By Chris Taylor, CEO, Titlesolv
The Insurance Act 2015, when it comes into force in August 2016, will bring the principles on disclosure, warranties and fraud for commercial insurance in line with those already introduced for consumer insurance by the Consumer Insurance (Disclosure and Representations) Act 2012. In doing so it will seek to update now archaic 18th and 19th Century insurance law introduced by the Marine Insurance Act 1906, which is also implied in non-marine commercial insurance contracts, making it more relevant to modern day insurance practices.
In its press release, issued one day after the passage of the Bill into law on 12th February 2015, HM Treasury commented that “the Bill will benefit both insurers and their business customers by increasing transparency and certainty over the rules that govern how they do business with each other, reducing the number of legal disputes over time. As a result, British insurers will be better equipped to compete against their global competitors, some of whom have already introduced more modern legal regimes for insurance, while businesses are expected to benefit by around £100m over the next ten years due to factors such as lower litigation and transaction costs.” The Act in effect, ambitiously seeks to codify principles on claims resolution developed by over a century of case law and in doing so, it is hoped that it will constrain the need for the courts to further develop the law in future.
The insurer’s ability to void a policy as a result of certain breaches of the duty of disclosure – a concept which dates back to the 1766 case of Carter V Boehm and which was supplemented by the principle of ubberima fiddes (utmost good faith) via the Marine Insurance Act – has long been thought to be weighted too heavily in favour of the insurer. The replacement of the principle of material non-disclosure with a “duty of fair presentation” and the concept of proportionate remedies, introduced by the Act, now protects the insured from a complete withdrawal of coverage. The Act does, however, protect the insurer’s right to void the contract and extends its ability to do so to situations beyond fraudulent non-disclosure to deliberate or reckless breaches of the duty of fair presentation.
The strict application of the consequences of breach of warranties, regardless of their materiality to the risk, has now been diluted. Importantly, the principle of the “suspensive condition”, introduced by the Courts in Kler Knitwear Ltd V Lombard General Insurance Co Ltd  Lloyds Law Red I.R. 47, has now been imported into the legislation, so that liability of an insurer is now restored once a breach of warranty is remedied by the insured. More importantly, where a warranty relates to a loss of a particular kind, location or time, the insurer will not be able to rely on breach of warranty to discharge its liability to the insured, if it can be shown that the breach could not have increased the risk of the loss which occurred.
Finally, the Act improves matters in the grey area of remedies available in the context of fraudulent claims. On a strict interpretation of the Marine Insurance Act, the insurer could void a policy from the onset in the event of fraudulent claims. The courts have always been nervous of applying this strict interpretation and have often deemed the insurer as not being liable only from the date of the fraudulent claim. This position is now entrenched in the Act such that the insurer, on giving notice to the insured, can treat the contract as terminated from the date of the fraudulent act, but its liability for acts occurring before this date remain unaffected. By introducing this change, Parliament has triggered the long awaited clarity on contractual obligations for fraudulent claims.
The Act is written in clear terms and arguably achieves its desired result of introducing legislative clarity for principles which have already evolved de facto to meet the equitable demands of modern commerce. Interestingly, however, the Act codifies the default position and allows the insurer and the insured to contract on more onerous terms, if the consequences of this are explicitly set out to the insured. In a commercial context, when all lines of insurance are increasingly faced with downward price pressures, the competitive realities of the insurance industry may very well result in little invocation of this opt-out provision.
The changes to the Act will become more important for lines of business such as title insurance, where due to the specialist nature of the risks underwritten, the question of a duty of fair representation of the risk becomes a very subjective issue. It is foreseeable, therefore, that specialist title insurers may now be compelled to revisit their processes and policy wordings so that they are not caught out by claims resolutions approaches, which now favour the insured. For the UK consumer, this should not be construed negatively: it will separate those insurers which are true insurance professionals (and thus able to intuit and deliver the industry-wide benefits the Act mandates) from those who operate in the context of processes and wordings superimposed from their monoline, extra-jurisdictional pedigree (and are thus less capable of adapting to the more positive claims philosophy that the Act mandates for the UK insurance market).
Titlesolv (www.titlesolv.com) is the trading name of London & European Title Insurance Services Ltd, authorised and regulated by the Financial Conduct Authority.