The Insurance Act 2015 (IA 2015) came into force on 12 August 2016 and applies to all contracts of insurance entered into on or after that date, including various categories of property insurance. The Act represents the most comprehensive update of the statutory framework of English law for insurance contracts since the Marine Insurance Act 1906 (MIA 1906). This blog explores what has changed, and outlines the new rules.
So, what has changed?
A key difference between the regime provided for in the MIA 1906 and the IA 2015 is the structure introduced by the new framework and the role it sets out for all parties. The IA 2015 aims to bring greater clarity while addressing historic imbalances between insurer and insured.
The IA 2015 covers five broad topics:
- duty of ‘fair presentation’
- proportionate remedies
- warranties and other terms
- contracting out
The new duty of ‘fair presentation’
Replacing the duty of full disclosure, an insured now has a duty of ‘fair presentation’ of a risk before entering into a contract of insurance. This is one of the key changes introduced overall by the Act, and is set out in detail in our Practice Note Insurance – duty of disclosure. This new duty requires the following:
- disclosure of every ‘material circumstance’ which it ‘knows or ought to know’ about (information is material if it would influence the judgement of a prudent insurer, and ought to be known if it would be revealed by a reasonable search), or
- failing that, disclosure of ‘sufficient information to put a prudent insurer on notice that it needs to make further enquiries’ to reveal any such material circumstances.
In addition, every material representation as to fact must be ‘substantially correct’ and every material representation as to expectation or belief must be made in good faith. Finally, information must be provided in a ‘reasonably clear’ and accessible manner, so for example handing over a large unsorted bundle of information will not be acceptable.
Proportionate remedies for non-compliance
The only remedy available to the insurer for breach of the insured’s duties under MIA 1906 was avoidance of the insurance contract. This has long been recognised as a draconian remedy that fails to distinguish between innocent and deliberate or reckless breach of duty.
IA 2015 largely replaces this with a new proportionate system. Except in case of fraud, avoidance is now only an option where the breach was ‘deliberate or reckless’ and the contract would never had been entered into had the information been disclosed. However, where a breach is ‘innocent’, while the insurer will still be able to avoid the policy if it can show that it would not have entered into it at all, if it would have simply agreed different terms or premium, then the policy will be treated in line with such terms or premium when calculating a claim. This is designed to put the parties back in the position they would have been if the risk had been fairly presented.
Other changes to the insurance regime
IA 2015 has abolished Basis of Contract clauses (automatic conversion of statements by policy holders into warranties) in non-consumer insurance, replaces the remedy for breach of warranty and prevents an insurer from avoiding liability where a breach has no direct relationship with the loss suffered. Instead, any warranty breach by an insured will merely suspend (rather than discharge) the insured’s liability, resuming if and when remedied.
The law surrounding fraudulent claims has also been clarified. An insurer will be able to terminate the insurance where there is a fraudulent act and recover any sums paid in respect of the loss, without having to return the premium.
Finally, where parties to non-consumer insurance contracts can largely contract out of the default regime (so long as any disadvantageous terms are clearly brought to attention), consumer contract parties cannot agree less favourable terms than set out in the IA 2015.
Improvements and challenges
As well as increased duties of disclosure and hence increased risk, there are parts of the new Act, eg in relation to warranty provisions, which might not be entirely clear in practice and will require case law to give certainty. It may also of course be difficult for insurers to prove what they would have done had they received fair presentation of the facts.
Despite such points, however, IA 2015 brings the existing century-old insurance regime into the modern age, and is ultimately intended to create greater clarity and fairness in the system.