Monday, 15 February 2016

Insurance Act 2015 – the key points

February 15, 2016. 

The Insurance Act 2015 (the Act) is the result of a detailed review of insurance contract law conducted by the Law Commissions of England and Wales and of Scotland. The review was prompted in part by a perception that, in some respects, the current law is outdated and unsuitable for the modern business environment. The Act seeks to address these concerns through a mixture of (i) radical amendment in areas where the existing law is no longer thought to achieve a fair balance between the interests of the insured and the insurer and (ii) the codification and clarification of existing law to reflect the development of the common law since the coming into force of the Marine Insurance Act 1906 (the leading statute relating to commercial insurance, which, despite its name, also applies to non-marine insurance and reinsurance).

The new laws will apply to all insurance other than consumer insurance.They are equally applicable to reinsurance.

The key features of the Act are summarised below.

Placement – duty to make a “fair presentation”

>  The insured must disclose all material circumstances about the risk or, failing that, it must give the insurer sufficient information to put it on notice that it needs to make further enquiries for the purposes of revealing all the material circumstances about the risk.

>  This will put a greater emphasis on the insurer to ask questions about the risk and to make clear what information it requires.

>  The insured is obliged to make disclosure in a manner which is reasonably clear and accessible to a prudent underwriter (preventing so called ‘data dumping’) and not to misrepresent material information.

>  The insured will be taken to know what is known to its “senior management”, to those responsible for the insurance (including agents such as brokers) and what “should reasonably be revealed by a reasonable search” of information available to the insured both within its own organisation or held by “any other person”.

Graduated remedies for breach

>  The single remedy of avoidance from inception for a breach by the insured of its duty to make a fair presentation of the risk at placement is abolished. If the breach of duty was deliberate or reckless, the insurer may still avoid the contract and keep the premium whatever it would have done in the event of a fair presentation.

>  In the more likely event that the breach was innocent or negligent, however, there will be a new system of graduated remedies based on what the insurer would have done had a fair presentation been made. These include:
  •   avoidance if the underwriter would not have written the risk at all; or

  •  the imposition of different terms in the contract from inception if the evidence is that the underwriter would have imposed those terms in the event of a fair presentation (this may mean that some claims which have already been paid have to be revisited); and/or

  •  if the premium charged was lower than it would have been if a fair presentation had been made, any claims under the contract may be reduced by the same proportion as the actual premium charged bears to the premium that would have been charged.

Warranties and terms not relevant to the actual loss 

>  A breach of an insurance warranty will no longer automatically discharge insurers from further liability under the contract.

>  Instead, the contract will be suspended until the breach of warranty is remedied. Insurers will not be liable in respect of losses occurring or attributable to something happening during the period of breach.

>  Where a loss occurs when an insured is not in compliance with a term which “tends to reduce the risk” of loss of a particular kind, at a particular location or at a particular time, the insurer will not be able to rely on that non-compliance to exclude, limit or discharge its liability if the insured can show that its non-compliance did not increase the risk of the loss which in fact occurred in the circumstances in which it did occur.  This provision will not apply, however, if the term in question is one which “defines the risk as a whole”.

Remedies in the event of a fraudulent claim

>  The insurer will not be liable to pay any part of a fraudulent claim and may recover any money paid in respect of that claim prior to discovery of the fraud.

>  The insurer may give the insured notice that the contract is terminated from the date of the fraud (regardless of when the fraud is discovered). The insurer can then keep the premium and has no liability for claims arising after the fraud.

>  In the event of a fraudulent claim by one beneficiary under a group scheme, cover for the innocent beneficiaries is not impacted.

Contracting out

The Act allows the parties to contract out of any of the provisions relating to the duty to make a fair presentation, warranties and fraudulent claims (save for the provision relating to the abolition of so called ‘basis of the contract’ clauses). Contracting out will only be effective, however, if transparency requirements stipulated in the Act are observed. These requirements apply to any term which is more “disadvantageous” to the insured than the default position as per the Act.



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