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Upcoming reform of insurance law in the UK – The Insurance Act 2015
The upcoming implementation of the Insurance Act 2015 (the “Act”) marks the first significant reform to commercial insurance law in the UK in over a century. The Act, which is due to come into force on 12 August 2016, will make a number of far reaching and substantial changes to the existing insurance law regime and aims to bring a better balance of interests between insurers and the insured.
Historically, as most of the law on insurance derived from the Marine Insurance Act 1906 and from EU legislation, insurance law has been very similar in Ireland and the UK. However, following the enactment of the Insurance Act in the UK, insurance law in Ireland will be significantly different from the UK law. Many Irish risks are written in the London market and are frequently subject to UK law therefore, the UK reforms are expected to have an impact on the Irish insurance market. It is important that both insurers and policyholders in Ireland become familiar with the reforms proposed in the UK. There is also an opportunity for insurers and policyholders in Ireland to adopt some of the reforms on a contractual basis in the absence of legislative reform in this jurisdiction.
The most notable of the changes to be introduced by the Insurance Act is to the duty of disclosure. The Act shifts some of the responsibility of disclosure from the insured by imposing a duty of enquiry on the insurer and limiting the insured’s duty of disclosure. However, the Act also introduces a new duty of “fair presentation” which requires policyholders to either (i) disclose to insurers “every material circumstance which the insured knows or ought to know”; or (ii) provide the insurer with “sufficient information in relation to those material circumstances as would put a prudent insurer on notice that it needs to make further enquiries”. Insurers, brokers and policyholders in the UK are struggling to determine what they need to do to comply with this duty. It appears disclosure must be made in a “manner which would be reasonably clear and accessible to a prudent insurer.” The objective here is to reduce the possibility of “data dumping” by the insured.
The Act also introduces, for the first time, proportionate remedies for non-disclosure. The insurer will no longer be entitled to simply avoid an entire policy due to a failure by the insured to disclose all material information. The remedy available will instead depend on whether the breach was “deliberate or reckless” or, for other types of breaches, whether the insurer would have entered the contract. To a large extent insurers in the UK and Ireland have already addressed some of these issues and many policies provide that insurers are not entitled to avoid the policy for innocent non-disclosure. The key issue now will be the interpretation of the scope of the policyholder’s duty of fair disclosure in the context of determining if the non-disclosure was deliberate or reckless.
The Act makes important changes to the current law on warranties for non-consumer contracts. Under the Act, the insured can remedy a breach of warranty, with the effect that the policy is suspended while the warranty is being breached. The Act also abolishes “basis of contract” clauses and prevents the insurer from avoiding liability for the non-compliance with a term which is not material to the actual loss suffered.
The Act also aims to clarify the effect of fraud on an insurance contract. If a fraudulent claim is made, the insurer may avoid the claim, treat the contract as terminated with effect from the time of the fraudulent act and recover any sums paid in respect of the loss.
Finally, while a provision providing a remedy of damages for late payment of claims was deleted from the Insurance Act at bill stage due to lack of market consensus, the same clause has been reintroduced in the Enterprise Bill, which is currently before the House of Lords for approval. If enacted, insurers will be required to pay sums due within a reasonable time and compensation will be payable to an insured where a policyholder suffers additional loss because of an insurer’s unreasonable delay in payment.
The Law Reform Commission of Ireland has also recently published its draft Consumer Insurance Contracts Bill 2015 (the “LRC Bill”) (click here for further information on the reforms proposed by the LRC). However, unlike the UK Insurance Act, the LRC Bill applies only to consumer insurance contracts. While the changes being proposed in the LRC Bill are not generally as wide-reaching as those to be implemented by the UK Act, there are some similarities. In particular, the LRC Bill recommends similar changes to the duty of disclosure, proportionate remedies for non-disclosure, and allowing an insured to remedy a breach of warranty.
There is no visibility on the timeline in Ireland for the enactment of the LRC Bill.