Insurance Act 2015 – Reforms
In 2006 the Law Commission and Scottish Law Commission began a joint review to reform insurance contract law for consumer, non-consumer and marine insurance.
This review was conducted in stages, with the first stage culminating in the Consumer Insurance (Disclosure and Representations) Act 2012. This Act relates to one distinct area of consumer insurance law and applies to policies issued or renewed on or after 6th April 2013. The 2012 Act replaced the consumer’s duty to volunteer information with a duty to answer the insurance company’s questions honestly and reasonably.
Last week, on the 12th February 2015, Parliament passed the second piece of legislation, which is known as the Insurance Act 2015. This Act reforms post contractual issues for consumer and non-consumer insurance contracts alike and pre-contractual obligations on commercial policyholders to make a fair presentation of the risk. These latest reforms represent the largest overhaul to insurance contract law in England, Scotland and Wales in over a century. They are intended to bring the market into the twenty first century by rebalancing rights and remedies when things go wrong.
Insurers have the option to opt out of these changes or embrace them by August 2016. Given the pressure within the industry, it is likely that most insurers will adopt the measures, and in some cases make more radical changes.
The key provisions relate to Disclosure, Warranties, Conditions and Fraud, as follows:
Duty of Disclosure and Representation
The duty of disclosure is retained for business insurance, as part of a wider ‘duty to make a fair presentation of the risk’. The duty is satisfied if either all material circumstances are disclosed by the business, or sufficient information is provided to put the insurer on notice to make further enquiries.
Remedy for Failing to Make a Fair Presentation of the Risk
If a business fails to make such disclosure, the insurer‘s remedies must be proportionate (other than where non-disclosure is fraudulent or reckless), based on what the insurer would have done if it had received a fair presentation of the risk.
Basis of Contract clauses (Warranties)
Basis of contract clauses are abolished for all classes of insurance. These are clauses which incorporate all statements made in the proposal form as warranties in to the insurance policy.
Remedy for breach of Warranty
Significantly, all warranties are made remediable. If a business breaches a warranty, the insurer’s liability is suspended for the duration of the breach. If the breach is remedied before a loss occurs, the insurer has to pay the claim.
Remedy for breach of terms designed to reduce particular types or risk
Where an insured breaches a term of an insurance policy (whether it is a warranty, condition or similar) which is intended to reduce the risk of particular types of loss, the insurer cannot refuse to pay a claim if the insured shows that the breach did not increase the risk of the loss.
Remedy for fraud
The option of avoidance – treating the policy as if it had never existed – has been removed. This means that the insurer is still on risk for claims made before the fraudulent act occurred. The insurer has the option to terminate the policy with effect from the date of the fraudulent act.
The Act also introduced amendments to the Third Parties (Rights against Insurers) Act 2010 so that this latter piece of legislation can finally be brought into force. This will allow third parties to bring actions directly against the insurer without first establishing the liability of the insured.
What does this mean for consumers and business policyholders?
The aim of the legislation is to provide a fairer system for the policyholders – by introducing measures that mean an insurer’s response to a breach of the policyholder’s duty of disclosure, as well as breaches of warranties or conditions is proportionate and reasonable.
By implementing these Reforms in full, the customer could see the following changes:-
· Warranty – free policies
· Conditions precedent to liability will only be invoked (applied) if the breach of this condition by the policyholder has contributed to the loss.
· Basis clauses will be removed from policies.
We have seen in the past incidences where a policyholder submits a claim for say storm damage to their premises, and because they did not have the required locks or security measures in place as required by a warranty or condition on their policy, the insurer has exercised their rights to avoid the policy and refuse to deal with the claim.
These reforms are not intended to remover the policyholder’s responsibilities – but ensure that their position is not prejudiced if an innocent breach occurs.
Andrew Long Cert CII
Commercial Account Executive
CAP BUSINESS CLUBS BLOG
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