Out-Law Guide 7 min. read
06 Jan 2016, 3:17 pm
The Act is the result of a joint review by the Law Commission and Scottish Law Commission into insurance law. It introduces substantial changes to the laws governing disclosure in non-consumer insurance contracts; warranties and other contractual terms; and insurers’ remedies for fraudulent claims.
This guide sets out some of the most importance changes introduced by the Act, and considers the practical implications of these changes for insurers and insureds.
Previously, insured parties were required to disclose every circumstance that they knew, or ought to have known, which would influence an insurer in fixing a premium or deciding whether to underwrite a risk. This required insured parties to predict, without much guidance, what factors a hypothetical prudent insurer would be influenced by. The same obligation extended to brokers acting on behalf of insured parties.
Part 2 of the 2015 Act has created a new ‘duty of fair presentation’ aimed at encouraging active, rather than passive, engagement by insurers as well as clarifying and specifying known or presumed to be known matters. From 12 August 2015, before entering into a contract of insurance, insured parties will be required to disclose either:
Insured parties will be considered to have known, or ought to have known:
Insurers will be considered to have known, or ought to have known:
Brokers will no longer be subject to disclosure duties.
Under the Act, disclosure must be made in a reasonably clear and accessible manner, material representations of fact must be ‘substantially correct’ and material representations of expectation or belief must be made in ‘good faith’. Individuals will be deemed to know matters which they suspected and which they would have known about had they not deliberately refrained from confirming or enquiring about it.
Insured parties will have to review their disclosure processes to ensure that those responsible for procuring insurance disclose all matters they will be presumed to know. For example:
The Law Commissions stated that the new standards were designed in part to prevent ‘data dumping’, meaning the presentation of large volumes of material without distinction between the material and the trivial. Pre-disclosure analysis and filtering of relevant information will be needed to ensure that disclosure is made in a reasonably clear and accessible manner.
Insurers will not be able to rely on a passive approach to disclosure if seeking to exercise remedies for non-disclosure. More active engagement will now be encouraged and, if not in place already, insurers should consider establishing systems and processes to identify when further enquiries need to be made before underwriting risks.
Insurers will have to review what information is readily available to those who decide whether to accept risks and the terms on which to do so. For example:
Previously, an insurer was able to refuse all claims under an insurance contract if the pre-contractual disclosure duty was breached, even if the breach was committed by the broker. The 2015 Act has now introduced a range of proportionate remedies, applicable depending on the scale of the breach and the state of mind of the insurer. These are:
These remedies will only be available if the insurer would not have entered into the insurance contract had the breach not occurred, or would have done so on different terms.
To bring an action for relief for non-disclosure, insurers will need to be able to prove how they would have acted differently if the breach had not occurred. Disclosure of underwriting guides and other relevant documents may now be required, along with records of underwriting decisions made and factors considered in particular cases. Insurers will need to consider the extent to which they are willing to disclose commercially sensitive information contained within such records or documents.
Previously, ‘basis of the contract’ clauses could convert all representations made in the course of a non-consumer insurance contract into contractual warranties. Breaching a warranty would completely discharge an insurer from liability for all risks covered by the policy from the time of the breach, even if the warranty had no bearing on the risk.
Part 3 of the 2015 Act has now banned ‘basis of the contract’ clauses from non-consumer insurance contracts. Instead of discharging liability, a breach of warranty now results in the insurance cover being suspended for the duration of the breach and re-instated once the breach has been fixed. An insurer will no longer be able to rely on non-compliance with a warranty, or any other term relating to loss of a particular kind or at a particular location or time, if the non-compliance could not have increased the risk of loss that occurred in the circumstances that it occurred. For example, if a requirement in a policy to maintain window locks is not complied with by the insured party and loss is subsequently caused by flooding, then the insurer will no longer be able to rely on the insured party’s non-compliance to avoid liability as the maintenance of window locks could not have reduced the risk of flooding occurring.
This will not apply in respect of terms that define the risk as a whole: for example, terms restricting cover to non-commercial use, rather than a term that relates to loss of a particular kind during such non-commercial use.
Previously, in the event of fraud, an insured party would forfeit the whole claim and insurers could also avoid the whole contract. Part 4 of the 2015 Act now sets out a clear statement of insurers’ remedies in the event of fraudulent claims brought by policyholders. Insurers:
The same rights apply in respect of fraudulent claims made by persons under group insurance policies, although only in respect of those persons who committed fraudulent acts and not the other innocent members of the group policy. Insurers will need to serve a notice on the fraudulent group member and the person who took out the policy on behalf of the group. Sums paid in respect of the claim may be recovered from the person who committed the fraudulent act, or the person who took out the policy on behalf of the group if they had not passed sums on to the fraudulent person.
Previously, either party could avoid the insurance contract if the other failed to act in accordance with ‘utmost good faith’. Significantly, Part 5 of the 2015 Act has now removed avoidance of contract as a remedy for breach of this duty, and abolished any parts of legislation prescribing this as a remedy. Insurance contracts will still be based on utmost good faith, and clauses and obligations will be interpreted in a way that favours compliance with this duty.
Finally, it is important to note that Part 5 of the Act prevents an insurer from contracting out of its provisions with the effect of placing an insured party in a worse position than they would have been in under the provisions of the Act. Parties to non-consumer insurance contracts can agree less favourable terms than those in the Act, provided that the alternative provisions are clear and unambiguous and sufficient steps are taken to draw them to the attention of the insured party or its agent before the contract is concluded.
Parties to both consumer and non-consumer contracts cannot contract out of the new prohibition on ‘basis of contract’ clauses.