The Insurance Act 2015 heralds the long-awaited reform of insurance contract law. It represents a number of significant changes to the rights and remedies of insurers and policyholders and impact on the role and duties of commercial brokers. In this article we consider changes to the remedies available to insurers in circumstances where it contends that the insured has breached its duty of fair presentation.
The concept of the ‘duty of fair presentation’ is introduced by the Act and revises the obligations on both policyholders and insurers with regard to pre-inception disclosure. Previously, in the event that the insured fails in its duty of disclosure, the insurer was entitled avoid the entire contract. Furthermore, the non-disclosure could be entirely unrelated to the loss. The law has been changed to provide a more practical and fairer set of remedies depending on the severity and nature of the breach.
Deliberate or reckless breach
Now, an insured can still avoid the policy but only in circumstances where the breach is deliberate or reckless and the insurer can show a causative link i.e., that, but for the breach, it would not have offered cover or would only have done so upon different terms. Reckless is a higher burden that negligent and will not be an easy test to satisfy.
Breach not deliberate or reckless
Where the breach is neither deliberate nor reckless (eg where it is negligent), the Act provides a range of proportionate remedies. Key to determining the remedy is what the insurer would have done had the disclosure been made correctly:
1. If the insurer can establish it would not have written the risk at all it can still avoid the policy;
2. If the insurer would have written the risk on different terms, the contract will be treated as though it was formed upon those terms. Possibilities are that an insurer may have included certain conditions to reduce risk or excluded certain risks. Therefore, it is possible that an insurer could establish that the policy it would have offered would not have covered particular claims that have been presented to it. Notably, this would in principle have a retrospective effect on the insurance contract and therefore, if previous claims were paid when they should not have been upon the fresh terms, there would be scope for reimbursement from the insured.
3. If the insurer would have provided but for a higher premium, it can proportionately reduce its liability to settle any claim by reference to what percentage of the ‘true’ premium had been paid.
The remedies for non-disclosure will now be more varied and potentially provide for fairer outcomes. Central to any dispute will be what an insurer says it would have done but for the breach… and whether it can prove it. Considering the available evidence will therefore be key to presenting arguments and resolving disputes in the most favourable way for the client.