[co-author: Isabella Lewis]

On 12 February 2015 the Insurance Act 2015 received royal assent.  The Act makes important formal changes to the centuries-old laws of disclosure and warranties in insurance contracts.

The Insurance Act 2015 will enter into force in August 2016, giving time to allow insurers to prepare for the changes made.

Below are the two main changes made by the Act:

Disclosure

The Act provides that, in non-consumer insurance contracts, the existing duty of pre-contract disclosure (often referred to as the ‘duty of utmost good faith’) shall be replaced with a ‘duty of fair presentation’ on the behalf of the insured (subject to the ability to contract out of this provision). This effectively requires prospective policyholders to undertake a reasonable search of information available to them and to present this to the insurer in a manner that is reasonably clear and accessible to a prudent insurer.

There is also a duty placed upon insurers to play a more active role in asking questions.  Unlike under the current law, the policyholder need only disclose sufficient information about facts and matters known to it which are relevant to the risks insured to put a prudent insurer on notice that it needs to make further enquiries, leaving the insurer to then make those enquiries. The Act also clarifies whose knowledge is included in the insured’s knowledge, limiting those individuals to senior management and those who are responsible for the insured’s insurance.

In terms of remedies, the Act provides for more proportionate remedies than the current position of avoidance being the remedy for any breach of the duty of disclosure. It provides that if the breach was deliberate or reckless then the insurer may avoid the contract in its entirety (which is the current remedy for any non-disclosure).  However, in the absence of a deliberate or reckless breach, the policy can only be avoided if the insurer would not have entered into the contract.  Otherwise the terms of the contract or the amount of the premium may be varied so that they reflect what the contract would have been had the risk been fairly presented.

Warranties

The Act also amends warranties relating to non-consumer insurance contracts.  Under the current law a breach of warranty in an insurance contract, however trivial and whether or not it impacts on any insured risk which actually occurs, allows the insurer to avoid the contract in its entirety.  In a significant change, the Act provides for suspension of cover where a warranty is breached and reinstatement once the breach is remedied and also outlaws so-called ‘basis of contract’ clauses whereby representations given to the insurer by the policyholder are converted into warranties. The parties can however contract out of these provisions.

Perhaps the most interesting change on warranties however is that the Act introduces the principle that breach of a term not relevant to the actual loss does not give rise to avoidance of the contract if non-compliance with that term ‘could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred’.

Whilst a relaxation of the current position, this test nonetheless appears very strict; the wording is ‘could not’ have increased the risk as opposed to the inclusion of any element of (for example) reasonableness or materiality. The provision was introduced into the Act during its passage through Parliament, and was not included in the original version introduced into the House of Lords.  The Act also provides that where a breach of warranty is remedied or the warranty is no longer applicable there can be no avoidance of the contract by the insurer.

Effect

The Act makes important changes to disclosure and warranties, on its face significantly improving the lot of the policyholder.  Interestingly however the explanatory note to it as a bill states that ‘the behaviour of most insurers is not expected to change significantly, because the reforms are based on best practice in the bulk of the market’. This is no doubt a correct statement of the approach of insurers in the consumer market but may be less accurate in the commercial market.  Whilst many insurers supported the reforms, this was not true of all and it remains unclear what the reaction of insurers to the changes will be, particularly as the Act allows contracting out of its key provisions on disclosure and warranties.

The Law Commission proposal on making damages available as a remedy to a policyholder for late payment of a claim by the insurer was not included in the Act, presumably being deemed too controversial for accelerated passage through Parliament. This is in contrast to the inclusion of the provision on breach of a warranty that could not have affected the loss (above) which was included suggest that the latter provision is not deemed to be controversial.

There is market debate on whether insurers will simply insist on contracting out of the Act completely to safeguard the draconian remedies available under the historic law.  It will be important in relating to any policy to have a clear view as to whether that is the right option and, if so, to have included appropriate provisions to ensure a fair balance between insurer and policyholder.