On February 12, 2015, the Insurance Act 2015 (“2015 Act”) became law in the United Kingdom and will come into force on August 12, 2016. The 2015 Act replaces a number of key provisions in the Marine Insurance Act 1906, Edw. 7, ch. 41, which, as a codification of common principles, has applied for more than a century to both marine and non-marine commercial insurance policies. Although the 2015 Act covers many aspects of insurance law, significant changes have been made in the following areas.
Non-disclosure and Misrepresentation
Under the Marine Insurance Act 1906, an insured applying for insurance was under a duty of utmost good faith, or uberrimae fidei, to fully disclose and accurately represent all facts material to the risk. In what amounts to a momentous change in the law, the duty of utmost good faith is replaced in the 2015 Act by the requirement in Clause 3 that an insured must make a “fair presentation of the risk." In order to constitute a “fair presentation,” the insured must accurately disclose all material facts in a manner that is reasonably clear and accessible to the prospective insurer. This requirement is in response to a tactic referred to as a “data dump,” in which an insured submits vast amounts of data and documentation to the insurer without making any effort to cull out what it material to the risk.
"Fair presentation" requires the insured to disclose every material circumstance which it knows or ought to know. Alternatively, the insured is required to give the insurer sufficient information to put a prudent insurer on notice that it needs to make further enquiries to reveal such material circumstances. Under Clause 3(5), should the insurer fail to make enquiry, the insured is then excused from having to disclose a circumstance that diminishes the risk, which the insurer knows, ought to know, or is presumed to know, or which has been waived by the insurer.
A fact is material, and thus required to be disclosed, under Clause 7 of the 2015 Act if it would influence the judgment of a prudent insurer in determining whether to take the risk and, if so, on what terms. Under Clause 3(3)(c), material representations of fact are required to be substantially correct, whereas material representations as to matters of expectation or belief must be made in good faith.
An insurer will no long have an absolute right to avoid an insurance policy on the basis of an insured’s breach of the duty of disclosure, as it did under the 1906 Act. Instead, Clause 8 of the 2015 Act provides a range of remedies intended to be proportionate to the particular circumstances of the insured’s failure to fairly present the risk at the time coverage is requested. Schedule 1 to the Act specifies that the insurer will only have the right to avoid the policy if the insured’s breach was deliberate or reckless. In all other circumstances, the burden shifts to the insurer to demonstrate what it would have done had it received a fair presentation. If, for example, the insurer can show that it would have written the policy on different terms had a fair presentation been made, a claim under the policy is assessed on the basis of those different terms. Should the insurer prove that it would have written the policy but at a different level of premium, under Part 2, Clause 11, of Schedule 1, the amount of the claim is reduced proportionately to reflect the premium actually paid.
Under Clause 9 of the 2015 Act, neither the application/proposal for insurance, nor the policy itself, may contain what is known as a “basis of the contract” clause, which purports to convert all representations made by the insured into warranties. It will still be open to the insurer to include specific warranties in the policy.
Under the 1906 Act, a breach of warranty operated to take the insurer off the risk, regardless of whether the breach had any causal relationship to the loss incurred. In what amounts to another profound change in the law, the remedy for breach of warranty has been substantially revised by Clause 10 of the 2015 Act. Under this clause, warranties shall have suspensive effect only, meaning that the insurer can only rely on a warranty for losses occurring while the insured is in breach. In those cases in which the breach can be remedied, coverage will be reactivated for any losses incurred once the breach is remedied. In addition, an insurer will no longer be able to rely on a breach of warranty if the insured can show that non-compliance with the warranty did not increase the risk of the particular loss incurred.