THE INSURANCE ACT 2015 – an overview of the most significant changes to UK Insurance Contracts for over 100 years

14th July 2016

The Insurance Act 2015 (“the Act”) comes into force on 12th August 2016.  The delay of 18 months from when the Act was passed by Parliament was deliberate in order to give everyone the opportunity to prepare for, and become familiar with, what are very substantial changes.

Prior to the Act UK insurance contracts have always been regarded by the law as contracts of “utmost good faith”.

This placed a very high duty upon an insured to disclose all material facts and refrain from making material misrepresentations when applying for insurance.  This duty was very onerous and included a duty to disclose matters even if the insurer had not enquired about them.  A failure to comply, even innocently, allowed the insurer to avoid liability.

Additionally, insurers regularly provided that terms in the proposal were to be treated as warranties by the insured.  This could again have very onerous and unexpected consequences.

If for example, the insured warranted that it would install a new fire detection system by a given date but failed to do so, under the previous law, the insurer would be entitled to avoid cover even if the loss which occurred had nothing to do with this breach (e.g. because of a flood).

Under the Act cover would be suspended until such time as the insured remedied the risk (e.g. if it installed the fire detection system at a later date) in respect of loss or damage by fire but would not be affected for an unrelated risk.

The Act seeks to re-balance the position more in keeping with modern day expectations of fairness and reasonableness both in relation to business contracts and to consumer contracts.

The Act has different provisions in relation to consumer contracts which, as one would expect, gives the insured greater protection.

For business contracts, the duty of utmost good faith is now replaced with a duty of “fair presentation”.

Doubtless this term will be fertile ground for many disputes and debates as to its precise meaning and its application to the facts in any given case but, in essence, it is likely to mean a less onerous responsibility upon the insured.

The duty includes a requirement for the risk presentation to be reasonably clear and accessible.  The obligation to disclose is limited to matters which the insured ought to know (but that also includes matters which should reasonably have been revealed by a reasonable search for information).

A deliberate or reckless breach of duty would still allow insurers to avoid liability completely.  However, for other breaches, the remedy will depend upon what the insured would have done had the risk been fairly presented.

As an example, if the insurer is able to establish that, had the insured provided the relevant information it would still have insured but would have charged double the premium, it is likely the claim will be treated as if it were only 50% insured and therefore only 50% of the losses will be paid.

As mentioned above, if there is a breach this will no longer permanently discharge the insurer’s liability, if the breach is remedied before the loss occurs, cover will remain in place and, if the breach had no impact on the loss then it will not relieve the insurer of liability.

It is also possible for parties to contract out of the provisions of the Act in respect of business contracts (but not consumer contracts).  Whether any will attempt to do so remains to be seen but it is not anticipated that it will generally be the position.

The Act is going to mean fundamental changes to insurance law and practice and this note is only intended to be a very broad overview of what are major changes to the current position.

Insurers, brokers and their clients will need to consider their new obligations and rights carefully as it certainly will not be sufficient simply to carry on as if nothing had changed.

Overall the Act should mean a fairer balance between insurer and insured but doubtless there will be much scope for argument over the precise meaning and effect of many of the provisions over the coming months and years.

Howard Colman