Four statutes this decade have significantly changed insurance contract law: the Third Party (Rights Against Insurers) Act 2010 (TPRAI), the Consumer Insurance (Disclosure and Representations) Act 2012, the Insurance Act 2015 and the Enterprise Act 2016. With this level of statutory reform it is perhaps hardly surprising that Mr Justice Turner decided, in Redman v Zurich on 26 July, against “an interpretation … tantamount to judicial legislation” when consider trigger dates for applying the TRPAI Act 2010 above.
Four months have passed since the Insurance Act became law in August. Too early for any major court decisions but, nonetheless, time enough for a few preliminary observations. Despite some initial doubts and wobbles, the market has largely taken the new law in its stride. Policies have been updated, training sessions have been provided and processes have been refreshed. Some have focused on gaining market advantage, whilst others have taken a more technical approach. As with all change some have adapted better than others. In some cases risk managers have been surprised at what their reasonable search revealed and underwriters by what their old policies contained. Generally however, more thought seems to have been given to the placement process and in addition, the better prepared brokers have examined their role, procedures and what liabilities they can assume.
The Insurance Act is principles based but the facts behind any disputes will be infinitely variable. Was the presentation fair, was the search for information reasonable, were individuals “senior management”, was the warranty a risk migration term or did it define the risk? All of these questions could give rise to new test litigation. If the Insurance Act follows CIDRA then the nature of disputes may alter too, moving away from misrepresentation and non-disclosure towards post-loss conditions, the extent of cover and the effect of policy terms.
We should expect some significant litigation over the next few years which will give further guidance to the market. However, many policies contain binding arbitration clauses which, as several senior judges have observed, hinder the development of the common law. The process may therefore take longer than would be ideal. Whatever the courts eventually decide whether the Law Commissions will have achieved their aims of improving practices to support the UK insurance industry abroad and assist its reputation at home may not be known for some time yet.
Written by David Hertzell, consultant
In our series “Elvis blogs the Insurance Act” we considered some of the issues that arose as Insurance Act compliant policies were formally incepted on 12 August, renewals took place or variations to existing policies were applied.
We concentrated solely on the Insurance Act but to do so ignores some other aspects of the Law Commissions’ programme of reform of insurance law that we should address and a couple of areas of concern which arise from the “entrepreneurship” of the claims management sector.
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
The Insurance Act 2015 will apply to new policies or variations from tomorrow, Friday 12 August – the “Glorious 12th” of the hunting season.
I have considered in my earlier blogs this week (and indeed within many of the papers, FAQs in the Time for Change area of the BLM website) those areas of the new law which might be subject to challenge or dispute after 110 years of “old” law and practice.
We have presented, lectured, workshopped, written, blogged (obviously) and listened very extensively on the Insurance Act 2015. Many questions and concerns and much of the press coverage and other commentary has centred around the duty of fair presentation. Will this be the area of substantial dispute, as theory is applied to practice, and claims start to test “Insurance Act” policies that were written from 12 August 2016?
The question that should be addressed is whether it is this part of the Act that, although widely discussed, is more contentious than other areas. The answer, because lawyers always caveat, is that there will certainly be disputes.
The first area of concern is around the “threshold test” for the policyholder to provide “sufficient information” which puts the insurer on notice to raise questions. Although this does mirror “waiver” issues under the old law one can envisage that there will be disputes. Secondly, the duty of fair presentation does preclude “data dumping” with the wholly new requirement that a fair presentation must be in a “clear and accessible format”.
Does “wholly new” mean “wholly contentious”? In fact, whilst we can anticipate some litigation around the issues “fair presentation” will not, we predict, prove to be area of substantial dispute. In the first instance there is the practical control that an underwriter can exercise to decline to offer terms when “data dumped”.
Additionally, and of benefit to the policyholder there is the corresponding question that might prove difficult for the underwriter to answer if the defence is subsequently raised: “Why did you offer terms if you were not happy with the format of the presentation?” It is likely too that the issue of “clear and accessible” will be a question of fact at first instance and will not often trouble the higher Courts.
The issue of “fair presentation” itself does carry greater scope for dispute of course. There will be arguments around the “sufficiency” of disclosure and underwriters enquiries but there is some case law for guidance which should assist. Thus, referencing Elvis again, we conclude: pre-commencement aggravation and less (satisf)actioning me!
Written by Terry Renouf, partner, BLM
Any new law does bring some uncertainty even where carefully drafted.
The Law Commission was aware of those concerns and the Insurance Act 2015 deliberately uses terms that, although not “modern”, reflect particular terminology familiar to insurance practitioners and judges.
This has been done to avoid the uncertainty that change can bring. However as sure as a lawyer follows an ambulance there will be some litigation that will arise from the Act. One would certainly hope, with legislation that was carefully constructed by industry consultation, that those disputes will be around issues that are generally interpretative of the new areas of the law, and not parties taking points either because the law proves to be poorly drafted or, like Mount Everest, because it is there. And so, having worked so hard to explain and prepare customers for the new law (and listened to concerns) where do we think might be the problem areas? Fair presentation? Proportionate remedies? Contracting out? Warranties? Irrelevant terms? The list of itself could extend and even in its short form, suggests that the Supreme Court might be engaged fairly frequently.
Our overview is that this is a good piece of legislation that will stand the test of time and will outlast the career of this blogger and most of the readers.
Disputes will arise, some thrown up by unusual facts and some by the new law: the question is which areas of the new law will create all this aggravation. I consider this in my next blogs.
Written by Terry Renouf, partner, BLM
Although Insurance Act “day” is formally the 12 August 2016, it has been a reality for any policyholder or underwriter for some time: a placement is not (or should not be) conjured up overnight.
The “fair presentation” (and of course the disclosure of every material fact under the “old regime”) should be the result of a careful consideration of assessment of risk before inception.
Few will remember EU Referendum day as marking the 50 day countdown to commencement of the Insurance Act nor that it marks 497 days of preparation since the Insurance Bill was enacted on 12 February 2015. The short time before the Act will apply to policies incepted, renewed or varied is giving rise to a flurry of activity as the focus now moves on to the practicalities of the Act.
On the day that BIBA and Mactavish launch a dedicated guide to the Insurance Act, calling for the insurance industry to “embrace the underlying objective of fairness embedded in the Insurance Act”, it seems like an opportune time to remind our blog subscribers of the key attributes at the heart of the Act.