Insurance Act 2015

The Insurance Act 2015 (the “Act) came into force on 12 August 2016. It represents the biggest reform to insurance contract law in the UK in more than a century. In this article, we summarise the key changes being implemented by the Act.

Application of the act

The Act extends to England, Wales, Scotland and Northern Ireland^1. The Act applies mainly to non-consumer insurance contracts. However, some  provisions, notably those relating to the duty of good faith and contracting out, apply to both consumer and non-consumer insurance contracts. A “consumer” in this context is an individual who enters into an insurance contract for purposes which are unrelated to its business².

In broad terms, the Act deals with:

1. duty of fair presentation;
2. warranties;
3. fraudulent claims by policyholders;
4. late payments;
5. good faith and contracting out; and
6. amendments to the Third Parties (Rights Against Insurers) Act 2010.

The duty of fair presentation

The duty of fair presentation applies to non-consumer contracts only. It requires the policyholder to make a “fair presentation of the risks” prior to entering into the insurance contract in question. This means that to discharge its duty, the policyholder must:

1. disclose to the insurer every material circumstance which the policyholder knows or ought to know; or failing that, provide sufficient information to put 
   prudent insurer on notice to make further enquires;
2. disclose information in a way that is reasonably clear and accessible to a prudent insurer, not dumping huge amounts of unsorted information on the insurer; and
3. ensure that in respect of each disclosure, any material representation of fact is substantially correct and any material representation of belief is made in good faith.

The knowledge of the policyholder extends to the knowledge of anyone who is part of senior management or responsible for the policyholder’s insurance, but does not include confidential information acquired by the policyholder’s agent (for example, its broker) through a commercial relationship with someone other than the policyholder and who is not connected with the insurance contract.

The policyholder must disclose information that it ought to know, meaning any information that should reasonably have been revealed by a “reasonable search” of available information. What the policyholder ought to know may be tricky to assess in practice and could possibly develop into an area of contention.

Remedies

For non-consumer insurance contracts, the Act introduces a new remedies regime for insurers. The new regime applies in circumstances where the insurer can show that, but for the policyholder’s breach of the duty of fair representation, the insurer would either not have entered into the insurance contract or would only have done so on different terms. Where the insurer can show that the breach was deliberate or reckless, the insurer can avoid the contract and refuse to pay all claims. Also, the insurer does not need to return any of the premiums paid.

For breaches which are not deliberate or reckless, the insurer can avoid the contract if it would not have entered into the contract on any terms, so long as it returns any premiums paid. If it would have entered into the contract but on different terms, the contract is to be treated as if it had been entered into on those different terms. If the insurer would have entered into the contract but for a higher premium, the insurer can reduce the amount paid on any claim proportionately.

Warranties

The Act introduces changes to the law on warranties. 

Basis of contract clauses 

Clauses in non-consumer insurance contracts which seek to convert all representations by the policyholder into warranties, so called “basis of the contract clauses”, are no longer permitted under the Act and the parties are not able to contract out of this.

Remedies

The Act also changes the remedy for breach of warranty in relation to both consumer insurance contracts and non-consumer insurance contracts. Under the old regime, a breach of warranty by the policyholder completely discharged the insurer’s liability under the contract from the date of the breach. However, under the new regime, the insurer’s liability is merely suspended until the breach has been remedied by the policyholder and the insurer continues to be liable for any valid claims which arose prior to the warranty breach.

Terms not relating to actual loss

If the policyholder under a consumer insurance contract or a non-consumer insurance contract breaches a term of the insurance contract where compliance would tend to reduce the risk of loss, the insurer will not be able to escape liability unless the breach actually increases the risk of loss suffered by the policyholder. This means that the insurer will no longer be able to avoid liability by pointing to an unrelated breach of the contract by the policyholder. 

Fraudulent Claims 

Under the Act, the insurer is not liable to pay out money for a fraudulent claim under a consumer insurance contracts or a non-consumer insurance contracts and can recover any payments already made in respect of such claim. The insurer can also, by notice, treat the contract as having been terminated from the time of the fraudulent act and keep the whole premium. However, valid claims arising prior to the fraudulent act are unaffected. 

If a member of a group insurance policy makes a fraudulent claim, the insurer has a remedy against the fraudulent member only; other policyholders are not affected.

The Act does not define “fraud” or “fraudulent claim” but leaves these to be determined in accordance with common law principles.

Late payment of claims

The Act introduces an implied term under every insurance contract (both consumer insurance contracts and non-consumer insurance contracts), whereby if the policyholder makes a claim under the contract the insurer must pay any amounts due under the contract within a “reasonable time” (unless the insurer is disputing the claim). What constitutes “a reasonable time” depends on the relevant circumstances.

Utmost good faith

 The Act abolishes any rule of law that permits the avoidance of consumer insurance contracts and non-consumer insurance contracts for breach of utmost good faith. 

Contracting out

The Act contains different contracting out provisions which depend on whether the policyholder is a consumer or a non-consumer. 

Consumer

For consumer insurance contracts, contractual terms will have no effect if they relate to warranties, fraudulent claims or late payment of claims and put the policyholder in a worse position than the policyholder would have been in by virtue of the Act.

Non-consumer

For non-consumer insurance contracts, parties are permitted to agree alternative regimes to the provisions of the Act provided the insurer satisfies the following transparency requirements:

1. the insurer must take sufficient steps to draw the disadvantageous term to the policyholder’s attention before the contract is entered into; and
2. the disadvantageous term must be clear and unambiguous as to its effect.

However, the parties are not permitted to contract out of the prohibition of basis of contract clauses (see “Basis of contract clauses” above), or the implied term about late payment of claims (see “Late payment of claims” above) if it would result in the policyholder being put in a worse position as respects deliberate and reckless breaches of such implied term.

Conclusion

The Act marks the biggest reform to insurance contract law in more than a century and affects all players in the insurance industry, including insurers,  policyholders and brokers. Insurers and brokers should ensure that they have carefully reviewed all relevant contract wordings, policy documents and practices to ensure that they comply with the new regime.

Notes

1. Sections 21(4) and 21(5) do not apply to Northern Ireland.
2. We have not dealt with third party rights in this article.

If you would like to view any other articles in Global Insurance Focus - November 2016 please click on the links below:

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