Acting to stop harm: the FCA and Appointed Representatives
The Insurance Act 2015 (the “Act”) received Royal Assent on 12 February 2015 and comes into force on 12 August 2016.
A reform of the insurance law regime is long overdue as the main piece of legislation that still forms the basis of British insurance law (the Marine Insurance Act 1906) was passed when Edward VII was on the throne. The times, and the British insurance market, have changed somewhat in the intervening years. The Insurance Act 2015 is intended to bring the law up-to-date to fit the modern insurance market.
The Act brings into force a number of fundamental changes and the impact will be wide ranging and will affect the whole industry. This article reviews the key changes embodied in the Act and assesses the potential impact this may have for insurers, the insured and those seeking to bring claims against professionals with insurance.
Disclosure/Fair Presentation (applicable to non-consumer insurance contracts)
The duty of disclosure (known as the duty of fair presentation in the Act), previously required an insured to provide all information relevant to the risk (known to them before entering into the contract), with potentially little input from the insurer as to what this might include. Therefore, the responsibility for the content of the disclosure was borne wholly by the insured, whilst the legal definition of what represents reasonable disclosure was vague.
The new Act clarifies the law and introduces the new duty of “fair presentation" requiring the insured to either disclose every material circumstance which the insured knows or ought to know, or provide the insurer with sufficient information. This suggests that insurers may need to clarify or investigate material circumstances. The presentation will be fair if it is made in a manner that is “reasonably clear and accessible” and the facts are “substantially” correct and the representations as to expectation or belief are made in good faith. These changes encourage insurers to be more proactive in defining what they require in disclosures and whether further investigation is needed for assessing related risk.
Remedies for breach of pre-contractual disclosure (applicable to non-consumer insurance contracts)
At present, an insurer is entitled to avoid the entire policy if there is a failure by the insured to disclose material information. The new Act introduces a range of proportionate remedies and only permits insurers to avoid claims in cases where breaches were “deliberate or reckless” (unless fraud can be proved).
In many cases, it may be difficult for insurers to prove that a breach was “deliberate or reckless”. In cases where the breach was not ‘deliberate or reckless’ available remedies depend on the mind-set of the insurer. If the insurer would not have entered into the agreement on any terms if they had known of the breach, they can avoid the contract but must return premiums paid to the insured. If the insurer would have entered into the agreement under different terms, then the claim can go ahead as though these different terms applied. If the insurer would have entered into the agreement with higher premiums, the insurer can reduce their cover proportionately.
Contractual Warranties (applicable to consumer and non-consumer contracts)
Previously, a breach of warranty in an insurance contract would entitle the insurer to avoid all claims under the policy from the date of breach. This was the position even if the warranty had no bearing on risk.
Under the new Act, insurers can no longer be automatically discharged of liability for risk if contractual warranties are breached. Instead, the insurance is suspended for the duration of the breach and is reinstated once it has been fixed. In addition insurers can no longer automatically use a breach of warranty to avoid claims. Any non-compliance has to be related to the loss in order to be used to challenge a claim.
Fraud (applicable to consumer and non-consumer contracts)
The new Act does not change, but codifies into law, a number of remedies for fraudulent claims. Previously insurers were entitled to avoid the contract in fraudulent claims. The Act sets out insurers’ remedies in the event of fraudulent claims. Remedies set out in the Act include: (i) insurers recovering costs/sums paid to the insured in respect of fraudulent claims, (ii) no liability to pay a fraudulent claim and (iii) by notice treating the claim as terminated from the fraudulent act and retaining all premiums paid.
Duty of Utmost Good Faith (applicable to consumer and non-consumer contracts)
Previously, insurance contracts could be avoided if either side was proven to have not acted with “utmost good faith”. This remedy has been abolished in the new Act. Insurance contracts will still be based on the principle of utmost good faith and the relevant obligations will be drawn up and interpreted in accordance with this duty.
Contracting out of Insurance (applicable to consumer and non-consumer contracts)
An insurer can no longer contract out of its provisions if it puts the insured in a worse position than they would be in under the Act.
In relation to non-consumer contracts, the parties can agree less favourable terms subject to various transparency requirements which specify that the terms must be clear and unambiguous and sufficient steps have been taken to draw disadvantageous terms to the insured’s attention.
For the most part, the changes embodied in the Act appear to improve the position of the insured and provide more balance, particular in respect of disclosure and remedies for breach of warranty/pre-contractual disclosure. It remains to be seen how the changes will be implemented in practice and the impact they will have on the underwriting process before policies are entered into. However, the changes are generally thought to be positive and with more proportionate remedies being introduced, it is hoped that the ability of insurers to avoid polices for lack of disclosure/breach of warranty will be diminished. This is also welcome news to those considering pursuing a claim against a party with insurance i.e. in professional negligence claims.
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