The “small print” might well be the two words that best encapsulate the public’s concerns with insurance – a reputational issue associated with the “contract of utmost good faith” that undermines and causes challenges and problems for the industry, despite the fact that billions of pounds are paid to customers of insurers every year – both in personal and commercial lines. Albeit that discussion of the Insurance Act 2015 has largely revolved around commercial policies it should be remembered that it is only the duty of fair presentation and the remedies associated with breach that apply to the “non-consumer” and that those sections of the Act dealing with warranties (and “irrelevant terms”), fraudulent claims and contracting out apply to all policies. In the earlier “Elvis blogs the Insurance Act” we have considered which of those areas were the most likely to prove contentious and now turn to the issues that arise from the contract itself.
Warranties and other terms can impose draconian remedies on a policyholder; a “valid” claim might not be paid because of the breach of a warranty or a term that is irrelevant to the loss. The courts have been reluctant to enforce such an outcome and have often strained the interpretation of the law to do justice between the parties. This has meant that the application of the law in these areas has been uncertain. The Act provides that warranties become suspensive terms, capable of remedy and that an underwriter may not rely on an “irrelevant” term. Will the new provisions be an area ripe for dispute? We do consider that the second of the clauses which relates to “irrelevant terms” is the more likely to cause difficulty. The Act states that the insurer may not rely on a term if the insured “shows that the non-compliance with the term, could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred.” Merely quoting the section in detail highlights its brief complexity and illustrates the dangers of dispute. This section where the underlined “could” (this bloggers underlining) replaced “would” in earlier drafts is a lower threshold for the policyholder and if expectations are not adjusted by insurers there could be a number of litigated cases.
Turning to the clauses on warranties itself, we do envisage some testing of the term and the issues where a breached warranty might be remedied. Ultimately, this should lead to fewer disputes even if there is some “testing” of the issue in the near term. Though it is the case that market practice was in many cases not to rely on a breach so perhaps there will not be the upturn in litigation if the point was rarely pursued commercially (and of course the Financial Ombudsman has in practice been applying the “new” law on warranties and irrelevant terms in relation to “consumer” and micro-businesses for some years).
The area relating to warranties that will cause difficulties unless addressed, relates to repeal section 18 (3)(d) of the Marine Insurance Act relating to the “superfluity” of warranties. An insured will now need to disclose anything that forms the subject matter of a warranty and because of repeal has no defence if the issue is raised by the underwriter. There is not the time here to detail the issue but custom and practice will need to be considered and one can anticipate that there will be many disputes if the point is not dealt with by contracting parties.
So how might the problems that we have discussed in the “Elvis blogs” of this week be avoided or mitigated? That is of course the $64,000 question the solution to which, and the avoidance of a dispute, would be in the best interests of insurer and policyholder. There are three golden rules to applying the new law and matching customer needs with insurer risk appetite:
- know the law of the Insurance Act;
- know the policy terms (and amend as appropriate – being careful when contracting out);
- know the client.
The outcome will be a little less fight as a consequence of a little more spark in the placement process: thank you Elvis.
Written by Terry Renouf, partner, BLM