The new Insurance Bill is set to reform business insurance law in the UK. Currently making its way through Parliament; yesterday saw its final reading in the House of Commons.
With an extensive consultation process and detailed technical review of the Bill already having been carried out, the Bill was considered in a Committee of the whole House on 3 February 2015, immediately followed by the report stage and third reading. So it is time to look at the implications of the new regime in readiness for when the Bill comes into force which (subject to any final amendments) is scheduled for 18 months after Royal Assent, currently expected before the May 2015 General Election.
The most recent amendments to the Bill carried out by the House of Lords in January 2015 include:
- clarifying that “information” which an insured ought to know (and therefore disclose) includes information held by the person covered under the policy;
- introducing an additional clause limiting an insurer’s ability to rely on a breach of warranty to avoid liability, where the insurance claim is for a loss which is entirely unrelated to the warranty in question; and
- extending the application of provisions relating to remedies for fraudulent claims to the non-consumer context.
The latest changes, therefore, leave the duty of fair presentation of the risk and the proportionate remedies available in the event of non-compliance with that duty as previously proposed.
Fair Presentation of Risk
An insured will be required to disclose “every material circumstance which the insured knows or ought to know,” or gives the insurer sufficient information to put a prudent insurer on notice that it needs to make further enquiries. Thus, the onus is put on the insurer to ask additional questions following presentation of the risk. What an insured ‘ought to know’ includes what should reasonably be revealed by a reasonable search of information available to the insured. Of note, is that knowledge will be imputed in the event that an individual deliberately refrains from seeking confirmation of any suspicion held. Where the insured is not an individual, knowledge includes knowledge of senior management or those individuals responsible for the insured’s insurance.
Remedies for a breach of the duty of fair presentation arise only where the insurer can show, but for the breach:
- it would not have entered into the contract of insurance; or
- it would have done so on different terms.
The insurer will also have to establish if such a breach is a ‘qualifying breach’ for the purposes of the Bill, being either: (a) deliberate or reckless (i.e. where the insured knew it was a breach of the duty of fair presentation or did not care either way); or (b) neither deliberate nor reckless. For those breaches that are deemed deliberate or reckless, the insurer can avoid the contract, refuse all claims and need not return any of the premiums paid.
If neither deliberate nor reckless, the following remedies apply:
- if the insurer would not have entered into the contract, the insurer may avoid the contract, refuse all claims, but must return any premiums paid;
- if the insurer would have entered the contract on different terms, those terms will be treated as forming part of the contract; and
- if the insurer would have entered the contract but charged a higher premium, the insurer may proportionately reduce the amount paid on a claim.
How an insurer will go about showing what it would / would not have done in each hypothetical event is likely to require considerable thought to produce detailed supporting evidence.
Warranties also receive an overhaul in the Bill. ‘Basis of Contract’ clauses, whereby representations are automatically converted to warranties, are abolished. Warranties are to become ‘suspensive’ conditions, such that an insurer is not liable for any loss whilst the insured is in breach of a warranty, but will be after such breach has been remedied.
Fraudulent claims continue to be a major issue in the insurance market and the Bill has sought to address the remedies available to an insurer in the event of fraud (the definition of which is left to the courts). In this respect, the Bill applies to both consumer and non-consumer insurance. Where fraud is committed, the insurer is not liable to pay the claim (regardless of whether only part of the claim is fraudulent e.g. fraudulent exaggeration of a genuine claim), may recover any sums paid already under the claim and can give notice to terminate the insurance from the time of the fraudulent act. Following any such termination, the insurer may refuse liability for any event after the fraudulent act and need not return any premiums paid. The Bill also enables any fraudulent member of a group policy to be separated from the other members and treated as though they were a party to a consumer insurance contract.
The assumption that in business insurance two sophisticated parties are entering into a contract of insurance, leads the Bill to allow for the contracting out of its provisions. Whilst the aim has been to introduce a default regime for business insurance, this opt-out is likely to be used by specialist markets such as marine. Contracting out is only permitted where insurers comply with the Bill’s transparency requirements, by taking sufficient steps to draw the disadvantageous term to the insured’s attention and ensuring such term is clear and unambiguous. Parties may not, however, contract out of the ‘basis of contract’ clause prohibition, or those parts of the Bill relating to consumer insurance.
The option to ‘contract out’ highlights that the Bill is unlikely to meet the needs of the specialist insurance market. It should, however, help the courts to distinguish between sophisticated insurance buyers (who may negotiate their own terms outside of the default regime) and smaller businesses without insurance expertise that can benefit from the protection of the Bill.
Damages for Late Payment of Claims
Initial provisions covering damages for late payment of claims have been removed from the current Bill, as significant concerns were raised over the potential for these terms to introduce ‘punitive damages awards’ (as in the USA). At this late stage it seems highly unlikely that this issue will be reinstated. Being shelved for later discussion may well consign this area of insurance law to remain unresolved for many years to come (particularly with an upcoming General Election in 2015).
With the Marine Insurance Act 1906 no longer reflecting the commercial realities of modern business insurance, the Bill’s reforms are welcome and timely! Insurers, brokers and insureds will need to prepare for the changes to the current law, from how a policy is sold and purchased (including the associated wordings) to bringing and processing a claim. The new regime provides for a more equitable balance between parties to business insurance contracts and will require new systems to be put in place to handle the additional evidential requirements. It seems likely, however, that the courts will see its fair share of disputes arising from interpretation of the Bill’s provisions.
Will an insured be able to take advantage of an insurer’s inability to prove what they would have done if a fair presentation of the risk had been given? Will an insurer continue to avoid liability upon an insured’s non-compliance with a warranty, where the insured struggles to show that the non-compliance could not have increased the risk of the actual loss? It remains to be seen, in practice, what the future of business insurance law holds.