The UK 2015 Insurance Act – why it matters
It has been reported that one in four London market insurers will have to rely on investment returns to make a profit in 2016 (PWC December 2015). The market is soft across its various classes of business and this includes the mining sector, which also faces a number of key challenges from increasing costs associated with sourcing and extracting various commodities.
Business costs in such circumstances are always under the microscope - particularly expenses such as insurance premiums.
With the needs of mining companies and their insurers potentially in conflict, policy coverage specialists are no doubt being inundated with potential amendments to policy wordings relating to mining insurance contracts now that the Insurance Act 2015 has been introduced in August 2016 (“the 2015 Act”).
A new landscape for insurance contract law
Despite 60 years of criticism, the Marine Insurance Act 1906 (MIA) has not been formally repealed but the 2015 Act sets out a new landscape for insurance contract law. Fundamental changes will be made in respect of the negotiation of the contract of insurance and a greater onus now falls upon insurers to ask key questions of the assured and its business before the policy incepts or renews.
The 2015 Act affects the way in which business is underwritten and placed. It also changes insurers’ remedies for non-disclosure and misrepresentation, breach of warranty and fraudulent claims. The 2015 Act has particular ramifications for key aspects of insurance law, including critical policy provisions such as warranty and due diligence clauses.
The assured and its brokers are be required to make a fair presentation of the risk. This represents a fundamental shift from the doctrine of “utmost good faith” (enshrined in section 17 of the MIA). That is not a new concept - in fact there is an element of going “back to the future”.
Nearly 250 years ago Lord Mansfield (Carter v Boehm  3 Burr 1905 at 1909) stated:
“Insurance is a contract based upon speculation. The special facts upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only; the underwriter trusts to his representation and proceeds upon the confidence that he does not keep back any circumstance in his knowledge, to mislead the underwriter into a belief that the circumstance does not exist, and to induce him to estimate the risqué as if it did not exist”
What does this mean in practice, against the backdrop of statements of practice, FCA rules, FOS discretions and industry guidance?
First, these changes will apply only to business insurance (consumer insurance having already been clarified by the Consumer Insurance (Disclosure and Representations) Act 2012).
The most important aspect of the 2015 Act is the requirement of a fair presentation of the risk.
The Law Commissioners criticised the perceived practice of overly complicated presentations and “data dumping” by assureds and their agents. Accordingly, disclosure must be “in a manner which would be reasonably clear and accessible to a prudent underwriter” (Section 3(3) (b) of the 2015 Act).
Multi-nationals seeking coverage in the London Insurance Market have been accused of “data dumping” and providing a mass of information that may not be particularly relevant to insurers in determining whether to accept the risk. The assured must carry out a reasonable search for information; with what is “reasonable” depending on the size, nature and complexity of the business.
The 2015 Act places a duty on the assured’s senior management (including the board of directors and others such as Risk Managers, amongst others, who have actual knowledge of the assured’s business) to make a fair presentation of the risk.
The assured is deemed to know what “should reasonably have been revealed by a reasonable search“.
Positive duty of inquiry for the insurer
Unlike the MIA where the insurer was not required to ask questions or indicate what it wished to know, the 2015 Act also creates a positive duty of inquiry for the insurer. Also, an assured is not required to disclose information that an insurer already knows (Section 5 (1)); or information that it ought to know (Section 5 (2)); or information that it is presumed to know (Section 5 (3)). As is the case now, an insurer will also be presumed to know things which are common knowledge.
Examples of “material circumstances” for the purposes of a “fair presentation” are set out in the 2015 Act for guidance. They include “special or unusual circumstances” relating to the risk; any particular concerns that led the assured to seek insurance in the first place; or anything which those concerned with the class of insurance and field of activity would generally regard as being required to be dealt with in a “fair presentation”. Insurers and brokers have been tasked with developing protocols setting out their agreed procedures.
The fundamental change is that insurers are required to raise queries if they are put “on notice” of information that requires further clarification. No defence of non- disclosure will be available to insurers who do not raise enquiries in those circumstances.
Also, the effect of the MIA had “evolved” in the Courts where if an insurer had been put fairly on enquiry about the existence of other material facts, which an enquiry would have revealed then if the insurer does not purse those enquiries he will have been held to have waived the disclosure of those material fact(s). The test is objective while the insurer need not be “….a detective on one hand nor lacking in common sense on the other” notwithstanding that mere possibilities would not put the insurer on enquiry (per Lord Justice Rix – WISE (Underwriting Agency) Ltd v Grupo Nacional Provincial SA .
The 2015 Act also changes the remedies that are available to parties to the policy.
The test for reliance on the “nuclear” remedies of non-disclosure or misrepresentation has changed significantly. Furthermore, the ability of either party to avoid the policy for a breach of good faith is abolished.
It is now possible to avoid a policy only where the misrepresentation or non-disclosure was deliberate or reckless, which, depending on the facts of the case may prove to be an extremely difficult test for an insurer to overcome. In all other cases the following proportionate remedies will apply, depending on what the insurer would have done if a fair presentation had been made:
- If the insurer would not have entered the contract at all, it can avoid the contract but return the premium
- If the insurer would have entered the contract on different terms, the contract is treated as if those different terms were applicable
- If the insurer would have charged higher premium then the amount paid on a claim may be reduced proportionately
The test of what the insurer would have done had it known the true facts remains entirely subjective, while the burden of proof for avoidance is also unchanged. It remains to be seen whether the Courts will be more willing to conclude that the insurer has met this burden with proportionate remedies being on the menu as opposed to the one option presently available.
The level of egregious behaviours – in terms of what constitutes an unfair presentation – will no doubt be developed by case law. The increased options available to insurers should assist commercial relationships as opposed to having only the sole present “nuclear” option.
The MIA provided that a warranty had to be strictly complied with, whether it was material to the risk or not (Section 33 (3)). If not complied with, the insurer is discharged from liability from the date of the breach.
The effect of the breach is actually automatic rather than being dependent upon the insured’s acceptance or election of the breach (per Lord Goff - Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd (The Good Luck) .
The 2015 Act mirrors the present position in consumer contracts of insurance by doing away with basis of the contract clauses. Long lists of answers to questions in a Proposal Form being “converted” into individual warranties have therefore become a thing of the past.
Instead, all warranties have become “suspensive conditions” so that an insurer will be liable for losses that take place after a breach of warranty has been remedied, assuming this is possible. For example, if an oil tanker steams in to a warranted excluded area she may be without cover for the period of that element of the adventure and she is only “back on cover” when she is navigating non-excluded waters.
Alternatively, and considering the matter from a non-marine perspective, if the assured breaches a warranty that an alarm system will be inspected every six months that breach will be “remedied” if the system is inspected after seven months, with coverage being deemed to have been suspended for one month in such circumstances.
If a claim arises during that one month period then insurers can potentially rely upon the breach of warranty.
The Act makes it clear that breaches of warranty that are irrelevant to the loss that occurs will no longer discharge insurers from liability. If the assured can show that failure to comply with any term in the contract (including warranties) could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred, insurers will no longer be able to rely on the breach to exclude liability.
In order to limit the scope for dispute, it would be advisable for the parties to clearly set out their requirements and the consequences for non-compliance. Warranties are still “live” but clear wording is required for them to bite. The usage of detailed protocols has been encouraged and should include specific reference to warranties.
An insurer is not of course liable to pay a fraudulent claim. Under the 2015 Act an insurer has the option of terminating the contract from the date of the fraudulent act – not the discovery of it – or if it does not treat the contract as having been terminated refuse all liability to the insured in respect of a relevant event after the time of the fraudulent act without any return of premium.
The Law Commissioners believed that insurers would welcome this option as it would allow greater commercial flexibility. The insurer can then refuse to pay any claims from that point onwards (but will remain liable for legitimate losses before the fraud) whereas previously under the MIA an insurer may be able to cancel the policy from inception regardless of when the fraudulent act occurred enabling them to recover any sums already paid prior to the act.
The changes are intended to be a “default regime” for business (non- consumer) insurance. The Law Commissioners anticipated that “in sophisticated markets, including the marine insurance market, we expect contracting out will be more widespread“. A business opportunity has been presented to insurers and brokers who wish to provide and negotiate a bespoke product.
That said, if insurers seek to proceed arbitrarily during the placing negotiations they will be required to identify every change which they do not intend to apply and the opt-out for that change separately in the policy. The changes need to be transparent.
Where insurers intend to include a more disadvantageous term than in the default position, they must take sufficient steps to draw that to the assured’s attention before the policy incepts and the disadvantageous term must be “clear and unambiguous as to its effect“. Particular attention in that regard should be given to small businesses (especially when purchasing via online platforms). However it is not possible to contract out of basis of contract clauses (see Warranties above).
The Enterprise Bill
This bill proposes an amendment to the 2015 Act that, if passed, could be law in 2017. Basically, insurers are now faced with an implied obligation to pay claims within a reasonable time.
How long is that? It is not known, as with all claims the facts will differ from case to case. Where the insurer is in breach the remedy is damages which will be awarded in addition to and distinct from any right to enforce payment of the sums due under the policy and any right to interest on those sums.
Again, the amount will be case specific and will vary. This implied term can be “contracted out” provided the transparency requirements are complied with and the insurer does not deliberately nor recklessly fail to pay the claim.
A limitation period is deemed to be of one year from the date when the insurer actually makes payment (if it does) or the last payment if in tranches or if earlier 6 years from the date on which the cause of action for the breach of the implied term occurred.
The bill is currently in the House of Commons having been amended by the Lords last year.
A final word
The Act has in parts codified modern case law (as did the MIA in its day). However, the introduction of proportionate remedies in cases on non- disclosure and warranties are startling and the effects on the insurance market will be far–reaching.
The clock is ticking - insurers, brokers and assureds would be well advised to get up to speed with the new framework and be prepared for the “new normal“.