On 17 July 2014, the Law Commission recommended several reforms in its report titled ‘Insurance Contract Law: Business Disclosure, Warranties, Insurers’ Remedies for Fraudulent Claims, and Late Payment’. Last week, the Insurance Act 2015 (“the Act”) received Royal Assent and thereby the Law Commission’s reforms will come into effect in the autumn of 2016. With the objective of modernising and revising insurance contract law across the UK, the Act will be effected more than a century since the Marine Insurance Act 1906, the current default authority.
The revised rules are considered to reflect the realities of the modern connection between Insurers and Insureds. Those operating in specialist classes of Insurance can continue to contract on different terms, provided that this is in line with the openness and fairness that the Act strives to achieve.
As the title of the Law Commission’s report hinted at, the Acts targets three issues: first, the duty of disclosure; second, the effect of warranties; and third, Insurers’ remedies for fraudulent claims.
DUTY OF DISCLOSURE
Insurance contracts have long been distinguished from prima facie contractual norms, not least because generally a party to a contract is not required to act in good faith. A party to an insurance contracts is obliged by the principle of “uberrimae fidei”, the duty of utmost good faith. This duty stretches as far back as the landmark case Carter v Boehm [1766]
Clause 3 of the Act appears to provide the 250-year-old principle a sibling, imposing a “duty of fair presentation”. How Insured’s can fulfil this duty remains to be seen but it appears that an Insured should have a simpler task in deciphering what to disclose to an Insurer at the pre-contract stage.
At the same time, whilst the duty of utmost good faith remains Insurers will be obliged to do more to assess the risk posed by prospective Insureds, as hinted by the following wording of the Act:
“disclosure which gives the insurer sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances”.
The Act appears to provide that whilst an Insured should be more aware of what it needs to disclose to an Insurer, an Insurer also ought to “make further enquiries” where necessary.
THE EFFECT OF WARRANTIES
It is important for Insurers to be aware that section 9 (2) of the Act provides:
“a representation is not capable of being converted into a warranty by means of any provision of the non-consumer insurance contract (or of the terms of the variation), or of any other contract (and whether by declaring the representation to form the basis of the contract or otherwise)”.
Effectively, this terminates “basis of contract” clauses. Insured’s answers in Proposal Forms will no longer automatically convert into warranties by virtue this provision. It is likely that case law will determine to what extent Insurers’ obligations will fill the remedial gap that section 9 creates.
Effectively, this terminates “basis of contract” clauses. Insured’s answers in Proposal Forms will no longer automatically convert into warranties by virtue this provision. It is likely that case law will determine to what extent Insurers’ obligations will fill the remedial gap that section 9 creates.
Insurers should equally be aware that a breach of warranty will no longer automatically release Insurers from their obligations from the moment of breach. Instead, by virtue of Clause 10 (2) of the Act:
“an insurer has no liability under a contract of insurance in respect of any loss occurring, or attributable to something happening, after a warranty (express or implied) in the contract has been breached but before the breach has been remedied”.
Subsequently, the old rules which released Insurers from their obligations are being replaced by a regime whereby Insurer’s obligations are suspended until the breach is remedied by the Insured.
INSURER’S REMEDIES FOR FRAUDULENT CLAIMS
A fraudulent claim can have a variety of effects on policies depending on the policy wording. The common law position remains uncertain in this regard but it is generally considered that the result of a fraudulent claim is the forfeiture of the entire claim whilst the policy itself continues to run. This has especially been the position since the Court of Appeal’s ruling in Axa General Insurance Limited v Gottlieb and another [2005] whereby a fraudulent claim resulted in the whole of the fraudulent claim failing but claims made under the insurance policy which were not fraudulent remaining valid and insurers unable to recover the monies paid out on them.
As a result, many insurers have rightly dealt with this by stipulating clauses to ensure that a fraudulent claim will not only void the claim but also the policy from the date of the fraudulent claim.
The Act now provides Insurers with a statutory right to terminate the policy from the time of the fraudulent act (with no obligation to return the premium).
Further, Insurers are unable to contract out of the prohibiting of “basis of contract” clauses. Therefore, the reforms will present Insurers with relatively new commercial decisions and challenges in what we consider to be one of the most substantial revisions of governing insurance contracts for the best part of over a century.
