The Insurance Act 2015: An overview

The Insurance Act 2015: An overview Introduction Act comes into force on 12 August 2016 No retrospective effect Will apply to all commercial insurance contracts, where they incorporate English law Does not formally repeal the MI Act 1906 itself, but does repeal and replace large sections of the 1906 Act Relates mostly to the non-consumer insurance market 2

The Insurance Act 2015: An overview Duty of disclosure Part 2 of the 2015 Act New concept of proportionate remedies Schedule 1 of the 2015 Act New definition as to warranties Part 3 of the 2015 Act Remedies for fraudulent claims Part 4 of the 2015 Act Contracting out Part 5 of the 2015 Act 3

A. Duty of Disclosure Under the 1906 MI Act: Section 18 requires the assured to disclose to the insurer every material circumstance which the assured knows or ought to know before concluding the contract Under Section 18(2) a material circumstance is defined as every circumstance which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk Under Section 17 also an overriding duty of utmost good faith pre and post contract 4

Duty of Disclosure Under the 1906 MI Act: Section 20(1) provides: Every material representation made by the assured or his agent to the insurer during the negotiations for the contract, and before the contract is concluded, must be true. If it be untrue the insurer may avoid the contract 5

Duty of Disclosure Under the 2015 Act: Sections 3(1) to (5) Replaces s.18, 19 & 20 of the 1906 MI Act s.17 of the 1906 Act remains New duty on the insured, to now make a fair presentation of the risk The new duty requires: disclosure of every material circumstance which the insured knows or ought to know ; OR failing that, 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 6

Duty of Disclosure Under the 2015 Act: Sections 7(3) (4) What is a material circumstance? if it would influence the judgment of a prudent insurer in determining whether to take the risk and, if so, on what terms Also: special or unusual facts relating to the risk any particular concern which led the insured to seek insurance cover... anything which those concerned with the class of insurance and field of activity in question would generally understand as being material 7

Duty of Disclosure Under the 2015 Act: Section 3(3) What is a fair presentation of the risk? A disclosure made in a manner which would be sufficiently clear and accessible to a prudent insurer; and In which every material representation as to a matter of fact is substantially correct, and every material representation as to expectations or beliefs is made in good faith 8

Duty of Disclosure Knowledge of the insured: Section 4, of the 2015 Act: Objective test what the insured knows or ought to know Individuals vs. organizations (i.e. corporate entities) Individuals includes knowledge of: insurance brokers Corporate entities includes knowledge of: anyone who is in senior management, or anyone who is responsible for the insured s insurance Knowledge also covers actual and suspected knowledge so the test is also subjective 9

Duty of Disclosure Exceptions: It is not necessary for an insured to disclosure a circumstance if: It diminishes the risk The insurer knows or ought to know of it The insurer to presumed to know it; or It is something as to which the insurer waives information 10

Duty of Disclosure 2015 Act: Insured vs. Insurer knowledge For the insured, the key criteria is whether an individual is a member of senior management or one of those responsible for the insured s insurance For the insurer, the key criteria is whether it was known by one or more individuals who participate on behalf of the insurer in the decision whether to take the risk, and if so on what terms 11

B. Proportionate Remedies a new concept Under the 1906 MI Act Section 18(1): a consequence of non-disclosure is that the insurer may avoid the contract - so not pay any claims. Same with s.17 of the 1906 Act. Avoidance is from policy inception. So there is/was only one remedy available for non-disclosure (and breach of the duty of utmost good faith) 12

Proportionate Remedies a new concept Under the 2015 Act Schedule 1 Duty of utmost good faith (s.17 of the MI 1906 Act) still exists, its just the remedy which has changed. Failure to make a fair presentation of the risk OR Deliberate / reckless? Innocent / negligent? 13

Proportionate Remedies a new concept Under the 2015 Act Schedule 1 Deliberate or reckless breaches Burden is on the insurer to show it was deliberate / reckless If the insurer would not have entered into the contract, or would have done so on different terms avoid policy, refuse claims, KEEP premium paid Deliberate breach? one where the insured party knew it was in breach of its duty to make a fair presentation Reckless breach? one where the insured party did not care whether or not it was in breach of that duty 14

Proportionate Remedies a new concept Under the 2015 Act Schedule 1 For innocent or negligent breaches there a complex inducement test : If the insurer wouldn t have entered into the contract at all avoid contract, refuse claims, RETURN premium If the insurer would have entered into the contract, but charged a higher premium contract remains, but reduce claim payout accordingly If the insurer would have entered into the contract, but on different terms, those terms are deemed incorporated into the contract Again, burden is on the insurer to prove this 15

C. Warranties refined Under the 1906 MI Act Breach of a warranty entitles the insurer to avoid all claims under the policy, from the date of the breach: Regardless as to whether or not the breach is subsequently remedied Regardless as to whether the breach was material to the loss/claim in question 16

Warranties refined Under the 2015 Act key change: Section 10 (s.10) Breach of a warranty now suspends, rather than discharges, an insurer s liability between the date of the breach and the date the breach is remedied. So the timing of any breach, and its remedy, will be more important than ever 17

Warranties refined Under the 2015 Act An insurer has no liability under a contract of insurance in respect of any loss occurring, or attributable to something happening, after a warranty (express or implied) in the contract has been breached but before the breach has been remedied. The term occurring, or attributable to something happening covers a series of events that gives rise to a loss, i.e. a warranty is breached but is remedied before the loss, but the loss was attributable to something happening after the warranty was breached and before it was remedied. The insurer would not be liable for this loss. However 18

Warranties refined Under the 2015 Act - This subsection does not apply if: because of a change of circumstances, the warranty ceases to be applicable to the circumstances of the contract, compliance with the warranty is rendered unlawful by any subsequent law, or The insurer waives the breach of contract (Similar to the 1906 Act) 19

Warranties refined under the 2015 Act - Remedies: A breach of warranty has no effect on insurers liability before it occurred or after it is remedied. A warranty is remedied when the insured is no longer in breach of the warranty, OR; If the warranty is something to be done (or not done) and is then not complied with, the breach will be remedied if the risk to which the warranty relates later become essentially the same as that originally contemplated by the parties 20

Warranties refined Under the 2015 Act three key changes: Section 11 A new test of materiality. A direct causal link is not required, but the breach / non-compliance must have some bearing on the type of loss in question Burden is on the insured; but If they can show that the non-compliance with a warranty could not have increased the risk of the loss which has occurred, then the insurer cannot rely on the non-compliance to exclude or limit its liability under the contract; But this test of materiality doesn t apply to terms defining the risk as a whole 21

D. Fraudulent claims Under the 1906 MI Act s.17 duty of utmost good faith, applies pre and post contract. Remedy for breach is total avoidance of the contract Insured forfeits the whole (fraudulent) claim; Premium is returned to insured. 22

Fraudulent claims Under the 2015 Act Section 12 What constitutes a fraud hasn t changed, just the remedies In the event of a fraudulent claim: Insurer not liable to pay the fraudulent claim Sums already paid for that claim will be recoverable by the insurer; AND By serving a notice to the insured, insurer can treat contract as terminated from time of the fraud 23

Fraudulent claims Under the 2015 Act Section 12 Insurer remains liable in respect of claims before the fraudulent act All subsequent claims are invalid Insurer can retain premium paid before the fraud 24

E. Contracting out Under the 2015 Act Sections 16-17 Commercial parties can contract out of all terms, with the exception of basis of contract clauses This includes: The new duty to make a fair presentation The new treatment as to warranties The new remedies for fraudulent claims; AND The new proportionate remedies introduced for breach of the new disclosure requirements 25

Contracting out Under the 2015 Act Sections 16-17 HOWEVER: there are transparency requirements Any terms more onerous than the 2015 Act must be: clear and unambiguous insurer must take sufficient steps to draw the disadvantageous term to the attention on the insured before contract is entered into / varied broker notification may be sufficient 26

Enterprise Act 2016 Introduction Amends part 5 of the Insurance Act 2015 Comes into effect 4 May 2017 will apply to all insurance and reinsurance contracts entered into after that date 27

Enterprise Act 2016 Key points Implied term in all insurance contracts that claims must be paid within a reasonable time The insured will be able to claim damages if it can prove on the balance of probabilities that a (re)insurer s unreasonable delay caused additional loss Right to claim interest for late payment remains Interest and damages claimed by insured are in addition to the original claim amount Insured must make the claim for damages within 1 year of the date of the last payment by the insurer in respect of the loss. 28

Enterprise Act 2016 Contracting out Parties to a non-consumer contract will be able to contract out of this implied term, subject to transparency provisions in the Insurance Act 2015, as previously discussed. 29

Enterprise Act 2016 Implications for claims handling Reasonable time Relevant factors: Time to investigate and assess the claim (extra time may be reasonable for third party claims etc.) Size and complexity of case Regulation and guideline compliance (e.g. sanctions) Factors outside of the insurers control (e.g. third parties) 30

Enterprise Act 2016 Implications for claims handling Disputing the original claim Failure of insurer to pay while dispute is continuing = not unreasonable But, in determining whether there has been an unreasonable delay by insurer, account to be taken of: Failure to respond to case developments promptly Conducting investigations too slowly Refusal of, or failure to propose Alternative Dispute Resolution (ADR) provisions Failure to make or accept reasonable settlement offers Failure to make interim payments 31

Conclusions Insurance Act 2015 Amends a piece of key legislation in the Marine Insurance market which was seen as out-dated Rebalances the burdens in insurance contracts Enterprise Act 2016 Implied that claims must be paid in a reasonable time May add pressure on insurers to settle claims more quickly 32