New insurance laws: a field day for policyholders?
22 June 2016
A raft of new legislation related to the insurance sector is due to come into force in the coming months that will usher in some of the most significant changes to the basic framework of commercial insurance law for a century. These changes represent a shift to a more balanced playing field from what is traditionally perceived to be a pro-insurer legal landscape, where the less savvy policyholder can all too easily find itself without coverage for its insurance claims. However, both insurer and insured alike would do well to take note of the changes as there are still plenty of traps for the unwary.
Insurance Act 2015 - a new disclosure duty from 12 August 2016
Underpinning these changes is the Insurance Act 2015 which, replacing certain provisions of the Marine Insurance Act 1906, will apply to new insurance policies from 12 August 2016. The big change relates to a new duty of fair presentation of risk which will require the insured to disclose to the insurer every material circumstance which the insured knows or ought to know, and to do so in a manner which would be reasonably clear and accessible to a prudent insurer.
This replaces the previous duty to disclose every material circumstance which had significant downsides for both parties. For the insured, the draconian remedy of avoidance of the policy in the event a material circumstance was not disclosed, led to the insurer's all too inevitable raising of a defence to any claim of material non-disclosure. For the insurer, it was faced with the unenviable choice between sifting through the mountains of data provided by an insured in an attempt to avoid that eventuality or of electing to price the risk without doing so.
The new regime seeks to remedy this by requiring the disclosure to be presented to the insurers in a reasonably clear and accessible way, and also by introducing proportionate remedies for any failures in the duty of fair presentation that were neither deliberate nor reckless. For example by the deemed inclusion in the policy of terms that would have been included by the insurer had they been made aware of the particular non-disclosed fact from the outset.
However welcome these changes are, they put an increased onus on both parties at the time of entering into the policy. It is up to the insured to give consideration to what they "know or ought to know" which extends to carrying out a "reasonable search", and subsequently to presenting that information to insurers in an organised and user-friendly way. This collation and presentation of information may require the development of systems and processes to ensure that the relevant knowledge has been captured and considered, and that the steps taken can subsequently be verified. For their part, insurers would be advised to document how the risks as presented informed their underwriting decisions so they can substantiate future arguments that had an additional risk been made known to them it would have affected the terms on which they entered into the policy.
It is not clear how ready either insurers or insureds are to adapt to these changes, nor whether there will be resistance to their implementation. Insurers for example may instead look to take advantage of the parties' ability to contract out of these terms of the Insurance Act 2015, which is permitted so long as the insurer draws any disadvantage to the insured to its attention.
Damages for the late payment of insurance claims
Another aspect of the new changes that benefits policyholders but which again insurers may seek to contract out of relates to damages for the late payment of insurance claims.
The Enterprise Act 2016, which comes into force on 4 May 2017, will bring in a legal requirement for insurers to pay out on insurance claims within a reasonable time, and to permit claims for damages based on the consequences of a failure by them to do so.
These measures, geared towards small and medium sized businesses in particular, are being introduced with the aim of enabling them to recover more quickly from insured losses, such as fires and floods. The late payment of insurance claims can have serious consequences for such businesses, including insolvency. Originally intended to be included within the Insurance Act 2015, they were dropped in the face of resistance from the insurance industry but subsequently resurfaced as part of the Enterprise Act 2016. When that Act comes into force next spring, it will introduce these provisions as new sections to the Insurance Act 2015, and in so doing, bring the London insurance market into line with many other jurisdictions that already permit the recovery of damages in these circumstances.
The key feature of this legislation is the creation of an implied term that insurance claims must be paid within a reasonable time, taking into account all relevant circumstances including the type of insurance and the size and complexity of the claim. The apparent victory for the policyholder may be short lived, however, if insurers take advantage of their ability to contract out of this implied term in non-consumer contracts, which they are able to do if the delay is neither reckless nor deliberate.
Third Parties (Right against Insurers) Act 2010
Some six years after receiving Royal Assent, the Third Parties (Rights against Insurers) Act 2010 (the 2010 Act) finally comes into force on 1 August 2016. This act is designed to simplify the process for bringing claims against the insurer of an insolvent defendant. Its implementation was delayed because of issues in its original drafting which will be rectified by the Insurance Act 2015, thereby enabling it to be brought into force.
Currently claims against the insurers of insolvent defendants can be brought under the Third Parties (Rights against Insurers) Act 1930, which the 2010 Act replaces. What the new legislation changes is the need to have established the insolvent insured's liability as a prerequisite to the bringing of proceedings against the insurer. Instead, both the insured's liability to the third party and the insurer's liability under the policy can be determined by the court in a single set of proceedings as a result of the automatic transfer of the insured's rights to the third party.
This is a welcome change from the existing regime under which, if the insolvent defendant had been dissolved, it was necessary for the third party first to restore the dissolved company to the register and bring proceedings against it, before commencing a second set of proceedings against the insurer on the back of a successful judgment or award establishing liability.
All change or business as usual?
On the whole, the many changes that will be coming into force over the coming months have been welcomed by insurers and insureds alike. Their impact however remains to be seen, and depending on the extent to which the insurance market looks to exercise its right to contract out of some of these changes, on one view there is the possibility that it may end up simply being business as usual.