Insurance law reform: don't damage the market

While most litigators have grown used to significant reform every decade or so, it is necessary to look back to the Marine Insurance Act 1906 for the foundation of the current commercial insurance law regime. It is testament to the lawmakers of the time that the Act still underpins insurance written worldwide.

However, following on from the Consumer Insurance (Disclosure and Representations) Act 2012, the Law Commission and Scottish Law Commission have consulted on sweeping changes to commercial insurance law, including writing cover and the remedies available to insurers for breach of disclosure obligations or policy terms. The proposed changes will be published in the Insurance Contract Law Bill this summer.

Fair presentation

The duty of utmost good faith is to be removed and replaced with a duty on proposers to give a fair presentation of risk. This may be largely symbolic as proposers will still have to disclose all material circumstance they know or ought to know, but the remedies for breaching this duty are to be diluted.

Currently, the remedy of avoidance for failure to disclose a material circumstance is as uncompromising as it is clear. However, under the reforms, while avoidance will remain for deliberate or reckless failures, in other circumstances the remedy will depend upon what the insurer would have done had the duty of fair presentation been complied with.

If the policy was not underwritten, avoidance will still be an option. However, if the policy was written on different terms, those terms will be retrospectively applied, or if a different premium charged, claims payments will be reduced proportionately.

While endorsing fairness, the Forum of Insurance Lawyers (FOIL) is concerned the proposals will result in more scope for disputes, as it will not just be necessary to establish that a representation should have been made, but the 'what would have happened' question will need answering.

Fraud

For some time, courts have been reluctant to apply universally the statutory remedy of avoidance in the event of policy holder fraud.

Acknowledging this, it is proposed that while an insurer will have no liability for claims in respect of fraud, and may terminate the contract and retain the premium on its discovery, it will remain liable for any loss suffered before the fraud committed.

FOIL is concerned that there is a requirement in the proposals for a direct causal connection between a fraudulent act and a claim, which might prevent insurers from repudiating liability for claims that have involved, but not necessarily arisen from, fraud.

Enforceable warranties

FOIL welcomes the proposal to abolish 'basis of the contract' clauses, acknowledging that sometimes severe consequences arise from simple and inadvertent mistakes made at proposal stage.

Warranties expressly agreed will still be enforceable in the usual way. It is unclear whether or not terms that would otherwise be warranties at common law, regardless of explicit categorisation by the parties, will remain.

As with the duty of fair presentation though, it is the amended remedies for breach that are most eye-catching, given that warranties will become 'suspensive conditions'.

In practice, this means that insurers' liability for loss will merely be suspended during a period of breach and reinstated when the breach is remedied.

Further, breach of a warranty that is relevant to a particular type of loss, or loss at a particular location or time, will only suspend the insurer liability for that type while liability remains for all other types regardless of whether the loss, though different, may be causally connected to the breach.

While the law on warranties is ripe for reform, FOIL's concern is that the changes do not recognise their importance as justifiable means of reducing the risk faced by insurers.

Using more flexible wording allows insurers to suspend liability for losses where there is a causal link between the breach and the loss suffered, wherever and whenever it has occurred, preferred.

Insurers' position

The 1906 Act has been refined by over 100 years of case law, reflecting the complexity and sophistication of the insurance market. Reform of the underlying principles is inevitable and the Law Commission's work is welcome.

It is, however, crucial that the reforms are considered in practical terms and do not weaken the insurer position to the extent that increased premiums are inevitable and appetite to place insurance in the London market is diminished.

James Gibbons was a member of FOIL's insurance contract law working party and is a solicitor at Browne Jacobson