On 12 February 2015 the Insurance Bill finally received Royal Assent and is now known as the Insurance Act 2015. The provisions on insurance contract law will come into force in August 2016. A copy of the Act can be found on the legislation.gov.uk website.
The Explanatory Notes on the Insurance Bill, as brought from the House of Lords on 15 January 2015, state that its purpose is to update the statutory framework in specific areas, in line with best practice in the modern UK insurance market. The headline points are:
Disclosure and misrepresentation in business and other non-consumer insurance contracts
The Act amends the duty on business policyholders to disclose risk information to insurers before entering into an insurance contract, introducing a duty of “fair presentation” of the risk. It also provides the insurer with a number of proportionate remedies when the duty is breached. These include:
- Avoidance of the policy and the return of the premium
- The application of terms that would have applied had a fair presentation of the risk been made
- If a higher premium would have been charged, a proportionate reduction in the claim paid to reflect the proportion by which the premium that would have been charged exceeds the actual premium.
Insurance warranties and other terms
The Act abolishes “basis of the contract” clauses (which have the effect of converting pre-contractual information supplied to insurers into warranties). It also provides that, if there is a breach of warranty, the insurer’s liability should be suspended, rather than discharged, so that insurance coverage is restored after a breach has been remedied. Brokers will therefore need to advise, not just on the need to observe the terms of the warranty, but of the need to remedy any breach as quickly as possible so that cover is restored. Finally, the Act provides that breach of a warranty or similar term should not allow an insurer to refuse to pay a claim if the insured shows that the breach was completely irrelevant to the loss suffered.
Insurers’ remedies for fraudulent claims
The Act also sets out clear remedies for when a policyholder submits a fraudulent claim.
Points of Note for Brokers
For brokers, the Act is a generally positive development. It is intended to place Insured and Insurer on a more equal footing and should, in theory, result in more claims being paid, either in full or in part. This in turn should result in fewer claims against brokers.
A Note of Caution!
However, one note of caution. The Act provides that business insureds may contract out of the new provisions. Brokers will therefore need to advise clients on the impact of contracting out. In all likelihood, this will mean advising them not just on the direct consequences of doing so, but also on the relative merits of a cheaper premium set against the risk of more onerous policy terms.
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