Dragging insurance law into the 21st Century
It’s arguable that words like ‘utmost good faith’, ex gratia, and ‘my word is my bond’ have lost their shine in the recent era. The new ‘Insurance Bill’ will radically modernise insurance law in superseding existing legislation first enacted in 1906!
The insurance regime based on the Marine Insurance Act 1906 was good in its time. But it’s now outdated and lags behind the rest of the EU. After many years of lobbying, we now have the Insurance Bill, which received Royal Assent in February 2015 and is expected to come into force next year. Finally, the UK is coming into line with the rest of the EU in abolishing the old draconian avoidance regime in favour of a new fairer system.
Buyers expect insurance policies to pay out when a claim is made. Regrettably – and more so in recent years – insurers have looked for grounds on which to walk away from a claim.
Under the new law, opportunities for insurers to avoid paying claims – or terminate cover – have diminished significantly. But it is a default regime where commercial insuring parties can opt out. Buyers should therefore beware the opt-out wordings, or discussions in policy negotiation meetings. Whilst there is an 18-month transition period before the new law comes into full force, some are already drafting clauses to allow the law to apply to insurance policies immediately.
Key changes include introduction of a “duty of fair presentation” of risk, in place of the existing duty to disclose all material facts. And also proportionate remedies for unintentional breach of this requirement, so that the policy may survive, with any claims settlement adjusted accordingly.
This is a significant adjustment to current disclosure rules, under which insurers are entitled to avoid liability altogether in the event of failure to disclose a material fact, regardless of whether the non-disclosure was deliberate, or had any bearing on the loss claimed under the policy. Insurers will remain entitled to avoid the policy, and retain the premium in the event of intentional or reckless non-disclosure.
In relation to any other type of non-disclosure, the policy may be avoided only if the relevant information would have caused the insurer to decline the risk completely, and even then the insurer does not recover the premium. If cover would have been agreed on different policy terms, the insurer will be entitled to treat the contract as if it was on such terms, and if a higher premium would have been charged, the claim amount may be reduced proportionately.
Further significant changes relate to insurance warranties. Breach of warranty by the insured will in future merely suspend – and no longer discharge – the insurer’s liability under the policy. So a subsequent claim will be valid notwithstanding a previous breach of warranty that has since been remedied by the insured.
Insurers will also be prevented from relying on non-compliance with a warranty as grounds for avoiding liability for a claim for loss of an entirely different kind than that envisaged by the warranty. “Basis of contract” clauses are abolished under the Insurance Bill i.e. provisions which seek to turn all the insured’s representations in relation to the risk into warranties. The potentially draconian consequences of such clauses have been criticised, and it will not be possible to contract out of this prohibition.
Overall, the Bill is a positive step in addressing some of the harsh provisions currently contained in UK insurance law which adversely affect policyholders. It is hoped it will create a more balanced approach to solving problems arising out of insurance contracts. Only time will tell as to whether this happens in practice.