global insurance management

Insurance Bill 2014 gets Royal Assent


Mar 02 2015

Insurance Bill 2014 gets Royal Assent

Relevance:                   All firms offering insurance policies.

Action required:           Understand the impact of revised terms in insurance documentation.

We recently updated firms on the progress of the Insurance Bill 2014 through Parliament and we are able to confirm that it has received Royal Assent, which now makes it a law under The Insurance Act 2015.  It is intended that this will be effective from October 2016.

The new law demands proportionate remedies for innocent non-disclosure and eliminates basis clauses. It also provides protection for policyholders against the inappropriate use of warranty breaches to avoid policies.

As a result, there will be a lot of work going on at insurance companies to bring their documentation into line with the requirements of this new Act.

Client firms should also be aware of the changes that will be coming into force next year.

We will keep firms advised of any developments that we get to know about but firms should also be alert to information that is provided by their insurer contacts in the lead up to implementation of the Act.

Reaction from the industry appears to be positive whilst recognising the impact the Act will have.

The International Underwriting Association (IUA) and Lloyd's Market Association (LMA) both praised the reforms and said they are making plans to prepare their members for "fundamental changes" to insurance contact law. They said the reforms will impact insurers' day-to-day operations, consumer policy wordings and the consequences of fraud.

The IUA and LMA are working with a number of leading law firms and counsel to prepare guidance to highlight changes in the law. The guidance will highlight how the changes affect the placement of insurance and reinsurance contracts, contract wordings and claims.

Law firm DAC Beachcroft also welcomed news that the Insurance Act had received Royal Assent.

Partner Nick Young said “After nine years of work and a whirlwind of activity in the last few months, I am delighted to see this Act succeed. Whilst there may now be a temptation to relax, 18 months is not a long time for insurers to make the necessary changes to their policies and procedures. They will need to carry out their impact assessment; consider whether to contract out of some of the provisions; review existing policy wordings, underwriting guides and policy documentation; and train claims handlers and underwriters to ensure that their practices are fully compliant. There is a lot to do,"

He added that commercial policyholders now need to understand the rules against which they will be measured when presenting their risks to insurers.  They (insureds) need to be clear about who, both within and outside their organisation, needs to be consulted in order to gather information for a fair presentation to insurers," he said.

According to Georgina Squire, partner at solicitor's Rosling King, the new law has 'significantly' diminished insurers' ability to avoid paying claims or terminate cover. 

Ms King stated “A key change under the new law is the introduction of a 'duty of fair presentation' of risk. This will replace an existing duty on insureds, under the Marine Insurance Act 1906, to disclose all material facts. The new rules will bring in proportionate remedies for unintentional breach of 'fair representation”.

Ms King also pointed out that the new law will operate as a default regime from which commercial insuring parties can opt out. She warned insureds to 'beware the opt out wordings or discussions in policy negotiation meetings'.  She explained that while there is an 18-month transition period before the new law comes into full force, some insurers, brokers and buyers are already drafting clauses to allow the law to apply to insurance policies immediately.

Graeme Trudgill, Biba's executive director, said: "Biba is extremely pleased that the Bill has received Royal Assent before the election.  This is good news for business customers and it means that insurers will be obliged to pay claims when a breach of a policy term is totally irrelevant to the loss that has taken place, unless of course it defines the risk as a whole."

Solicitors, Brown Jacobson suggest that although the Act has been welcomed across the industry as providing clarity and increasing fairness between insurers and their policyholders, they do not expect the transition to the new regime to be smooth.

For instance, they expect that:

  • brokers and insureds will find it difficult to anticipate what insurers, and the courts, will consider constitutes a 'reasonable search' for material information falling within the duty of fair presentation
  • there will be confusion over who falls within the 'senior management' definition of the bill - senior management being those people within an organisation who are deemed ought to know material circumstances falling within the duty
  • disputes are sure to arise over how the new proportionate remedies will apply to non-fraudulent/reckless breaches of the duty of fair presentation - particularly given that it will be for insurers to hypothesise about what would have happened had a disclosure been made, and
  • the application of terms relevant to particular types of risk will be tested, in particular when insureds attempt to convince an insurer that a breach of any such term could not have increased the risk of loss.

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