It has been eight long years since The Law Commission and the Scottish Law Commission were asked to review UK insurance contract law. Much has been written and said on the subject of insurance contract law reform since then (including by me). Now at last the government has introduced a new insurance bill for consideration under a special fast-track parliamentary procedure.
When the bill receives Royal Assent, which is likely to be before the next election in 2015, it will mark the most profound shift in UK commercial insurance law ever. That is not a claim to be made lightly but, if you doubt me, take a look at just the following three highlights.
Changes to the Duty of Fair Presentation
The Insurance Bill replaces the insured’s longstanding duty to disclose to the insurer “every material circumstance” that it knows or ought to know “in the ordinary course of business” with a duty to “make to the insurer a fair presentation of the risk”. This brings commercial law into line with the law that now applies to consumers by virtue of the Consumer Insurance (Disclosure and Representations) Act 2012.
The new duty will be satisfied if the insured discloses every material circumstance that he or she knows or ought to know would enable the prudent underwriter to price or write a risk or cause the prudent underwriter to ask further questions. Where the insured is an entity, the test will be based on relevant knowledge possessed by senior management or those responsible for taking out the insurance. (As the law currently stands the duty of disclosure is based on what the insurer would consider to be material.)
More radically still, if the insured breaches this new duty, the insurers can only avoid the policy and retain the premium where the non-disclosure was deliberate or reckless. In all other cases, it will depend on what the insurers would have done had a fair presentation been made. Avoidance will only be available to insurers as a remedy where they can show that they would not have contracted on any terms. This brings UK insurance law much more in line with that of other developed economies.
While the concept of warranties will be retained, much of the perceived unfairness to insureds will be legislatively excised. In particular:
- Under the law as it stands, if, either in the policy wording or in the proposal form, the information supplied by the insured is expressed to form the “Basis of the Contract” and is subsequently shown to have been in any respect inaccurate, insurers can treat this as a “breach of warranty” with the consequence described in (2) below. Under the new Act insurers will be deprived of any special rights in respect of such clauses ;
- Under the law as it stands, a breach of warranty entitles insurers to treat any payment obligations in respect of claims as discharged from the date of breach. In other words they can (and sometimes do) refuse to pay irrespective of the merits of the claim itself. Under the new Act, a breach of warranty would suspend rather than discharge the insurer’s liability. In other words, once the breach has been remedied the insurer will still be liable to pay any valid claims that arise.
The Insurance Act will introduce a default statutory regime for fraudulent claims. Of perhaps greatest interest in a D&O context is the statutory application of the concept of severability (i.e. the principle, accepted for some time under English common law, that if the parties so intend, an insurance contract can be treated as a bundle of separate contracts between the insurer and individual insureds.) Thus, where fraud is committed by persons entitled to make claims under group insurance policies, such policies will be treated as if the insurer and the fraudulent insured had entered into a separate insurance contract so that any remedies visited on him or her would not invalidate the contract as a whole.
The insurers will remain liable for claims arising before any fraudulent acts but, if the insurers elect to treat the contract as terminated, they would have no liability for future claims and would not have to return the premium.
Some might say that this is only the most significant change to UK insurance law in the last hundred or so years since the Marine Insurance Act of 1906, but I stand by my claim. The 1906 Act tried to codify rather than change existing common law. Outside the consumer context, nothing approaching this significance to insurance law has hit UK statute books before.
The chances are that the new Act will receive Royal Assent by March 2015 and will come into force 18 months after that. Whilst it will be possible in a non-consumer context for parties to expressly opt out of most of the provisions of the new regime, it is doubtful that insureds will be keen to allow many of the statutory improvements for them summarised above to be negotiated away.
Equally though, insureds should not assume that insurers will be prepared to give them the benefit of these reforms before they come into force. To be clear and until further notice, the duty of utmost good faith under the Marine Insurance Act 1906 is still very much in force as are all the unpleasant consequences of basis of the contract clauses.