[Insurance] The Insurance Act 2015
The Insurance Bill received Royal Assent on 12 February 2015 to become the Insurance Act 2015. The Act is seen as modernising insurance law, and addressing some of the provisions made in the Marine Insurance Act (MIA) 1906.
The Act presents a number of key challenges for insurers and brokers, as summarised here:
Pre-contractual disclosure
The MIA 1906 stipulated that the assured had to disclose to the insurer ‘every material circumstance…and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such a disclosure, the insurer may avoid the contract’ This enabled insurers to void policies, on the basis of non-disclosure by the assured. Thus, the MIA was seen as protecting the insurance market.
Within the Insurance Act 2015, whilst the obligation on the insured remains to make a fair representation of the risk and every material circumstance which the insured knows, or should know about, to the insurer, section 3) of the Act further stipulates that:
- disclosure should be reasonably clear and accessible to a prudent insurer; and
- where a disclosure which puts an insurer on notice, the insurer needs to make further enquiries for the purpose of revealing those material circumstances.
The result of this being that there is now more onus on the insurer to ensure they have an accurate understanding of the risks and circumstances affecting the insured.
The Act also clarifies the knowledge that the insured and insurer should have, for example within the section ‘Knowledge of the insured’:
- point 3 – ‘an insured who is not an individual knows only what is known to ….individuals who are – part of the insured’s senior management, or responsible for the insured’s insurance’; and
- points 2 and 3 – an insurer ought to know something if an agent ought to have passed it on, or something which is common knowledge, or that an insurer in a specific field would be expected to know.
Finally, where a breach in ‘fair representation’ is identified and yet the insurer still would have entered into the contract, though perhaps on different terms or with a different premium, the insurer must take a proportionate approach, as opposed to voiding the policy – for example by reducing the premiums proportionately to reflect the know information or knowledge.
Warranties
Previously, the ‘Basis of contract’ principle allowed representations within an insurance contract to be made into warranties, thereby enabling insurers to void a claim if there were any mistakes or misrepresentations within the representations. As such, even trivial and accidental errors could void a contract and the insurer was no longer liable to pay out.
Section 9 of the Act ‘Warranties and representations’ abolishes this provision, stating, in point 2 that:
- ‘such a representation [made by the insured] is not capable of being converted into a warranty by means of any provision of the non-consumer insurance contract … or of any other contract’
This therefore serves to better protect the insured, since representations made may no longer be made into warranties.
Furthermore, a breach ‘does not affect the liability of an insurer in respect of losses attributable of something happening before the breach of warranty or ….. after [the breach] has been remedied.’
Fraudulent claims
- The Insurance Act confirms that where fraudulent claims are made the insurer:is not liable to pay out the claim;
- can terminate the contract and retain premiums paid; and
- remains liable for outstanding claims made before the fraudulent claim.
Summary and impact
Marine Insurance Act 1906 | The Insurance Act 2015 | Impact |
Onus on the insured to make appropriate disclosures to the insurer. | Greater responsibility on the insurer to ask the right questions, and to have appropriate knowledge for their field. | Underwriters and brokers now have a greater obligation to be aware of circumstances or knowledge that they ought to know about in their line of field, and to be alert to disclosures made by the insured such that further enquiries might be made. Brokers too will have to ensure that they pass on complete and accurate information to the insurer. Firms may consider providing staff with further training, workshops of case studies or implementing system changes and flags to assist in this requirement. |
Contracts could be avoided by a party if utmost good faith was not observed by the other party. | Insurers must now take a proportionate approach, as opposed to completely voiding a policy, on discovery of a breach in fair representation, if it is identified that the insurer still would have entered into the contract, though perhaps on different terms. | Insurers will have to identify how particular breaches impact a policy. Insurers may also anticipate and perform scenario testing on particular situations that may arise. |
Insurers could void a policy due to accidental misrepresentations by the insured. | Representations cannot now be made into warranties, and therefore Insurers cannot void a policy based on misrepresentation: they are still liable for losses before a breach and after a remedy, or if the breach was completely irrelevant to the loss. | Insurers will have to assess the impact of breaches on claims, and adopt a process for identifying remedy of breaches, or whether breaches are relevant to a loss. |
No specific guidance regarding fraudulent claims | Where fraudulent claims are made:
| Claims handlers will also need to be alert as to the liability of paying out claims made prior to any fraudulent activity. |
Implementation
The Insurance Act comes into force in August 2016 (18 months after the Bill was passed).
The Act applies in relation to contracts entered into at the point of implementation, or where variations to contracts are agreed previously, are subsequently made.
References:
BIBA, (2015), Insurance Bill - Key Legal Developments 2014/15, page 4
CII, (2015) Policy Briefing - Insurance Act 2015
Hetzell D, (2015), The effect of the Insurance Act, Legal Update, Post Magazine
The Insurance Bill 2015, http://www.legislation.gov.uk/ukpga/2015/4/pdfs/ukpga_20150004_en.pdf