25 March 2015
On February 12, 2015, the Insurance Bill, which was introduced into Parliament on July 17, 2014, received Royal Assent, and is now known as the Insurance Act 2015 ("the Act"). The Act represents the culmination of an eight year review of insurance contract law by the Law Commission of England and Wales and will largely affect non-consumer insurance contracts. The purpose of the Act is to update the statutory framework in the following areas:
- Disclosure and misrepresentation in business and other non-consumer insurance contracts: The Act amends the duty on business policyholders to disclose risk information to insurers before entering into an insurance contract, introducing a duty of “fair presentation” of the risk. Provisions in the Act define what both a business and an insurer "know or ought to know" and what appropriate enquiries should be made to obtain that information. The knowledge of "senior management" will be relevant and may extend wider than board level. It also provides the insurer with a number of proportionate remedies when the duty is breached.
- Insurance warranties and other terms: The Act abolishes "basis of the contract" clauses (which have the effect of converting pre-contractual information supplied to insurers into warranties). It also provides that, if there is a breach of warranty, the insurer’s liability should be suspended, rather than discharged, so that insurance coverage is restored after a breach has been remedied. The Act provides that breach of a warranty or similar term should not allow an insurer to refuse to pay a claim if the insured shows that the breach was completely irrelevant to the loss suffered. For example, if the insured breached a contractual warranty to maintain a sprinkler system in a property and the property was then damaged by a storm, the insured would likely be able to demonstrate that the breached warranty had no effect on the loss suffered.
- Insurers’ remedies for fraudulent claims: The Act sets out clear remedies for when a policyholder submits a fraudulent claim. Insurers will be able to terminate contracts and refuse to pay claims relating to losses suffered after the fraud but will remain liable for all legitimate losses suffered before the fraud. If a fraud is made by a member of a group insurance contract, the Act will protect innocent group members by carving out the fraudulent member from the contract. The effect will be as if the fraudulent member and the insurer entered into a separate insurance contract, and the insurer will be able to terminate the contract without prejudicing the innocent group members.
Provisions that would have allowed a policyholder to claim damages for unreasonable delay in paying a claim were originally included in the Law Commission’s draft bill. However, despite such damages already being available in Scotland, the provisions were removed as they were considered too controversial to suit the fast-track parliamentary procedure used to instate the bill. The UK government has suggested that such provisions may be reviewed and possibly incorporated in later legislation.
The Act will come into force in August 2016. The full text of the act is available here.