The UK's new Insurance Act 2015 comes into force in August of this year, rewriting more than 100 years of British insurance law. The industry is preparing but, as we review below, there are some unintended consequences that may require extra thought-¦
A suite of 18 generic model clauses has been published by the Lloyd's Market Association (LMA), to assist Lloyd's managing agents in updating their policy wordings in relation to the new Insurance Act 2015 and for continuing use in the marketplace. The LMA has also published accompanying guidance.
The clauses are available in the Lloyd's Wordings Repository, in preparation for the Insurance Act 2015, which comes into force on 12 August (www.lmalloyds.com/actclauses).
The new clauses have been produced as many lawyers warn of the law of unintended consequences, worrying that many in the market are not prepared for all the nuanced changes the new rules will bring.
"Many existing standard policy wordings will need some degree of updating before August," according to Kees van der Klugt, the LMA's director, legal and compliance, "and the LMA clauses should be very useful for all concerned as a point of reference."
The clauses can be used by managing agents, brokers and clients to ensure consistency with the Act and to create additional contract certainty under a number of the provisions of the Act, where deemed necessary.
The clauses perform a range of functions. For example, there are model clauses for specifying details of the 'insured's organisation' and 'senior management', both these being facets of the duty of fair presentation under the Act. A number of the clauses contain model words for contracting out of certain provisions of the Act, where the insurer and insured both wish to do so in appropriate circumstances. The model clauses underwent extensive review by the LMA Insurance Act Working Group and other LMA practitioner groups.
The challenge for claims
Changes to be introduced by the Act (and later by the Enterprise Bill) will raise fresh challenges for claims handlers, says Ince & Co partner Simon Cooper, particularly in terms of assessing the impact on coverage of the insured's breach of various policy provisions.
He says: "The more flexible remedies set out in the Act, particularly in relation to the duty to make a fair presentation at placement, do however raise opportunities for negotiation and a more constructive approach to the settlement of contentious claims issues.
"All of these changes serve to emphasise the need for clear communication and liaison between underwriters and claims handlers in order to achieve the best outcome for all. Finally, if and when the requirement to settle claims within a 'reasonable time' becomes implied into insurance contracts, it will be incumbent on insurers to manage claims proactively and to ensure outsourced claims teams are properly trained and aware of the potential exposure."
However, nothing in the proposed changes should prevent insurers from disputing claims in good faith and it should be remembered that if the insured wishes to claim damages for late payment they will have to be able to prove, on the balance of probabilities, that they have been caused to suffer a loss as a result of the delay as well as the quantum of that loss.
The question of warranties
Mr Cooper explains that a breach of an insurance warranty will no longer automatically discharge insurers from further liability under the contract. Instead, the contract will be suspended until the breach of warranty is remedied. Insurers will not be liable in respect of losses occurring or attributable to something happening during the period of breach.
Where a loss occurs when an insured is not in compliance with a term which "tends to reduce the risk" of loss of a particular kind, at a particular location or at a particular time, the insurer will not be able to rely on that non-compliance to exclude, limit or discharge its liability if the insured can show that its non-compliance did not increase the risk of the loss, which in fact occurred in the circumstances in which it did occur. This provision will not apply, however, if the term in question is one which "defines the risk as a whole".
Parliament has never passed a law of unintended consequences, says Andy Stevenson, partner at Elborne Mitchell. "Yet, perversely, they are a feature of much that ends up on the statute books. The latest example may be the effect of the new Insurance Act 2015 on that stalwart of the insurance industry, the premium payment warranty (PPW)," he adds.
Originally designed as a simple but effective means of ensuring that insureds pay their premium on time, current PPWs may become a significantly blunted tool when the new Act comes into force in August, if they work at all, fears Mr Stevenson.
"The problem lies in the change to the law regarding warranties generally under the new Act. Under the current law, the position is clear: if the insured breaches a warranty, the insurer is immediately discharged from liability to indemnify any loss. This is regardless of whether the breach has anything to do with the cause of the loss. That is why PPWs are so effective -- if the premium is not paid within the prescribed period then the insurer is discharged from liability, regardless of what happens afterwards."
The new Act was designed to deal with the perceived draconian effect that many standard warranties (eg as to operating fire alarms, guarding of premises etc) have on businesses and to level the playing field in favour of insureds. However, because the Act makes no distinction between different types of warranties, it may have inadvertently removed, or at least reduced, the power that PPWs have traditionally held.
Finally, Stephen Netherway, a partner at CMS, adds that the new Enterprise Act is set to raise further questions for the market. He says: "The implications [of the Act] are wide-ranging and raise significant questions for brokers and insurers across primary, subscription and reinsurance markets, including issues around the recoverability of these newly imposed awards and the accuracy of reserves required to pay for them."
Parliament is set to grant Royal Assent to the Enterprise Act imminently, meaning policyholders will be able to claim damages for late payment of insurance claims. The market will then have 12 months to review its claims procedures and have systems in place once the law comes into force, to show that they acted reasonably if required.
"Under the existing law, policyholders are entitled to indemnity up to the sum insured on valid claims but cannot claim in respect of additional losses caused by the insurer's failure to pay within a reasonable time," says Mr Netherway.
However, he adds: "Although not included in the Insurance Act 2015, reform proposals were subsequently incorporated in the Enterprise Bill, which will amend the Insurance Act to imply a term in every contract of insurance that the insurer must pay claims within a reasonable time."
The upshot is an urgent requirement for insurers and brokers to review their claims procedures and systems in terms of 'reasonableness'. Insurers in non-consumer lines will be able to contract out of the new provisions or impose a limit on the liability but wordings will need to be reviewed to achieve this.
Mr Netherway adds that a reasonable time for payment of a claim is not defined. The legislation simply provides that it will depend on the "relevant circumstances", giving some examples of matters that may be taken into account, such as the type of insurance, the size and complexity of the claim.
Corporate insureds have been lobbying for changes to be included in these new provisions and a number of key questions have been raised. In particular, where risks are written on a subscription basis and the insurer is not subject to a claims agreement on the slip, control over these payments will be severely limited. Secondly, there are questions as to whether an award of damages would be recoverable under reinsurance arrangements.
"Both scenarios point to an urgent need to revise and reflect any potential increased exposure within reserves," he warns.
The message seems to be for insurers and brokers to welcome the changes but to be prepared for some major changes to market practice and further changes along the way
The Insurance Act 2015 is the result of a detailed review of insurance contract law conducted by the Law Commissions of England and Wales, and Scotland. The review was prompted in part by a perception that, in some respects, the current law is outdated and unsuitable for the modern business environment. The Act seeks to address these concerns through a mixture of:
(i) Radical amendment in areas where the existing law is no longer thought to achieve a fair balance between the interests of the insured and the insurer;
(ii) The codification and clarification of existing law to reflect the development of the common law since the implementation of the Marine Insurance Act 1906 (the leading statute relating to commercial insurance, which, despite its name, also applies to non-marine insurance and reinsurance).
The new laws will apply to all insurance other than consumer insurance. They are equally applicable to reinsurance.
Source: Ince & Co