THE INSURANCE ACT 2015 Alice Nash The basics Marine Insurance - - PDF document

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THE INSURANCE ACT 2015

Alice Nash The basics

• Marine Insurance Act 1906 – “designed to protect insurers from

exploitation by the insured”.

• Law Commission started review in 2006. Consultation papers in 2011 and

2012 – led to Consumer Insurance (Disclosure and Representations) Act 2012 (“CIDRA”)

• New Act reforms reflect “existing best practice”
• It reforms insurance contract law in the following areas:
• Disclosure and misrepresentation in business and other non-

consumer insurance contracts;

• Insurance warranties and other terms; and
• Insurer’s remedies for fraudulent claims
• Due to come into force 12 August 2016

The Insured’s duty of Fair Presentation of the Risk

Section 3 (replacing sections 19-20 of the 1906 Act) 3 key elements: 1. Insured must disclose “every material circumstance” : which he “knows or ought to know”. 2. “A fair presentation is one which makes that disclosure in a manner which would be reasonably clear and accessible to a prudent insurer”. 3. “in which every material representation as to a matter of fact is substantially correct, and every material representation as to a matter of expectation or belief is made in good faith. NB Section 3 (4) (b): insured must disclose every material circumstance or “failing that, [give] disclosure which gives the insurer sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances.”.

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Knowledge of the insured – Section 4

• Based on duty to disclose every material circumstance –

including “everything which in the ordinary course of business ought to be known to them.” (Section 4 (6))

• Section 4 (2) an insured is taken to “know” anything which

is known by “a person responsible for the insured’s insurance” – e.g. broker

• Section 4 (3) replaces common law rules so an insured

who is not an individual knows only what is known to one

• r more of the individuals who are the senior

management or responsible for the insured’s insurance.

• Section 4 (2): “reasonable search of information available”

The position of the Insurer Section 3 (4) (b): Putting insurer on notice

Insurer must ask for further information before it makes the underwriting decision: note the Insurer’s more active role.

Section 3 (5): no duty to disclose if

a) [the circumstance] diminishes the risk, b) the insurer knows it, c) the insurer ought to know it, d) the insurer is presumed to know it, or e) it is something as to which the insurer waives information.

Section 5: the Insurer’s knowledge

• Knows only if “known to one or more of the individuals who

participate on behalf of the insurer in the decision whether to take the risk, and if so on what terms” [i.e. underwriter]

• Ought to know only if an employee/agent knows and “ought

reasonably” to have passed it on or “readily available” to underwriter

• Presumed to know if “common knowledge” or “an insurer
• ffering insurance of the class in question to insureds in the

field of activity in question would reasonably be expected to know in the ordinary course of business.”

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Policyholder’s failures “Qualifying breaches”: Section 8

Absent breach, insurer would not have entered the contract at all, or would have done so only on different

• terms. Remedies in Schedule 1.

If breach was “deliberate or reckless”: insurer will be able to avoid the contract and keep any premiums. In all other cases, the question is “what would the insurer have done if the presentation had been fair?”

Remedies: breach not deliberate or reckless

• Insurer would not have entered into the contract: insurer can

avoid the contract but must return any premiums;

• Insurer would have entered into the contract on different

terms, other than terms relating to premium: insurer can treat the contract as if those different terms apply – e.g. any additional exclusions that would have been imposed;

• Insurer would have entered into the contract for a higher

premium: insurer can reduce the cover to which the insured is entitled on a proportionate basis – e.g. if premium would have been twice as high, insurer need only pay half the insured loss.

What’s new ?

• Abolition of “basis of contract” clauses: section 9
• New remedies for breach of warranty:

– Breach of a warranty leads to the suspension of the insurer’s liability from that point onwards until the breach is remedied (Section 10 (2)) – Insurer’s liability restored if breach of warranty is remedied (Section 10 (4) (b))

Warranties and representations

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Terms not relevant to the actual loss

• Section 11: applies if compliance with a term would

tend to reduce the risk of loss of a particular kind, at a particular location or at a particular time

• Insurer cannot rely on non-compliance to avoid

liability if “the non-compliance could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred”

• Section 12 Insurers not liable to pay fraudulent insurance

claim – puts the common law rule of forfeiture on a statutory footing

• Section 12 (1) (c) New option: Insurers now can treat the

contract as if it had been terminated at the time of the “fraudulent act”

Remedies for fraudulent claims

• Section 14 removes avoidance of the contract as a

remedy for breach of the duty of good faith

• Section 17 of the MIA 1906 amended.
• Intention of section 14 is that good faith will remain

an interpretative principle with Section 17 and the common law continuing to provide that insurance contracts are contracts of good faith.

Good faith

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• Contracting out of most of the Insurance Act is permissible in

non-consumer insurance subject to the insurer’s “duty of transparency” Section 17

• This is subject to the Insurer taking sufficient steps to draw any

“disadvantageous terms” to the insured’s attention (or the broker’s attention) before the contract is entered into.

• and provided the disadvantageous terms are “clear and

unambiguous”.

• Cannot contract out of section 9 (basis of contract clauses void)

Contracting out

• Large waste and recycling facility surrounded by vertical bar

security fencing. Backs onto a large area of land accessible to public.

• Insurance sought against theft, fire and flood. Presentation

does not mention site surroundings. Map of site does not make clear what is on any adjacent land.

• Policy issued includes warranties to maintain the fencing and

that smoking will not be permitted.

• Insured fails to enforce no smoking policy.

Case study

• Section 3(3)(b): reasonably clear and accessible?
• Section 3(4)(b): when is the insurer on notice?
• Confidentiality?
• Act that makes the claim fraudulent
• Section 11: materiality
• Duty of transparency

Potential problems

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• Not yet in force
• Insurance Act extends definition of “relevant insured

person” (Schedule 2) and confers rule-making power (Section 19)

• Watch this space

Third Parties (Rights Against Insurers) Act 2010

Thank you