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Insurance Act 2015 - Clyde & Co

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Insurance Act 2015Shaking up a century of insurance law

ContentsIntroduction 1The case for insurance contract law reform Part one: 6Part two: 10Part three: 18Part four: 20Part five: 21Part six: 22Part seven: 24Key changes introduced by the ActThe Act in practiceIn practice - how to comply with the ActInternational reach – choice of lawand the application of the ActInsolvent insureds: Third Parties(Rights Against Insurers) Act 2010Law reform in the consumer contextThe Act in focus - each classof business discussedAviation 24Construction and engineering 26Energy 28Financial institutions and D&O 30Marine 32Medical malpractice 34Mining, industrials and power 36Personal injury 38Product liability and product recall 40Professional indemnity 42Property 46Reinsurance 50Specialty 52Part eight: International insurance cover - the Act compared58

IntroductionThe Insurance Act received Royal Assent by Parliament on 12th February 2015, and will comeinto force on 12th August 2016. This represents the most significant reform of UK insurancelaw since the Marine Insurance Act of 1906. All contracts of insurance, reinsurance andretrocession made after 12th August 2016 (or variations to contracts which are made after 12thAugust 2016) will be governed by the Act.The Act is the product of a process of law reform whichwas instigated by the Law Commissions in 2006. The Act isintended materially to change the way in which insurancebusiness is conducted, and is designed to modernise andclarify the law.To the "casual observer" it might be surprising that theUK's insurance law regime has for so long been based ona statute that is more than 100 years old and which wasoriginally designed only to address marine insurance.And yet, the business of insurance in the UK has thrivedand the UK legal system, based upon a combination ofstatutory codification and judicial precedent, has, to asignificant extent, shaped the international insurancemarkets and the development of insurance law during thecentury since the 1906 Act. But as market practices havedeveloped the legal regime needed to be updated to reflectchanging demands and bring it into line withother jurisdictions.With the enactment date now looming, it is important tofocus on how the Act will work and the steps that insurerswill need to take to ensure they are ready to deal withthese changes. In this guide we have focused on how thekey provisions of the Act will operate, offering guidance onbest practice for insurers as they implement the provisionsof the Act, and assessing the practical implications ofthe Act across all lines of insurance business. Some ofthe more controversial provisions of the Act, such as theremoval of the basis of contract clauses, have alreadybeen widely implemented by the market, other provisionshave gradually been introduced by insurers as they havesought to ready themselves for the Act. Nevertheless, itis important to note that all contracts of insurance after12th August 2016 will be formed under a new regimeand insurers must take careful note as they are draftingcontracts of the potential implications of the Act.During the process of law reform, the Law Commissionslooked at other jurisdictions where similar provisions hadalready been implemented, and in part eight of this reportwe have considered how the new UK regime for insurancelaw measures up against the other major insurance markets.Like all new statutes, the full impact of the Act will not beappreciated until some of the provisions are interpretedby judicial precedent, and we expect that over the comingyears we will see further definition of the Act as it is putinto practice.We hope that this report will add valuable insight forinsurers as they move into the new regime.Simon KonstaGlobal Head of InsuranceJune 20161

The case for insurancecontract law reformThe Insurance Act 2015 received Royal Assent on 12 February 2015 and is due to come intoforce on 12 August 2016. It will amend certain key sections of the Marine Insurance Act1906, although the 1906 Act has not been repealed. It applies to England, Wales, Scotland andNorthern Ireland.The road to this point has not been straightforward; and thecase for reform has been discussed for many years. As earlyas 1957, there were calls for change, and various attemptssince then to kick-start the process of reform.Current UK insurance law stems from the 1906 Act, whichcodified common law principles that had been developedin the eighteenth and nineteenth centuries, largely frommarine cases, most notably, the case of Carter v Boehm(1766) which established the duty of utmost good faith.Over the years its provisions have been applied to marineand non-marine cases alike and there were increasingconcerns that the clear bright language of the 1906 Actrestrained the judiciary and was not able to keep up withthe changing market practice of the industry in both theconsumer and business sectors. No longer was insurancearranged between a few men face-to-face; no longer wasthe range of products limited and focussed on marineinsurance; no longer was it difficult to store and processinformation.As the Law Commissions put it:“The law has failed to keep pace with these changes.The law does not reflect the diversity of the moderninsurance market or the changes in the way peoplecommunicate, store and analyse information. Nor doesit reflect developments in other areas of commercialcontract and consumer law.”The call for reform got louder at the turn of the newcentury and, following a convincing BILA report, the LawCommissions of England and Scotland produced a scopingpaper in January 2006 examining the current state ofinsurance law to ascertain where reform was needed.The Law Commissions examined how insurance lawoperated in other jurisdictions noting that the 1906 Act hadprovided the global insurance market and legal professionwith a framework that became a model for codification inmany common law jurisdictions, with the UK judiciary’sinterpretation of the 1906 Act being instructive to otherjurisdictions and its principles often applied. However, overthe years many of these same jurisdictions had reformedtheir laws resulting in the UK lagging behind and out of stepwith international markets.2Following publication of their joint scoping paper in January2006, the Law Commissions published several issues papersand detailed consultations. It was decided that consumerand business insurance reform should be treated separately.The reviews culminated in the adoption of three new Actsof Parliament: The Third Parties (Rights against Insurers) Act 2010(coming into force 1 August 2016) The Consumer Insurance (Disclosure and Representation)Act 2012 (which came into force on 6 April 2013) The Insurance Act 2015 (coming into force 12 August 2016)In relation to business insurance, the Law Commissions hadpresented their Report and Draft Bill on 15 July 2014 to theGovernment, proposing a default regime in respect of: The duty of disclosure in business and other non-consumer insurance The law of insurance warranties Insurer’s remedies for fraudulent claims Late payment of insurance claimsThe majority of the Law Commissions proposals wereenacted in the Insurance Act 2015. The provisions for latepayment of insurance claims were not included in the Bill,enabling it to follow the uncontroversial bills route throughParliament. However, these provisions were subsequentlyreintroduced in the Enterprise Act 2016 which receivedRoyal Assent on 4 May 2016 and will come into force on 7May 2017.The process of insurance law reform is not yet complete.Still on the Law Commissions' agenda is to clarify andamend the law in relation to insurable interest: theirargument, in essence, is that insurance contracts shouldbe void, not illegal, unless the policy-holder had an interestat the time of contract or had reasonable prospects ofobtaining one during the contract. If the contract is void,there is no obligation to pay premium or, if it has been paid,premium must be refunded.

The Law Commissions published their Draft InsurableInterest Bill in April 2016 and intend to publish a jointreport in the second half of 2016, setting out theirrecommendations following consultations which took placein 2008, 2011 and 2015 and 2016.The changes introduced by the Act havelargely been welcomed; many insurershave already been following the provisionsof the Act.The Law Commissions also published proposals on thefollowing, though currently these items have been shelved: Whether the need for a formal insurance policy in marineinsurance (under the 1906 Act) should be abolished.Consultees said no Whether the broker should remain liable for premiumunder section 53 of the 1906 Act – if a broker goes outof business, the insurer is left out of funds and cannotrecover from the insured but must still pay the claim ifthere is a loss. There was a radical split in response withbrokers agreeing with the Law Commissions and theunderwriters disagreeingThe changes introduced by the Act have largely beenwelcomed; many insurers have already been following theprovisions of the Act.3

Law reform: a timeline2006Mar1980Jul1930Third Parties(RightsAgainstInsurers) Act1930 in forceJan1907MarineInsuranceAct 1906 inforce4The LawCommissionpublishesits report:InsuranceLaw: Nondisclosureand Breachof Warranty1957The LawReformCommitteerecommendsreform ofinsurance law2001Lord JusticeLongmoregives thePat SaxtonMemorialLecture andcalls for “AnInsuranceContractsAct for a newcentury”Feb1986TheDepartmentof Trade andIndustry tellsParliamentthat insurers’willingnessto strengthenthe voluntary“statementsof d that selfregulation ispreferableJan 2006The LawCommissions’joint scopingpaper isproducedSept 2006Issues Paper 1:Misrepresentation andnon-disclosureNov 2006Issue Paper 2:Warranties2002The BritishInsuranceLawAssociation(BILA)publishesa reportdeclaring thatit is “satisfiedthere is aneed tation, nondisclosureand breach ofwarranty bythe insuredIssues Paper5: Microbusinesses –should microbusinesses betreated likeconsumers forthe purposesof precontractualinformationand unfairtermsdec2009Report:consumerinsurancelaw: precontractdisclosureand misrepresentationmarjannovMarIssues Paper 3:Intermediariesand precontractinformationIssues Paper4: InsurableinterestThird Parties(RightsAgainstInsurers) Billintroduced toParliamentIssues Paper6: Damagesfor latepayment2007 2008 2009 2010Third Parties(RightsAgainstInsurers) Act2010 receivesRoyal Assent

jul2010Issues Paper 7:The insured’spost-contractduty of goodfaithIssues Paper 8:The Broker’sLiability forPremiums(Section 53)Mayfeb2011 Marapr2012 2013 ations) Bill isintroduced toParliamentConsumerInsurance(Disclosureand Representations)Act 2012receivesRoyal AssentConsumerInsurance(Disclosureand Representations)Act 2012 inforceInsurance Act2015 receivesRoyal Assent4/MAY 12/AUGIssues Paper10: InsurableinterestEnterprise Act2016 receivesRoyal Assent2016 2016Insurance Act2015 in forceOctdecjunjulsep1/AUG7/mayIssuesPaper 9: TheRequirementfor a FormalMarinePolicy: ShouldSection 22 BeRepealed?Consultation:insurancecontractlaw: postcontractualduties andother issuesConsultation:insurancecontact law:the businessinsured’s dutyof disclosureand the lawof warrantiesReport:insurancecontract ies forfraudulentclaims; andlate paymentEnterpriseBill (includingprovisionsrelating todamages forthe late payment if insuranceclaims) isintroduced toparliamentThird Parties(RightsAgainstInsurers) Act2010 in forceEnterpriseAct 2016provisionsrelating todamages forlate paymentin force2010 2011 2012 2014 2015 2016 2017Insurance Billintroduced toParliament5

Part one:Key changes introducedby the ActThe most significant changes introduced by the Act are summarised below. Note that theprovisions in relation to utmost good faith and non-disclosure only apply to non-consumerinsurance, consumer insurance having already been dealt with in this regard by the ConsumerInsurance (Disclosure and Representations) Act 2012.Utmost good faith/Non-disclosureFair presentation of the risk – Section 3 of the ActThe duty to volunteer information is being retained(unlike for consumer policies). An insured has to discloseall material facts or make a fair presentation, which willinclude putting a prudent insurer “on notice” that it needsto make further enquiries (and so falls short of requiringthe insured to disclose every material circumstance).Material information must not be deliberately withheld.The Law Commissions criticised the practice of convolutedpresentations and “data dumping”: “A lack of structuring,indexing and signposting may mean that a presentationis not fair”. Hence, disclosure must be “in a manner whichwould be reasonably clear and accessible to a prudentunderwriter”. Section 7 provides guidance on what toinclude in a fair presentation.Knowledge of Insured – Section 4 of the ActWhen deciding what an insured knows, it is the knowledge ofsenior management (which will include the board of directorsbut also those who play significant roles in the making ofdecisions about how the insured’s activities are to be managedor organised) and of those responsible for arranging theinsurance which matters (and blind-eye knowledge is included).An insured must now carry out a reasonable search forinformation, and what is reasonable will depend on the size,nature and complexity of the business.Disclosure must be “in a manner whichwould be reasonably clear and accessibleto a prudent underwriter”.The insured will be deemed to know what “shouldreasonably have been revealed by a reasonable search”and so information held by non-senior management (butby those who, say, perform a managerial role) may still beimputed to the insured. Information/knowledge held by anyother person with relevant information (even those outsidethe company, such as the company’s agents or beneficiariesof cover) will also be imputed to the insured if a reasonablesearch should have revealed that information.6However, the insured’s knowledge does not includeconfidential information acquired by the insured’s agent (egits broker) through a business relationship with someone otherthan the insured who is not connected with the insurance.Knowledge of Insurer – Section 5 of the ActThe Act also creates a positive duty of inquiry for theinsurer. An insurer “ought reasonably to know” something ifit is known to an employee/agent who ought reasonably tohave passed it on, or relevant information which is readilyavailable and held by the insurer.An insurer will also be presumed to know things which arecommon knowledge, or which an insurer offering insuranceof the class in question to insureds in the field of activity inquestion would be expected to know in the ordinary courseof business.Remedies – Section 8 and Schedule 1 of the ActThe remedies for material non-disclosure ormisrepresentation will change as follows:1. It will be possible to avoid a policy and keep the premiumonly where the misrepresentation or non-disclosure wasdeliberate or reckless.2. In all other cases (even where the insured is innocent), ascheme of proportionate remedies will apply, as follows:a. where the insurer would have declined the riskaltogether, the policy can be avoided with a returnof premiumb. where the insurer would have accepted the riskbut included a contractual term, the contract shouldbe treated as if it included that term (irrespectiveof whether the insured would have accepted thatterm); andc. where the insurer would have charged a greaterpremium, the claim should be scaled downproportionately (for example, if the insurer would havecharged double the premium, it need only pay half theclaim). This contrasts with some other jurisdictions,where only the additional amount of premium ispayable to the insurer. The Law Commissions haveexplained that this is because it was felt the insuredshould have something to lose (ie more than just payingthe amount of premium they should have paid in thefirst place)

The test of what the insurer would have done had it knownthe true facts is entirely subjective. In practice, it may behard for insureds to disprove that, for example, a particularinsurer would have viewed a certain breach as so seriousthat he/she would not have written the risk at all. The issuewill become one of credibility. The keeping of thorough andcomprehensive underwriting records (both of risks whichare accepted and risks which are not) will be important.In order to have any remedy at all under the Act for nondisclosure or misrepresentation (even a relatively modestone, eg a 20% reduction of the claim), the insurer willhave to meet the same burden of proof that is currentlyrequired for avoidance of the policy. However it may be thatjudges and arbitrators will be more willing to conclude thatthe threshold has been met once they are able to grant aremedy that is proportionate to the degree of mischief.Warranties and other policy termsBasis of contract clauses – Section 9 of the ActBasis of contract clauses will be prohibited (as is already thecase for consumer contracts) and it will not be possible forbusiness insurers to contract out of this particular change(section 9 of the Act). Thus any provision in a proposal formwhich purports to convert answers in the proposal forminto a warranty will be ineffective though it is still possibleto have warranties in the policy itself.Basis of contract clauses will be prohibitedand it will not be possible for businessinsurers to contract out of this particularchange.Breach of warranty – Section 10 of the ActAll warranties will become “suspensive conditions” (section 10of the Act). This means that an insurer will be liable for lossesthat take place after a breach of warranty has been remedied,assuming this is possible and provided that the loss is not“attributable to something happening” before the breach.Thus, for example, if an insured breaches a warranty thatan alarm system will be inspected every six months, thatbreach will be “remedied” if the system is inspected afterseven months, and so coverage will be suspended for onlyone month in such circumstances.Section one – The Insurance ActThe proportionate remedies can work together or assole remedies.Terms not relevant to the actual loss – Section 11of the ActA new provision has been introduced for any term (not just awarranty) designed to reduce the risk of a particular type ofloss, or of loss at a particular time or in a particular place. Itwill not apply to terms which define the risk as a whole (eg arequirement that a property will not be used commercially).Where there is non-compliance with such a term, insurerswill not be able to rely on that non-compliance as adefence if the insured can demonstrate that such noncompliance could not potentially have increased the risk ofthe loss which actually occurred in the circumstances inwhich it occurred.So, for example, where there is a requirement to install aburglar alarm, and that is not done, insurers will not be ableto refuse an indemnity on that ground for flood loss.Fraudulent claimsCurrently, an insurer is not liable to pay a fraudulent claimand can recover any sums already paid in respect of it. Itis not clear whether an insurer can refuse to pay genuineclaims for losses suffered after the fraudulent act but beforediscovery/termination of the policy.Under section 12 of the Act, an insurer will also have theoption of terminating the contract from the date of thefraudulent act (not the discovery of it), without any returnof premium. The Law Commissions believed that insurerswould want this option, rather than an automatic remedy,because it allows them more commercial flexibility. Theinsurer can then refuse to pay any claims from that pointonwards (but will remain liable for legitimate losses before

2012 Consultation: insurance contact law: the business insured’s duty of disclosure and the law of warranties JUL 2014 Report: insurance contract law: business disclosure; warranties; insurers’ remedies for fraudulent claims; and late payment Insurance