract clause as having no effect in all documentation
They will not void the policy or refuse indemnity where the breach of condition is not causally related to the loss
In the event of misrepresentation or non-disclosure they will act as shown above

The insurer will wait until the Bill is finalised before actually implementing the changes in their wordings.

What to do next? 

We have a team of experienced insurance professionals who would be happy to talk to you about managing your risk. If you would like to discuss further then please give us a call.

Call 01789 761660

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