Insurance Act 2015: A reform of insurance contract law, what’s in and what’s out for the P&I sector?
Insurance Act 2015: A reform of insurance contract law, what’s in and what’s out for the P&I sector?
The Marine Insurance Act 1906 (“MIA 1906”) provided the main pillar for marine insurance over the 18th and 19th centuries, at this time the insurance industry was in its very early stages of development as compared to today. As the insurance market quickly developed to accommodate the vast changes in many sectors, it was just a matter of time that a new insurance act would be required. The Law Commission had to consider whether the existing insurance law regime in the UK was indeed still fit for purpose in the modern insurance market. The Law Commission was of the opinion that the current law was outdated and required updating in order to meet the needs of the 21st-century commercial practice. The Insurance Act 2015 (the Act 2015) received Royal Assent in February 2015 and came into force on 12 August 2016.
The 2015 Act will directly create changes to English insurance contract law (replacing the existing common law) currently codified in the MIA 1906. The changes encompass reforms to areas such as disclosure by policyholders and their agents in business insurance, warranties, payment of claims, basis clauses and remedies for fraudulent claims.
During the drafting process, it was recognised that the Act 2015 might not be required in sophisticated markets such as the marine insurance sector. The P&I sector is a sophisticated insurance market, with well-established marine insurance practices benefiting both Members and the P&I Clubs. Eight of the Clubs in the International Group (“the IG”) are affected by the Act 2015 as their Rules are subject to English law, including the MIA 1906. The IG Clubs have decided that due to the interest of continuity across the wider International Group, the consensus amongst the eight IG Clubs is to contract out of (i.e. the Act 2015 would not apply) certain aspects of the new Act. The eight IG Clubs have recognised it is important to adopt some provisions of the Act 2015 because it provides clarity on certain aspects of the law which are presently uncertain. This article will discuss the elements of the Act 2015 which are contracted out of and those that will be adopted by the IG Clubs.
Duty of Fair Presentation
The old position under section 18 MIA 1906 establishes that the overall duty of utmost good faith is on the insured to provide all information that would be material to the risk, whether or not the insurer requests that information. This meant that the onus and responsibility of disclosure were entirely on the insured. In the event that the duty had been breached, the insurer was entitled to avoid the insurance policy altogether.
The Act 2015 under section 21(2) repealed section 18, 19 and 20 of the MIA 1906 on matters of disclosure by the insured or his agent and any pre-contractual representations. Under Section 14(1) of the new Act, “any rule of law permitting a party” to avoid a contract on the ground of the utmost good faith has been abolished. Furthermore, section 3 of the new Act attempts to clarify the current law and modify the duty of utmost good faith, replacing it with the new duty of “fair presentation” of the risk. There are some similarities between both the old and new positions, however, greater emphasis is given to the insurers’ role in the process of disclosure. The insured is now required to:
(i) disclose to insurers “every material circumstance” which the insured knows or ought to know; or
(ii) provide the insurer with “sufficient information” to put a prudent insurer on notice that it needs to make further enquiries to reveal such “material circumstances”.
Disclosure would not be a single event but a staged process. The insured must now disclose information in a manner that would be “reasonably clear and accessible to a prudent insurer”, the information disclosed should be structured and organised for underwriters. This requirement attempts to prevent the insured from data dumping and bombarding the insurer with vast amounts of information. A circumstance is material under section 7(3) of the Act if it would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms. This means that the information given should be enough to put him on notice or that would allow the insurer to make further enquiries. To ensure a fair presentation of risk, it may be advisable for the insurer to outline to the insured the particular or potential risks it is concerned about, thus put the insured on notice as to what the insurer considers is material to the relevant risk. This is consistent with the requirement that a reasonable search is now required by the insurer and it is now the insurer’s duty to probe and ask the appropriate questions. As a result, it is the responsibility of the insurer to make relevant enquiries and this should prevent insurers relying on a passive approach to disclosure when seeking to exercise its remedies for non-disclosure.
The eight affected IG Clubs agree that a fair presentation and a professional assessment of the risk are of mutual benefit to Members and to Clubs and that, consequently, the new duty of fair presentation will be adopted by the affected Clubs. Those clubs have, however, decided to contract out of the new Act’s provisions on remedies for breach of the duty of making a fair representation (this issue will be discussed later in this article).
Currently, basis clauses have the effect of converting all pre-contractual representations in a proposal form into warranties. In instances where basis clauses are used the insurer can be discharged from liability if the proposal form contains any statement that is inaccurate, whether or not that misrepresentation is material to the loss and in no way induces the insurer to enter the contract.
Under the new Act 2015 basis clauses or any other attempt to give pre-contractual representations on the status of a warranty by way of a provision in the insurance contract will be prohibited. The basis of the contract clauses it will not be possible for business insurers to contract out of this particular change (section 9 of the Act). This prohibition would negate the effect of the current Club Rules which declare such information to be the “basis” of the contract of insurance. Therefore, any such basis of contract wording will be removed from the Rules of the eight affected IG Clubs. The Clubs consider that any inaccuracies in material representations will instead be treated as relevant to the question of whether or not there has been a fair presentation of risk.
Remedies for Breach of the Duty of Fair Presentation
A very important change made by the Act 2015 relates to remedies for failure to comply with the duty of pre-contractual disclosure (known as the duty of fair presentation in the Act 2015). The old position established under section 18 and 19 of the MIA 1906 permits an insurer to avoid the entire contract in the event that there is a failure by the insured to disclose all material information. The undisclosed information need not relate to the loss. All that was required to enable the insurer to avoid the policy is that the undisclosed information was unknown to the insurer and was material.
Under the new Act 2015, an insurer will remain entitled to avoid the policy if an insured ‘deliberately or recklessly’ fails to make a fair presentation and where the insurer can show that he would not have entered into the contract had he known the information or would only have done so on different terms. The requirement that the insured’s failure to disclose information was “deliberate or reckless” could be very difficult for insurers to prove. Where the breach is neither reckless nor deliberate the remedies set out in the Act 2015 are less draconian. They are intended to be proportionate and to reflect what the insurer would have done if they were aware of the undisclosed information before entering into the contract.
The eight affected IG Clubs intend to contract out of the Act 2015 provisions on remedies for breach of the duty to make a fair presentation, the Clubs have recognised the importance in a mutual club of proper disclosure. Consequently, the eight IG Clubs will keep the MIA 1906 remedy of avoidance in respect of any breach of the duty to make a fair presentation of the risk.
Warranties and Other Terms
The old established position in practice under the MIA 1906 is that certain warranties are condition precedent. Any breach of such warranties under the insurance policy would entitle the insurer the right to reject claims from the date of the breach and discharge it from liability whether or not it is material or related to the loss. Such breaches of warranties may be waived by the insurer.
The new position under section 9 to 11 of the Act 2015 has a less draconian approach to a breach of warranty. A breach of warranty would mean that the insurer can suspend (rather than entirely discharge) the insurer’s liability until the breach is remedied. The insurer will be discharged from liability until the breach is fully remedied at which point the insurance policy will be fully in force once again. The IG Clubs in considering the new Act, regarded the importance of the mutual nature of the risk, the availability of the relevant Clubs’ Board or Managers’ discretion in appropriate cases and also the uncertainty of how the new Act’s provisions on warranties and other terms may be applied. IG Clubs felt it best to preserve the old position, insofar as permitted, they will be contracting out of the new Act 2015 on provisions related to warranties and will, therefore, maintain existing practices permitting a rejection of claims for breach of warranties.
Payment of Claims
Under the old practice and law, there can be no award of damages for the non-payment or late payment of an insurance claim. This means that losses consequent on the failure of an insurer to pay a valid claim under an insurance contract are irrecoverable. The insured has contended this causes significant difficulty especially when claims are not paid promptly or whose claims are unreasonably rejected. Additionally, no interest is payable on the payment of claims under the IG Clubs’ Rules as Members have no right of recovery of interest.
The Enterprise Bill 2015 (which is currently being considered by the UK Parliament) proposes to amend the Insurance Act 2015. This Bill will include a specific add-on to the Insurance Act 2015, relating to damages for late payment of claims by insurers. The intention of this add-on is to allow the insured to claim damages if their business has suffered recoverable losses as a result of the unreasonably delayed settlement of an insurance claim. It is important to note that this means that an insurer could be in breach of the implied term where, for example, it conducts its coverage investigation unreasonably slowly. For these damages to be available, an insured would need to show that an insurer has been unreasonable and that the insured has suffered identifiable loss. The Bill proposes certain remedies for breach of that implied term, including the possibility for the insured to claim interest. The IG clubs considers that due to the mutual nature of the risks insured and the manner in which claims are handled in the IG and under the Pooling Agreement, these provisions do not appear to be appropriate for IG Clubs. The eight affected IG Clubs, therefore, have decided to contract out of this provision and will maintain the longstanding exclusion of the payment of interest on Members’ claims. The IG Clubs are aware that the new Act 2015 does not permit an insurer to contract out of the implied term in circumstances if the insurer deliberately or recklessly fails to reimburse an insured’s claim within a reasonable time. Therefore, club Members will still be protected to that extent.
Prior to the enactment of the Act 2015, pre and post-fraud claims would be untainted by a fraudulent claim. Generally, fraudulent claims would result in forfeiture of the whole claim rather than the whole policy. The insurer would include provisions within the insurance contract to ensure fraudulent claims are void from the date of the fraudulent claim. It is important to note that fraud is difficult to prove as criminal standard of proof is higher than civil. Once proved, the contract can be avoided at inception ‘ab initio’. The 1906 Act allows an insurer to avoid a fraudulent claim at common law. Under section 17 of the 1906 Act, they can also avoid the policy, allowing the insurer to recover sums paid out previously under a non-fraudulent claim. The Act 2015 remedies this situation and provides clarity.
The new Act’s provisions on fraud provide clarity on this area of the law. Therefore, the affected IG Clubs will adopt the new statutory provisions as to the treatment of fraudulent claims. The Act 2015 provides the insurer has clear statutory remedies when the insured submits a fraudulent claim. In cases where a claim is tainted by fraud, the insured forfeits the whole claim and cannot recover the part of the claim that would genuinely have been payable. In addition, the insurer may also recover from the insured any sums paid by the insurer in respect of that claim. The insurer may choose to serve a notice that it is treating the contract as terminated from the date the offence was committed. If the insurer decides to treat the contract as terminated it may also refuse all liability to the insured under the contract in respect of a relevant event after the fraudulent act and need not return any premiums paid under the contract. However, previous valid claims arising prior to the fraudulent act are unaffected.
The IG Clubs have decided to exclude the operation of the Act’s 2015 provisions on the continuing validity of policies following a fraudulent claim made by a beneficiary who is not specifically named in the terms of entry, such as an entity associated with or affiliated to a Member against whom a covered claim is enforced. Where a fraudulent claim is made in this context, the IG Clubs considers that the fraud should have the same impact on the Member as if the Member had made the fraudulent claim. The affected IG Clubs will, therefore, contract out of these aspects of the Act 2015.