UK parliament approves "the biggest reform to insurance contract law in more than a century"

Out-Law News | 06 Feb 2015 | 4:10 pm | 2 min. read

The Insurance Bill , which will update aspects of commercial insurance law currently governed by the 1906 Marine Insurance Act, was passed unanimously by the House of Commons on Tuesday. The bill will now become law once it receives royal assent, subject to an 18-month transition period which will run until autumn 2016.

Insurance law expert Nick Bradley of Pinsent Masons, the law firm behind Out-Law.com, said that the provisions in the bill would result in "the most significant change to insurance contract law for over a century".

"Overall, the change should be welcomed by all industry participants as the law has needed updating for some time," he said. "Given the new bill now only requires royal assent to be brought into law, it is important for industry participants and insurers in particular to take the necessary steps now, and certainly before the end of this year, to prepare for the new legislative requirements."

Based on recommendations for reform by the Law Commissions of England and Wales and of Scotland, the Insurance Bill aims to align business insurance rules more closely with those that govern consumer insurance laws. Once the new regime is in force, policyholders will be subject to a new "duty of fair presentation"replacing the existing duty of disclosure.

The duty of disclosure imposed on brokers will not apply anymore. A policyholder will have to disclose every matter which it knows, or ought to know, that would influence the judgement of a prudent insurer in deciding whether to insure the risk and on what terms, or provide sufficient information to put a prudent insurer on notice that it needs to make further enquiries of material circumstances. The new bill prescribes in detail the matters which will be regarded as "known" or "ought to be known" by insurers and those who are insured. This includes matters known by employees of insurers and senior management of those who are insured.

The bill will also introduce significant new rules on warranties, as well as abolishing 'basis of the contract' clauses which effectively convert every statement made by a policyholder before the contract is signed into a warranty.

One of the changes to the remedies available to insurers for breaches of warranties originally proposed by the law reform bodies in their report of July 2014, and included as clause 11, was subsequently omitted from the original draft of the bill following concerns about clarity. An alternative version of this 'clause 11' was produced by the commissions at the end of last year, and has now been included in the final bill.

The law as it presently stands allow insurers to refuse claims on the basis of a policyholder's breach of warranty or other condition in the contract, even where that term is not related to prevention of the loss suffered. Clause 11 of the new Bill will allow policyholders to challenge an insurer's refusal to pay out if they can show that the breach could not have increased the risk of the loss that actually occurred in the circumstances in which it occurred. However, breaches by policyholders of terms "defining the risk as a whole" will still end an insurer's liability.

During the final House of Commons debate on the new bill, Treasury secretary Andrea Leadsom said that the change would prevent an insurer from refusing payment "on the basis of a breached term that could have had no bearing on the risk of the loss that actually occurred, such as where a warranty concerning a fire alarm is breached and the insured then suffers a flood in the insured property".

"Together with the Consumer Insurance (Disclosure and Representations) Act 2012 that preceded it, the bill marks the biggest reform to insurance contract law in more than a century. It is the product of careful consultation and consideration, and as a result it is well supported. It demonstrates the government's commitment to maintaining and growing the UK's insurance industry both at home and abroad," she said.