English and Scottish Law Commissions: is insurance law taking shape?

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We examine the English and Scottish Law Commissions' draft Insurance Contracts Bill and their proposals for reform of insurance contract law in relation to business and consumer insurance.

The English and Scottish Law Commissions have recently (17 June 2014) published their draft Insurance Contracts Bill. Some parts of the Bill relate only to business insurance but others apply to consumer insurance. The Law Commission has previously sponsored the Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA) changing the law on consumer insurance.

The main highlights are:

1. The proposer for insurance must make a fair presentation of the risk to the insurer. This re-states existing law but with important alterations relating to the knowledge to be attributed to the insurer and the proposer. In particular, where the proposer is not an individual, the knowledge attributed to that entity is the knowledge of its senior management and the person responsible for its insurance. There may also be problems with provisions stating that confidential information possessed by an agent of the insurer or the proposer is not attributable to the agent’s principal.

The main change is the introduction of proportionate remedies where the insured fails to make a fair presentation. Specifically:

  • If the breach was deliberate or reckless, the insurer may avoid the policy and need not return the premium
  • If the breach was neither deliberate or reckless:
    • If the insurer would not have written the policy on any terms, the insurer may avoid, refuse to pay any claims but must return the premium.
    • If the insurer would have written the policy but on different terms, the policy is treated as containing those terms. 
    • If the insurer would have charged a higher premium, claims payments will be reduced by the proportion by which the actual premium is less than the premium payable but for the breach. 

The section applies to business insurance only.

2. Breach of warranty will not automatically discharge the insurer from liability. Cover will be reinstated when the insured remedies the breach. Further, where the warranty reduces the risk of losses of a particular kind or loss at a particular location or time, the insurer cannot rely on the breach to discharge its liability for (respectively) loss of a different kind or loss at a different location or time. In other words, there needs to be a causative connection between the breach and the loss or claim.

“Basis” clauses, by which the insured warrants the accuracy of information supplied to the insurer before inception, will be outlawed (but this may be circumvented – see below).

This section applies to business and consumer insurance except that CIDRA has already abolished “basis” clauses in consumer contracts.

3. The law on fraudulent claims will be tidied up so that:

  • If the insured makes a fraudulent claim, the insurer is not obliged to pay the claim
  • The insurer may refuse all liability to the insured in respect of all liability under the policy arising after the fraudulent act 
  • But the insured retains its rights before the fraudulent conduct

The treatment of “fraudulent devices” (ie, cases where the claim is not fraudulent but is bolstered by the insured’s fraudulent device) is unclear. This has long been a vexed subject.

This section applies to both business and consumer insurance.

4. The introduction of a new remedy where the insurer fails to pay a claim within a reasonable time. This applies to both business and consumer insurance and is a completely new concept. It will impact significantly on claims handling.

5. Finally, in business insurance it will be possible to contract out of these provisions thereby maintaining freedom of contract but:

  • It will not be possible to contract out of the provisions relating to basis clauses (see 2 above) or deliberate or reckless late payment of a claim (see 4 above). 
  • Subject to that, any term contracting out must conform to the “transparency requirement” so that it is: 
    • drawn to the insured’s attention before entering the policy; and 
    • is clear and unambiguous.

Contracting out in consumer insurance will not be possible where it leaves the insured in a worse position.

The Law Commissions’ explanatory notes indicate that the insurer will have to draw to the insured’s attention the consequences of contracting out so that, for example, a term excluding the obligation to pay a claim in a reasonable time (in business insurance) will need to make clear that it relieves the insurer of that obligation.

Implications

Two important provisions (the introduction of a causation requirement for breach of warranty and late payment of claims) are subject to further consultation. Subject to that, the Commissions’ intention is that the Bill should be dealt with as a Law Commission Bill with accelerated passage through Parliament so that it becomes law before the next election in May 2015.

Our impression is that it will have a significant impact on the way in which insurers carry on their business. For example, the abolition of the basis clause may make it necessary to ensure the insured specifically warrants the accuracy of relevant information (eg, its claims history in the case of a professional indemnity policy) in the policy. Departures from the Bill (in business insurance) will have to comply with the “transparency requirement”. That will entail a review of policy wordings and underwriting procedures (bringing the terms to the insured’s attention before inception). Claims managers will have to grapple with proportionate remedies, claims for late payment of claims and, just as worrying, the threat of such claims.

It remains to be seen whether these reforms will have a structural effect on the market, particularly in relation to pricing. They are greatly watered down from the Commissions’ original proposals. More important will be the law of unintended consequences as unexpected implications of the legislation are revealed in disputes and litigation.

STOP PRESS: On 17 July 2014 the government introduced the Law Commissions’ draft bill in the House of Lords under the accelerated procedure for uncontroversial bills. It follows the Commissions’ draft but omits:

1. The proposal to introduce the requirement for insurers to establish a causal relationship between a breach of warranty and the loss suffered (see section 2 above – the provision relating to the suspensive effect of breach of a warranty remains in the bill).

2. The proposed remedy for late payment of a claim by insurers (section 4 above).

We will report further as the bill progresses through parliament.

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