The Insurance Contracts Bill - Significant Change for Contracts Written in the London Market
Since 2006, the Law Commission of England & Wales and the Scottish Law Commission have been undertaking a project to reform insurance contract law. The objective is to bring about a modern legal regime fit for the 21st century; the current one dates back to the Marine Insurance Act of 1906.
Having tackled the law for personal lines insurance with the Consumer Insurance (Disclosure & Representations) Act 2012, the Commissions moved on to commercial insurance. Draft legislation for the Insurance Contracts Bill was published on 17 July 2014. Passing through parliament under a special procedure for non-controversial Law Commission bills, the Bill is expected to receive royal assent before the May 2015 general election and take effect around October 2016. If the Bill does come into force, it will bring significant changes to insurance and reinsurance contracts written in London.
The Bill seeks to update and clarify commercial insurance law in four areas:
1) Fair presentation of a risk and remedies for non-disclosure and misrepresentation
Quite rightly, the existing duty of disclosure (based on the assumption that a proposer knows everything about a risk and an insurer nothing), has been identified as being no longer appropriate. The Bill introduces a duty of fair presentation of a risk, giving rise to proportionate remedies if breached.
If a breach is deemed “deliberate or reckless”, the insurer may avoid the contract and refuse to pay all claims. If the breach is determined “innocent or careless”, the insurer has the following remedies:
- If the insurer would not have entered the contract under those conditions, it may still avoid the policy.
- If the insurer would have entered the contract on different terms, those differing terms will apply from inception.
- If the insurer would have charged a higher premium, it can proportionately reduce the amount paid on the claim.
Importantly, it will be up to the insurer to demonstrate that there has been a breach, and how it would have underwritten the risk had it been presented fairly. The Bill retains the concept of a duty of good faith in insurance contracts, but removes the ability for insurers to avoid a contract because of a breach. Avoidance will only be possible for breach of the duty to make a fair presentation.
The harshness of insurance law relating to warranties has made them unpopular with the courts, which have sought to dilute their effect over the years. The Bill seeks to update the law in this area and bring it more in line with market practice, specifying:
- Warranties will become suspensive conditions. Insurers will not be liable for losses while the insured is in breach, but will be once the breach has been restored.
- “Basis of contract clauses” that turn any representation by the insured into a warranty are prohibited. Any warranty has to be agreed between the insured and the insurer.
Fraud is another area where the Bill seeks to align insurance law with market practice and more recent court judgements. It provides no definition of a fraudulent claim, leaving this as a matter for the courts to determine; however, where an insured does commit fraud, it proposes that:
- The insurer will have no liability to pay the fraudulent claim, and sums already paid can be recovered.
- An insurer can elect to terminate the contract thereby having no liability to pay losses after the date of the fraudulent act.
- Insurers remain liable to pay legitimate losses before the date of the fraudulent act.
4) Contracting out
For commercial insurance contracts, the Bill allows for contracting out, with the exception of “basis of contract” clauses. If contracting out, insurers will need to:
- Draw any disadvantageous terms to the insured’s attention before entering into a contract.
- Ensure any term departing from the default regime to the insured’s detriment must be clear and unambiguous.
Pre-legislation drafts of the Bill also contained a provision to introduce an implied term into all insurance contracts that claims would be paid within a “reasonable time”. Failure to do so would make the insurer liable for foreseeable losses. While the provision was considered too contentious for a Bill taking the non-controversial route through Parliament, the government is still interested in introducing a late payment provision, at a future date.
The Law Commission has received widespread support from the (re)insurance community for their work and endeavours to bring laws in line with commercial market practice. Should the Bill receive royal assent in May 2015, insurers and reinsurers will have 18 months to adapt their underwriting procedures and amend their policy wordings before the new legislation comes into force.
It is worth remembering that it is not just UK insurers and reinsurers that will be affected if the bill is passed. Indeed, any company writing or placing business through the London market must be aware of the changes and their consequences. If Gen Re can be of assistance to you, please don’t hesitate to contact your local office to discuss.