The Insurance Act – Flexible and fit for purpose

The Insurance Act 2015, enacted in February and expected to come into force on 12 August 2016, effects some fundamental changes to the commercial insurance regime. It will supersede legislation that has been in force since 1906, and which had become widely regarded as out of step with modern business.

The new legislation has received a fair degree of attention from insurers and insurance law practitioners, but probably less so from others. The intent of this article is to summarise certain key aspects of the 2015 act, as relevant to the legal sector.

As trading entities, firms clearly need to maintain a wide range of insurance covers, including professional indemnity, employer’s liability and business interruption cover. In addition, solicitors are also deemed to be insurance intermediaries for their clients, and are regulated under the SRA Financial Services (Conduct of Business) Rules 2001. These rules will apply if a firm is procuring insurance products, such as after the event and defective title cover, to cite two common examples. Under the rules, firms are required to inform clients whether advice has been given, on the basis of a fair analysis of a sufficient number of available insurance products, for a recommendation to be made as to which policy is adequate to meet the client’s needs. Moreover, the firm needs to explain to the client if it has any ties with insurance providers. Whether this is honoured more in the breach than the observance is a different matter.

In all these contexts, understanding what disclosure obligations are required when taking out insurance cover, or procuring it for a client, is highly important.

Under the old legislation (section 18 of the Marine Insurance Act 1906), an insured had a duty, when presenting a risk to an underwriter, to disclose before the contract was concluded every material circumstance which was known to the insured. The insured was deemed to know every circumstance which ought to be known by him in the ordinary course of business. If such disclosure was not made, the insurer was entitled to avoid the contract and treat it as if it had never existed. Every circumstance was deemed to be material which would influence the judgement of a prudent insurer in fixing the premium, or in determining whether to take the risk.

The all-or-nothing nature of this legislation, where an entire policy could, at least in theory, be treated as non-existent for a minor infringement of the insured’s duty, has long been regarded by many as draconian and unsatisfactory. The 2015 act abolishes the right of the insurer to avoid the contract on the grounds that utmost good faith has not been observed by the insured (section 14), and instead operates on the basis of a duty of fair presentation (section 3).

Under section 3(4), the duty is to disclose: (a) every material circumstance which the insured knows or ought to know; or (b) failing that, disclosure which gives sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances. The disclosure must also be ‘reasonably clear and accessible’, which in practice means that an insured cannot bury a material fact in a mountain of documentation in the hope that the insurer will overlook it, then claim the insurer should have found it. Material representations of fact must now be ‘substantially correct’, and representations as to matters of expectation or belief must be made in good faith.

On the face of it, the duty of fair presentation has the appearance of a significantly less onerous conduct requirement on the part of the insured than under the 1906 regime. Whether this will turn out to be the case in practice is something which will become clearer as the courts develop a new body of case law under the 2015 act.  The concept of ‘a fair presentation’ is certainly not unknown to the courts, as it is implicit (for example) in the duties of an applicant for injunctive relief, as set out in paragraph 25.3.5 of the Civil Procedure Rules, where ‘the applicant must disclose fully to the court all matters relevant to the application, including all matters…which are or may be adverse to it’. The rationale for this is that the court, like an insurer, is wholly reliant on the information provided by the claimant.

Paragraph 25.3.5 of the CPR also states, which is equally relevant, that ‘it is not only the duty of the claimant to disclose material facts: they must also present fairly the facts which they do disclose’. A number of cases on the exercise of the court’s discretion to grant or withhold injunctive relief expressly use ‘fair presentation’ terminology – the recent case of Eco Quest v GFI Consultants [2014] EWHC 4329 (QB) at paragraph 56 being one example.

The concept of fair presentation is in fact also well established in insurance law, particularly in the context of whether sufficient information has been given by the insured to enable it to argue that the insurer has waived rights of further enquiry. If anything, it may already be a moot point as to whether the courts will treat the new duty under the 2015 act to make a fair presentation as being radically different from the traditional duty imposed by section 18 of the 1906 act, at least as interpreted in most recent cases.

Earlier this year, when considering the application of section 18 in an avoidance case, the court in AXA Versicherung AG v ARAB Insurance Group [2015] EWHC 1939 (Comm) noted with approval that in Iron Trades Mutual Insurance Co v Companhia de Seguros Imperio [1991] 1 Re LR 213, Hobhouse J had pointed out that ‘the assured’s duty is essentially a duty to make a fair presentation of the risk to the insurer. In this regard a minute disclosure of every material circumstance is not required; the assured complies with the rule if he discloses sufficient to call the attention of the underwriter to the matter in such a way that, if he desires further information, he can ask for it …’. This seems markedly reminiscent of 2015 act principles, to say the least.

The remedies available for material misrepresentation and non-disclosure, however, are fundamentally different under the 2015 act. The all-or-nothing approach, irrespective of whether the breach was deliberate or inadvertent, has been swept away. Provisions which enable the contract to be terminated for the breach of a warranty deemed under the policy to be the ‘basis of the contract’ have now been abolished, and the breach of a term must be relevant to the loss in order for the insurer to rely on it. The policy can only now be avoided if the insured’s breach was deliberate or reckless, unless the insurer can prove that it would not have entered into the contract on any terms. If the insurer would have entered into the contract, but on different terms, those terms will be deemed to apply, and if the premium would have been reduced, cover will be reduced in proportion. There are also detailed provisions as to who in the insured’s and the insurer’s organisations are deemed to be cognisant of material facts.

All the above will provide fertile ground for arguments as to liability in the future: the overriding message however is that the 2015 legislation is considerably more flexible and fit for purpose in the modern world than that which it has superseded, and should on balance be welcomed by both sides of the market.

Adrian Bingham is a partner at Gordon Dadds, London WC2