Insurance Act 2015 – Brief Review Of Upcoming Changes
September 18, 2015
The Insurance Act 2015
As we know, the legislation applicable to contracts of marine insurance governed by English law is the Marine Insurance Act 1906. The Act is a codification of principles previously emanating largely from case law. Since that time, the statutes of the Act have only been slightly amended. However, significant reform of the law has been promoted by the Law Commission and has been evolved into law by the Insurance Act 2015. On 12 February 2015, the UK Parliament passed the Insurance Act 2015 and it will bring fundamental changes to commercial insurance in the UK. The Insurance Act 2015 will not repeal the MIA 1906, but it will amend some key sections. This will enter into force on 12 August 2016. We will consider some important changes introduced by the Insurance Act 2015.
UTMOST GOOD FAITH
As we know contract of Marine Insurance is a contract of utmost good faith. If the utmost good faith principle is not observed by either party, the contract may be avoided by the other party. Section 17 of the Marine Insurance Act 1906 applies before and after the contract of insurance is concluded – there is a positive duty to speak about the risk.
Under the Insurance Act 2015, the assured is still obliged to disclose all material facts, however there is a so-called “fall-back position”. Under Section 3(4)(b) the assured will satisfy his obligations of disclosure if they give the insurer “sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances.”
For instance: the assured have had wetting of cargo at POD couple of years ago due hatch covers were not watertight. When reviewing their insurance policies they have told to the new P&I insurer about this cargo claim describing it only as “cargo damage at POD”. It can be presumed, that the assured has fulfilled his obligations on disclosure and therefore it is the Underwriter who should enquire for some information in respect of such a claim. However, it should be remembered that the risk must be presented to the insurer “in a manner which would be reasonably clear and accessible to a prudent insurer”.
The obvious reason why it is done is to make Underwriters more involved in talks about the risk prior signing it, not when the claim has occurred.
DISCLOSURE BY THE ASSURED
The Insurance Act 2015 introduces an important change to disclosure itself. Under Marine Insurance Act 1906 the assured need not to disclose “any circumstance which it is superfluous to disclose by reason of any express or implied warranty”. So when the insurer is protected by warranty under the policy of insurance, disclosure can be avoided. However, classification of warranty has been changed to “suspensory condition” – removing such protection that was available to the Underwriter. This lead to Section 21(2) in the Insurance Act 2015, which omit Sections 18, 19 and 20 from the Marine Insurance Act 1906.
As we have mentioned classification and nature of warranties is changed. “Suspensory condition” means that in case of breach of a warranty (either express or implied) the insurer is still responsible for any loss, if the assured has remedied the breach before the loss. The insurer will be liable for losses, unless they were “attributable to something happening”. In order to get clear with term “remedied the warranty” the simple example can be taken: there is restricted area where ship can sail, however she in fact sails in this area (no cover when the ship is this area), however at the moment the vessel leaves this zone the breach will be remedied.
One more important change that should be mentioned is the new principle of remedies available to the assured. Under Section 18 of the Marine Insurance Act the only remedy available to the assured if he has failed with his duty of utmost good faith – is to treat the contract of insurance as it was never made (Section 18 of MIA 1906). Under the new Act the remedy is not only limited to avoidance of the contract, but is divided according to category of the breach: 1) deliberate or reckless breach; 2) “honest breach” which is not deliberate or reckless. In the first situation, which is obviously the severe one, the insurer may avoid the policy without necessity to return the premiums. It is the insurer who has burden of proof that the breach deliberate or reckless. Speaking about the second sort of situation, where breach is not deliberate or reckless, there are three ways:
1. The insurer may cancel the policy, but he needs to return the premiums. Depends on situation – whether the underwriter would have written the risk if there was no breach from the assured side.
2. The contract of insurance will be in force, however on terms on which the underwriter would have written the risk if there was a fair presentation of the risk.
3. The claim compensation can be reduced proportionately if it can be presumed that the underwriter would have written the risk on a higher premium.
As it is mentioned the Insurance Act 2015 will come into force in August, 2016. Obviously, it needs some time to be assimilated in the system of English Insurance Law. There will be some remarkable, important and paramount cases, which are still to come, however, without no doubt, these changes are quite significant and we have less than a year to become ready.
For more detailed information please see “A practical guide to changes in UK Insurance Law”, which is prepared for members of the Lloyd`s Market Association and the International Underwriting Association, and is available to download here.