the insurance act the final countdown

THE INSURANCE ACTTHE FINAL COUNTDOWN

02 THE INSURANCE ACTTHE FINAL COUNTDOWN

CONTENTSEditorial 03

InsuranceAct2015–thekeypoints 04

Damagesforlatepaymentofclaims–theEnterpriseBill2015 06

Implicationsofthenewlawsforclaimshandling 07

Implicationsofthenewlawsforreinsurance 10

Caselawunderthecurrentandnewlegislation 12


EDITORIALOn 12 February 2015 the UK Parliament passed the Insurance Act 2015 (the Act). It will come into effect for new contracts and for variations of contracts entered into on or after 12 August 2016 and will introduce the most significant changes to English commercial insurance law for at least 100 years.Therehas,ofcourse,beenagreatdealofdiscussionandcommentaryontheAct.OntheeveoftheanniversaryofitreceivingRoyalAssent,however,wethoughtitwouldbeusefultofocusontwoareaswhichhavenotreceivedsomuchattention:the impact of the Act on reinsurance and the challenges and opportunities which the Act will create for claims handlers.

ToillustratethepracticalconsequencesoftheActwehavealsoanalysedsomerecentCourtcasestoseehowtheymighthavebeendecideddifferentlyhadtheActbeeninforce.

Wehopethatyoufindthisupdateinterestinganduseful.IfyouwouldliketoknowmorepleasedonothesitatetocontactmeoryourusualIncecontact.

Simon Cooper Editor


INSURANCE ACT 2015 – THE KEY POINTSThe Insurance Act 2015 (the Act) is the result of a detailed review of insurance contract law conducted by the Law Commissions of England and Wales and of Scotland. The review was prompted in part by a perception that, in some respects, the current law is outdated and unsuitable for the modern business environment. The Act seeks to address these concerns through a mixture of (i) radical amendment in areas where the existing law is no longer thought to achieve a fair balance between the interests of the insured and the insurer and (ii) the codification and clarification of existing law to reflect the development of the common law since the coming into force of the Marine Insurance Act 1906 (the leading statute relating to commercial insurance, which, despite its name, also applies to non-marine insurance and reinsurance).Thenewlawswillapplytoallinsuranceotherthanconsumerinsurance.Theyareequallyapplicabletoreinsurance.ThekeyfeaturesoftheActaresummarisedbelow.

Placement – duty to make a “fair presentation” > Theinsuredmustdiscloseallmaterialcircumstancesabouttheriskor,failing

that,itmustgivetheinsurersufficientinformationtoputitonnoticethatitneedstomakefurtherenquiriesforthepurposesofrevealingallthematerialcircumstancesabouttherisk.

> Thiswillputagreateremphasisontheinsurertoaskquestionsabouttheriskandtomakeclearwhatinformationitrequires.

> Theinsuredisobligedtomakedisclosureinamannerwhichisreasonablyclearandaccessibletoaprudentunderwriter(preventingsocalled‘datadumping’)andnottomisrepresentmaterialinformation.

> Theinsuredwillbetakentoknowwhatisknowntoits“senior management”,tothoseresponsiblefortheinsurance(includingagentssuchasbrokers)andwhat“should reasonably be revealed by a reasonable search”ofinformationavailabletotheinsuredbothwithinitsownorganisationorheldby“any other person”.

Graduated remedies for breach > Thesingleremedyofavoidancefrominceptionforabreachbytheinsured

ofitsdutytomakeafairpresentationoftheriskatplacementisabolished.Ifthebreachofdutywasdeliberateorreckless,theinsurermaystillavoidthecontractandkeepthepremiumwhateveritwouldhavedoneintheeventofafairpresentation.

> Inthemorelikelyeventthatthebreachwasinnocentornegligent,however,therewillbeanewsystemofgraduatedremediesbasedonwhattheinsurerwouldhavedonehadafairpresentationbeenmade.Theseinclude:

> avoidanceiftheunderwriterwouldnothavewrittentheriskatall;or

> theimpositionofdifferenttermsinthecontractfrominceptioniftheevidenceisthattheunderwriterwouldhaveimposedthosetermsintheeventofafairpresentation(thismaymeanthatsomeclaimswhichhavealreadybeenpaidhavetoberevisited);and/or

> ifthepremiumchargedwaslowerthanitwouldhavebeenifafairpresentationhadbeenmade,anyclaimsunderthecontractmaybereducedbythesameproportionastheactualpremiumchargedbearstothepremiumthatwouldhavebeencharged.


Warranties and terms not relevant to the actual loss > Abreachofaninsurancewarrantywillnolongerautomaticallydischarge

insurersfromfurtherliabilityunderthecontract.

> Instead,thecontractwillbesuspendeduntilthebreachofwarrantyisremedied.Insurerswillnotbeliableinrespectoflossesoccurringorattributabletosomethinghappeningduringtheperiodofbreach.

> Wherealossoccurswhenaninsuredisnotincompliancewithatermwhich“tends to reduce the risk”oflossofaparticularkind,ataparticularlocationorataparticulartime,theinsurerwillnotbeabletorelyonthatnon-compliancetoexclude,limitordischargeitsliabilityiftheinsuredcanshowthatitsnon-compliancedidnotincreasetheriskofthelosswhichinfactoccurredinthecircumstancesinwhichitdidoccur.Thisprovisionwillnotapply,however,iftheterminquestionisonewhich“defines the risk as a whole”.

Remedies in the event of a fraudulent claim > Theinsurerwillnotbeliabletopayanypartofafraudulentclaimandmay

recoveranymoneypaidinrespectofthatclaimpriortodiscoveryofthefraud.

> Theinsurermaygivetheinsurednoticethatthecontractisterminatedfromthedateofthefraud(regardlessofwhenthefraudisdiscovered).Theinsurercanthenkeepthepremiumandhasnoliabilityforclaimsarisingafterthefraud.

> Intheeventofafraudulentclaimbyonebeneficiaryunderagroupscheme,coverfortheinnocentbeneficiariesisnotimpacted.

Contracting outTheActallowsthepartiestocontractoutofanyoftheprovisionsrelatingtothedutytomakeafairpresentation,warrantiesandfraudulentclaims(savefortheprovisionrelatingtotheabolitionofsocalled‘basisofthecontract’clauses).Contractingoutwillonlybeeffective,however,iftransparencyrequirementsstipulatedintheActareobserved.Theserequirementsapplytoanytermwhichismore“disadvantageous” to theinsuredthanthedefaultpositionaspertheAct.


DAMAGES FOR LATE PAYMENT OF CLAIMS – THE ENTERPRISE BILL 2015There is an old fiction in English insurance law that the obligation of an insurer is to keep the insured or its property safe and that any amounts recoverable under an insurance contract are damages for the breach of that duty. An insured cannot be awarded damages for the late payment of damages so its only remedy under the existing law is simple interest on the amount due, as with any other normal debt.TheearlydraftsoftheInsuranceAct2015containedprovisionswhichwouldhaveenabledaninsuredtorecoverdamagesfromitsinsurerforthelatepaymentofaclaim.Theseprovisionswere,however,consideredtobetoocontroversialandwerenotincludedinthelegislationpassedbyParliament.Insurerswereledtobelievethattherewouldbemoreconsultationbeforerevisedproposalsofthisnaturewereintroduced.

Insurersweresomewhattakenbysurprise,therefore,whentheEnterpriseBill2015(theBill)wasintroducedintoParliamentinautumn2015.TheBillcontainsproposalswhich,ifpassed,willindeedexposeinsurerstoaclaimfordamagesintheeventofalateclaimspayment.

The key pointsThekeypointsoftheBillareasfollows:

> Itwillbeanimpliedterminall“insurance contracts”thatclaimsmustbepaid“within a reasonable time”.

> Theremediesforbreachofthisimpliedtermwillbetheusualremediesforbreachofcontract,includingdamages.Thatmeans,ofcourse,thattheusualtestsofcausationwillhavetobesatisfiedandtheinsuredwillhavetoproveonthebalanceofprobabilitiesthatanylossforwhichitclaimsdamageswascausedbytheinsurer’sbreachoftheimpliedterm.

> Therighttoclaiminterestforlatepaymentwillremainandanydamageswillbeinadditiontothatinterestandinadditiontotheamountpayableundertheinsuranceinrespectoftheoriginalclaim.

> TheGovernmenthasintroducedanamendmenttotheBill(whichwillbereflectedintheLimitationAct1980)totheeffectthatthelimitationperiodinwhichaninsuredcanbringaclaimfordamagesforlatepaymentwillbeoneyearfromthedateofthelastpaymentbytheinsurerinrespectoftherelevantloss.

ThesenewprovisionswillapplytoallcontractsenteredintoafterSection5oftheBillcomesintoforce.TheBillislikelytobecomeanActofParliamentsometimearoundthemiddleof2016so,asthingsstand,theseprovisionswillcomeintoeffectinapproximatelyJune2017.

Contracting outIncertaincircumstancesthepartiestoanon-consumercontractwillbeabletocontractoutofthisimpliedterm,subjecttothetransparencyprovisionsintheInsuranceAct2015.


IMPLICATIONS OF THE NEW LAWS FOR CLAIMS HANDLINGThere has been a great deal written about the likely impact of the Insurance Act 2015 (the Act) on the placing process and on policy wordings but little has been said about the impact on claims. The Act will, however, govern claims on all contracts entered into on or after 12 August 2016 and there should be no doubt that the changes which it introduces will create a number of challenges and opportunities on the claims side. There will be complex new issues of coverage to be considered but also new opportunities for negotiation and settlement. We discuss a few of these further below.1. When is a warranty not a warranty?Underthecurrentlaw,abreachofwarrantybyaninsuredautomaticallyterminatesinsurers’liabilityfromthedateofbreachandthereisnoopportunityforthebreachtoberemedied.Underthenewlaw,however,abreachwillmerelysuspendinsurers’liabilityandtheinsuredwillhaveanopportunitytoremedythebreachofwarranty.Ifitdoesso,insurerswillbeliableforlossesoccurringafterthebreach.Itwillbenecessary,therefore,forclaimshandlerstobeabletoestablishtherelativetimingofthelosswithaccuracyandlossadjusters,surveyorsandanyoutsourcedclaimshandlerswillneedtobeinstructedaccordingly.Aparticulardifficultymayarisebecauseinsurerswillnotbeliableforlosseswhichare“attributable to something happening”duringtheperiodofbreachevenifthelossitselfdoesnotoccuruntilafterthebreachhasbeenremedied.Conversely,duringaperiodofsuspensionofliabilityfollowingabreachofwarranty,insurerswillcontinuetobeliableforlosseswhichare“attributable to something happening”priortothebreacheveniftheactuallossonlyoccursduringtheperiodofsuspension.TheActdoesnotofferany

guidanceonwhatdegreeofcausativelink“attributable to something happening” impliesanditisnotdifficulttoimagineclaimsnegotiationscentringonthispoint,particularlyincircumstancesinwhichtherearemultiplecausesoftheloss.

2. The section 11 issueIntheeventofabreachofwarranty,orindeedofothercontracttermssuchasaconditionprecedent,therewillbeafurtherlevelofdifficultyinanycoverageanalysis.Thisarisesfromsection11oftheActwhichdealswithpolicytermscompliancewithwhichwouldtendtoreducetheriskoflossofaparticularkind,ataparticularlocationorataparticulartime.Iftheinsuredcanestablishthatitsbreachofsuchaterm“could not”haveincreasedtheriskofthelosswhichactuallyoccurredinthecircumstancesinwhichitdidoccur,then,subjecttootherrelevantcontractterms,thelosswillbecovered.Thisprovisiondoesnot,however,applytocontracttermswhich“define the risk as a whole”.Inconsideringcoverageforlosseswhentheinsuredisinbreachofcontract,therefore,itwillbenecessaryfortheinsurerstoconsiderwhetherthetermwhichhasbeenbreachedisonetowhichsection11appliesand,ifso,whetherthebreach“could”infacthaveincreasedtheriskofthelosswhichactuallyoccurred.Itisonlyifthesetwoquestionscanbeansweredsatisfactorilythatcovercanberejectedinrelianceontheinsured’sbreachofacontractterm.Someofthedifficultiespresentedbythisnewprovisionmightbeavoidedordiminishedbycarefuldraftingofthepolicywording–forexampletoidentifyclearlythosetermswhich“define the risk as a whole”.

3. Non-disclosure and misrepresentationThenewActintroducesanewseriesofremediesforinsurersfacedwithaninnocentornegligentnon-disclosureormisrepresentationatplacement.Ratherthanthesoleoptionofavoidingthecontractfrominception,insurerswillnowbeabletoseekchangestothetermsofthecontract(andadjustmentstoclaimspaymentstoreflectpremiumshortfall)inordertoputthemselvesintothepositionthattheywouldhavebeeninhadafairpresentationbeenmadeattheoutset.Itistobehopedthatthiswillprovidenewopportunitiesforthesettlementofclaimsbecauseitwill


allowinsurerstoraiseissuesabouttheplacementwithoutresortingtothe‘nuclearoption’ofavoidanceandtheconsequencesthattheexerciseofthatoptionmaybringforfuturebusinessrelationships.Inordertoestablishasuccessfulpositiononbreachofthedutyoffairpresentation,however,itwillbenecessarytobeabletoshowwhattheindividualunderwriterwhoacceptedtheriskwouldhavedonehadafairpresentationbeenmade.Itwillbeimportantfortheclaimsside,therefore,thatunderwritersmaintainproperrecordsoftheunderwritingprocess.

4. Settling claims within a reasonable timeWhentheamendmenttotheActcurrentlygoingthroughParliamentintheEnterpriseBillcomesintoeffect(whichisexpectedtobeinmid-2017),itwillbeanimpliedterminallcontractsofinsurance(andreinsurance)thatclaimsaresettledwithina“reasonable time”.Iftheyarenot,theinsuredwillbeabletoclaimforanydamageswhichithassufferedasaresultofthedelayinadditiontoitsexistingclaimandinterestthereon.

Oneofthekeyissuesclearlywillbewhatconstitutesa“reasonable time”inwhichtopaytheclaiminthiscontext.ThiswillbeanobjectivejudgementandtheBillmakesclearthatitincludestimetoinvestigateandassesstheclaim.Whatelseisincludedwilldependonallthecircumstancesbutrelevantissuesarelikelytoinclude:

> Thetypeofinsurance(onecanimagine,forexample,thatsomethirdpartyclaimsorbusinessinterruptionlossesmaywelltakelongertoinvestigatethanfirstpartypropertylosses);

> Thesizeandcomplexityoftheclaim.Thatseemsclear,althoughreaderswillknowthattheremaybelargestraightforwardlosseswhichcanberesolvedmorequicklythansmallerbutmorecomplexclaims;

> Compliancewithregulatoryrulesandguidelines.Thesemightinclude,forexample,compliancewithsanctionsregimes;and

> Factorsoutsidetheinsurer’scontrol.Thisislargelyself-explanatoryandmightinclude,forexample,thefailureoftheinsuredorathirdpartytoprovideinformationordifficultiesingainingaccesstolosssites,forexampleforreasonsofsafety.Itisunlikelytoincludethingslikethelossadjuster’sworkload,however,becauseonewouldexpecttheinsurertoberesponsibleforthatinanyevent.

Ataminimum,itseemslikelythatreasonablegroundsfordisputingtheclaimmaywellequateto“...real prospects of successfully defending the claim...”,namelythesametestaswouldberequiredtodefendaclaimforsummaryjudgment.Thatisnotahighstandard,however,anditiscertainlypossiblethatmorewillberequired.

Failuretopaywhileadisputeiscontinuingwillnotbeunreasonablebuttheconductoftheinsurerinhandlingaclaimmaybearelevantfactorindecidingwhethertherehasbeen‘unreasonabledelay’.Forexample,aninsurermaystillbeinbreachoftheimpliedtermifitfailstorespondpromptlytodevelopmentsinthecaseorifitmovesforwardonlyslowlyintheconductofitsinvestigations.Otherissuesthatmayberelevantarehowtheinsurertreatstheinsuredinpre-actioncorrespondence,refusalofoffersofADR(orfailuretoproposesame),failuretomakeoracceptreasonableoffersofsettlement,failuretomakeinterimpayments,unsuccessfullycontestinginterlocutoryandsummaryjudgmentapplications,appealingunfavourablejudgmentsunsuccessfullyandbreachesoftheCPRwhichcausedelays.

Atleastintheshortterm,theconsequenceoftheintroductionofthesenewrulesislikelytobethatpressuretosettledifficultclaimsortomakeinterimpaymentsisincreasedandthatmaywellleadtohigherreservesandmorecapitalcommitment.

ThenatureoftheLondonmarketalsogivesrisetosomeparticularuncertaintiesabouttheoperationofthisproposedimpliedterm.Forexample:

> Whatwillbethepositionwherethereinsurerexercisesitsrightunderaclaimscontrolclausetotakecontroloftheclaimbutunreasonablydelayssettlement?Wouldtherebeaclaimbytheinsuredagainstthereinsurerifthecontractswerebacktoback?Iftheinsuredclaimedagainsttheinsurerwouldtheinsurerhavearightofrecoveryagainstthereinsurer?


> Subscriptionmarketsmayraiseasimilarissue:ifthefollowingmarkethasagreedtobeboundbythesettlementsnegotiatedbytheleaders,theywillpresumablystillbeliabletotheinsuredfortheirshareofanydamagesforthelatepaymentofclaims.Whethertheycanthenmakearecoveryfromtheleadersinrespectofthosedamageswilldependonthetermsofanyagreementamongstthemarketparticipants.

> Inlayeredprogrammes,highlevelinsurersmaynotbeliabletopayuntiltheprimarylayerhasbeenexhausted.Iftheprimarylayerinsurerisdelayingpaymentunreasonably,willtheexcessinsurersbeexposedtodamages?Dotheyhaveanobligationtoactiftheprimaryisunreasonable?Ifnot,couldthequantumofthedamagetowhichtheprimaryinsurerisexposedbeincreasedasaresultofanydamagecausedbythefailureoftheexcesslayerstopay?

> Finally,whataboutthepositioninrelationtoreinsurancerecoveries?Willareinsuredbeabletorecoveranydamageswhichithastopaytotheinsuredforbreachofthisimpliedtermfromthereinsurer?Thereisnoreasoninprincipleorinstatutewhysuchalosswouldnotberecoverableinthesensethatthereisnopublicpolicyobjectiontoitsrecovery–itisnotafineoracriminalpenaltyforexample.Inthosecircumstances,theissueofrecoveryisgoingtocomedowntotheextentofthecoverageunderthereinsuranceandhowitisexpressed.

ConclusionInconclusion,thechangestobeintroducedbytheAct(andlaterbytheEnterpriseBill)willraisefreshchallengesforclaimshandlers,particularlyintermsofassessingtheimpactoncoverageoftheinsured’sbreachofvariouspolicyprovisions.ThemoreflexibleremediessetoutintheAct,particularlyinrelationtothedutytomakeafairpresentationatplacement,do,however,raiseopportunitiesfornegotiationandamoreconstructiveapproachtothesettlementofcontentiousclaimsissues.Allofthesechangesservetoemphasisetheneedforclearcommunicationandliaisonbetweenunderwritersandclaimshandlersinordertoachievethebestoutcomeforall.

Finally,ifandwhentherequirementtosettleclaimswithina“reasonable time” becomesimpliedintoinsurancecontracts,itwillbeincumbentoninsurerstomanageclaimsproactivelyandtoensurethatoutsourcedclaimsteamsareproperlytrainedandawareofthepotentialexposure.Itisimportanttonote,however,thatnothingintheproposedchangesshouldpreventinsurersfromdisputingclaimsingoodfaithanditshouldberememberedthatiftheinsuredwishestoclaimdamagesforlatepaymentitwillhavetobeabletoprove,onthebalanceofprobabilities,thatithasbeencausedtosufferalossasaresultofthedelayaswellasthequantumofthatloss.


IMPLICATIONS OF THE NEW LAWS FOR REINSURANCEBoth the Insurance Act 2015 (the Act) and the Enterprise Bill 2015 (the Bill) are applicable to reinsurance as much as to insurance. On their own admission, however, the drafters of both pieces of legislation have given little thought to how the new laws will impact both the traditional and newer reinsurance markets. This has left a number of uncertainties which we discuss below, along with some suggestions as to how those uncertainties may be addressed.The duty of fair presentationUndertheAct,theinsuredwillbetakentoknowwhatisknowntoits“senior management”andwhatwouldreasonablyberevealedbyareasonablesearchofinformationavailabletoit.Itisunclearhoweitherofthosetestswilltranslatetothereinsurancesphere–beitinrelationtofacultativeortreatycoverorinrelationtonewerreinsurancestructures.Forexample,doestherequirementtoconductareasonablesearchextendtoarequirementtoaskappropriatequestionsoftheoriginalinsured?Willareinsuredinafacultativearrangementwhofailstoaskthosequestionsautomaticallybeinbreachofdutytothereinsurer?Howshouldthe“senior management”bedefinedinthecontextofawholeaccounttreaty;forexample,doesitincludeseniorofficersofthemanagingagencywherethereinsuredisaLloyd’ssyndicate?Whatistherelevanceoftheseniormanagementinthecontextofafacultativeplacement?Whatwillbetheparametersofareasonablesearchwherethereinsuranceisofacaptiveinsurer?

Theseandsimilarquestionswillhavetobeconsideredbybothreinsuredandreinsurer(aswellasanybrokersinvolved)priortothefinalisationofareinsuranceundertheAct.Itmaybeprudentinallbutthemoststraightforwardcircumstances

forthepartiestoseekexpressagreementonthescopeof,forexample,theextentandtimingofthesearchestobecarriedoutbythereinsuredandtheindividualswhoseknowledgewillberelevant.Thiswillbeparticularlyimportantinrelationtonewformsofreinsuranceinconnectionwithwhichthepartiesmaywishtocontrolthescopeofthedutytomakeafairpresentationtightlyandtolimittheremediesavailabletothereinsurerintheeventofbreach.Indoingso,itiscrucialthatcareistakentoensurethatthetransparencyrequirementsoftheActareproperlyobserved–anytermswhichrestricttheapplicationoftheActandwhicharenotsuitablytransparentwillbeunenforceableandofnoeffect.

Policy termsReinsurersandtheircedantsare,ofcourse,freetocontractoutofthetermsoftheActiftheywishtodoso.Forthecontractingouttobeeffective,however,thetransparencyprovisionsoftheActmustbeobserved.Thismeansthatsufficientstepsshouldbetakentodrawtothereinsured’sattentionanytermsofthereinsurancewhichputitinaworsepositionthanitwouldhavebeenundertheAct(socalled“disadvantageous terms”)andtoensurethatthosetermsareclearandunambiguousastotheireffect.Itmaybethecaseinfacultativereinsurancethat“disadvantageous terms”areincorporatedintothereinsurancefromtheoriginalinsurance.Inthesecircumstancesthecedantwouldbewellawareofthepolicytermfromitsinclusionintheunderlyingagreementbutthereinsurerwouldstillbewelladvisedtoensurethattherelevantclausesare‘clearandunambiguous’inordertoavoiduncertaintyaboutenforcement.

Claims issuesTheAct,andinparticulartheamendmenttoitproposedbytheBill,hascreatedanumberofuncertaintiesforreinsuredsandreinsurersalikeinrelationtothehandlingofclaims.If,asseemscertain,theBillispassed,theActwillbeamendedbytheinclusionofanewsection(s.13A)whichwillimplyintoallcontractsofinsuranceandreinsuranceaprovisiontotheeffectthatclaimsmustbesettledwithinareasonabletime.Ifthistermisbreached,theinsuredorreinsuredwillbeabletoclaimdamages


inrespectofanylosswhichithassufferedasaconsequenceofthelatepayment.Thisraisesanumberofparticularissuesatthereinsurancelevel.

Perhapsthemostpressingissuewillbewhetheraninsurerwhichisfoundliablefordamagesforthelatepaymentofclaimsunderthedirectpolicycanrecoverthosedamagesfromitsreinsurers.Sincedamagesofthisnaturewillnotinanysenserepresentacriminalsanction,thereseemsnoreasoninprinciplewhytheyshouldnotbecoveredunderasuitablywordedreinsuranceagreement.Itseemsmostunlikely,however,thatacourtwouldbepreparedtoimplyatermtotheeffectthatdamagesofthisnaturewererecoverable–inthepast,attemptstoimplytermsthatthecostsofinvestigating,settlingordefendingunderlyingclaimshavebeenunsuccessfulandthereseemsnogreaterreasontoimplyatermcoveringdamagesofthisnature(indeed,ifanythingtheoppositeistrue).Itispossible,however,thatdamagescouldberecoveredundercontractscontainingExtraContractualObligation(ECO)clausesbutcarefulconsiderationofthewordingoftheclauseineachcasewillbenecessary.

Anadditionallayerofcomplexitywillarisewherethereinsurerwasresponsibleforthe‘unreasonabledelay’inthesettlementoftheunderlyingclaim.Thismightarise,forexample,wherethereinsurerhastakenovertheconductoftheunderlyingclaimunderaclaimcontrolclauseorhasrefusedtoconsenttosettlementoftheunderlyingclaimwherethatisrequiredbythetermsofthereinsurance.Itistobeexpectedthatacourtwouldbemoreinclinedtoimplyatermthatreinsurerswillbeliabletoindemnifythereinsuredinrespectofthedamagespaymentinthesecircumstancesbutthatwillhavetobesubjecttotheexpresstermsofthecontract.Reinsuredsconcernedaboutthisissue,therefore,willbewelladvisedtoensurethatthematterisdealtwithexpresslyinthereinsurance.

Insummary,theActandBillraiseanumberofparticularissuesatthereinsurancelevel.Itwasenvisagedwhenthelegislationwasdrawnupthattheseissueswouldberesolvedbydiscussionswithinthemarketandthatmaywellbetheappropriatewayforwardinduecourse.Inthemeantime,however,allpartieswouldbewelladvisedtomakesurethatthepointswhichwehavediscussedexpresslydealtwithinanyreinsuranceagreementstowhichtheyarepartyandwhicharesubjecttothenewlaws.


CASE LAW UNDER THE CURRENT AND NEW LEGISLATIONNon-disclosure of valuation for superyachtTheClaimantinInvolnert v AprilgrangewastheownerofthemotoryachtGalatea.InMay2011,insurersinsuredtheyachtfor12monthswithanaggregateagreedvalueof€13million.

Intheearlyhoursof3December2011,theyachtsufferedsignificantdamageasaresultofafireonboardwhilstatherhomemarinainAthens.TheClaimantclaimedforaConstructiveTotalLoss.

Theinsurersdisputedliabilityunderthepolicyandlitigationwascommencedagainstthem.Duringthecourseofthelitigationitemergedthat(unknowntotheinsurersatplacement)theClaimanthad(a)receivedaformalvaluationinlate2009thattheyachtwasworth€7m(netofVAT),(b)beenadvisedinMarch2011that,inthecontextofadecisiontomarkettheyachtforsale,theyachtshouldnotbemarketedformorethan€8.5mandtoldtobecontenttoreceive€7mnetonasale,and(c)beenmarketingtheyachtforsalefor€8mwhenthepolicywasconcluded.

Theinsurersconsideredthatthesewerematerialfactswhichshouldhavebeendisclosedatplacementandpurportedtoavoidthepolicyonthatbasis.TheClaimantadmittedthenon-disclosuresbutdisputedthevalidityofthepurportedavoidanceonthebasisthat,itwassaid,thefactswerenotmaterialanddidnotinducetheactualunderwritertoagreethepolicy.

The decisionTheJudgeheldthatthe2009valuation,theMarch2011emailandthefactthattheyachtwasbeingmarketedwithanaskingpriceof€8mwereallmaterialfacts,inthesenseofbeingfactsorcircumstanceswhichaprudentyachtunderwriterwouldwishtotakeintoaccountwhendecidingwhethertooffercoverforayachtonthebasisofanagreedvalueof€13m,andshouldhavebeendisclosedtotheinsurers.

TheJudgealsofoundthattheunderwriterhadbeeninducedbythenon-disclosuresashewouldnothaveagreedtoinsuretheyachtfor€13miffulldisclosurehadbeengiven.Heaccordinglyupheldinsurers’avoidanceofthepolicyanddismissedtheclaim.

How the case might have been decided under the Insurance Act 2015AstheJudgehimselfnoted,theoutcomeofthiscaseonthenon-disclosureissue(otherdefenceswereraised)wouldhavebeendifferentunderthenewAct.ThenewActwillintroduceasystemofproportionateremediesinrespectofnon-disclosure.Underthenewsystem,giventhatthenon-disclosuresinthiscasewereneitherdeliberatenorreckless,thecourtwouldberequiredtoconsiderwhattheactualunderwriterwouldhavedoneifafairpresentationhadbeengiven.Iftheunderwriterwouldhaveagreedapolicyondifferentterms,thelawwillre-writethecontracttoreflectthosetermsandimposethatcontractontheparties.

TheJudgeheldthatiftherelevantmaterialinformationhadbeendisclosedinthiscase,theinsurerswouldhaveagreedapolicywithanaggregateagreedvalueof€8m.Althoughtheclausesonwhichthepolicywaswrittencontainaprovisionbywhichthepolicywillbevoidintheeventofpre-contract“concealment” (whichtheJudgeheldwouldincludeaninnocentornegligentnon-disclosure),thatclausewouldprobablybeviewedasa“disadvantageous term”undertheActandsowouldbeofnoeffectintheabsenceofeffectivecontractingout.


Non-disclosure and misrepresentation relating to railway worksThedefendantinsuredinBrit v F&B Trenchless Solutions (F&B)wasaspecialisttunnellingsub-contractor.Ittookoutemployers’liability,productliabilityandpublicliabilityinsuranceforitsworkofbuildingmicro-tunnelsforcablesundergroundrailwaytracks.Theinsurancewasprovidedonthebasisthattheworkswouldleadtogroundsettlementofbetween2-4mmandthattheywouldatnopointtakeplaceunderneathanactiverailway.

Beforecontractingwiththeinsurer,however,theinsuredknewofanactualgroundsettlementofupto15-18mmandtheappearanceofavisiblevoidinthegroundinthevicinityoftheworks.Theinsuredwasalsoundertakingworksunderanactiverailwayline.

Eightdaysaftertheinsurancecontractincepted,afreighttrainderailedwhenpassingoveralevel-crossingabovetheinsured’stunnelling.Thederailmentwasdeterminedtohavebeencausedbyseveresettlementoftherailwaytracksasaresultoftheinsured’sworks.ThemaincontractorfiledaclaimagainstF&Bwhichinturnattemptedtoclaimanindemnityfromitsinsurer.Theinsurersoughtadeclarationthatithadvalidlyavoidedthepolicyonthegroundsofnon-disclosureandmisrepresentation.

The decisionTheJudgeheldthattheincreasedsettlementandundertakingofworksunderactiverailwayswerematerial;theywere“matters which would clearly influence the judgement of a prudent insurer”.TheJudgealsoheldthattheactualunderwriterhadbeeninducedbythenon-disclosureandmisrepresentationtoenterintothecontract,acceptingtheunderwriter’sevidencethat,hadhebeentoldaboutthesettlementandthevoidintheleaduptowritingtherisk,hewouldhaveexcludedthesitefromthepolicy.Theinsurerhad,therefore,validlyavoidedthepolicy.

How the case might have been decided under the Insurance Act 2015Itisunlikelythatthefindingsonmaterialityandinducementwouldhavebeenanydifferent.Astomateriality,theJudgefoundthatthe“central flaw”inmuchofF&B’sdefencewastooverlooktheobjectivenatureofthetestformateriality.Forexample,F&Barguedthatitspreliminaryviewwasthatthetunnellingwasnotthecauseofthevoidandthusthefactofthevoidwasnotmaterialfordisclosure.TheJudgenotedthatF&B’sownopinion,whilerelevant,didnotrelievetheappearanceofthevoidofmaterialityforunderwritingpurposes.UnderthenewAct,the‘prudentinsurer’testofmaterialityhasbeenretained.

Equally,oninducement,underthenewActjustasnow,iftheinsureristohavearemedyforbreachofthedutytomakeafairpresentation,itmustshowthattheunderwriterwouldhavedonesomethingdifferenthadheorshereceivedafairpresentation.Inthiscasetheunderwriterwasabletoovercomethatevidentialhurdle.

Intermsofaremedy,however,theunderwriter’sevidenceseemstohavebeenthathewouldhavewrittenthepolicybuthewouldhaveexcludedthesite.Inthosecircumstances,undertheActthepolicywouldhavebeenrewrittenwiththeappropriateexclusion.Accordingly,F&Bwouldnothavebeenabletomakearecoveryforthislossbutwouldhaveretainedcoverageforanyotherlossesinthepolicyperiod.Theunderwriter,meanwhile,wouldhaveretainedthepremium.


Losses of a particular kind or at a particular time or placeMilton Furniture v Brit InsuranceconcernedafireinApril2005,whichdestroyedmostofthefurnitureintheClaimant’swarehouse.

TheClaimantsubmittedaclaimunderitsCommercialCombinedInsurancepolicy.Thepolicycontainedtwotermsthatcameunderparticularscrutiny:ProtectionWarranty1(PW1)andGeneralCondition7(GC7).

PW1 provided:“It is a condition precedent to the liability of the Underwriters in respect of loss caused by Theft and/or attempted Theft that the Burglar Alarm shall have been put into full and proper operation whenever the premises... are left unattended and that such alarm system shall have been maintained in good order throughout the currency of this insurance policy under a maintenance contract with a member of NACOSS”[emphasisadded].

GC7 stated:“The whole of the protections including any Burglar Alarm provided for the safety of the premises shall be in use at all times out of business hours or when the Insured’s premises are left unattended and such protections shall not be withdrawn or varied to the detriment of the interests of Underwriters without their prior consent” [emphasisadded].

Onthenightofthefire,twoindividualsweresleepingatthepremises.Theburglaralarm,whichhadbeenmonitoredbySECOMuntilFebruary2005whenmonitoringceasedduetonon-paymentofinvoices,wasnotset.InsurersdeniedtheclaimonthebasisthattheClaimanthadfailedtocomplywithGC7,whichinsurersclaimedwasaconditionprecedent.

TheClaimantarguedthatPW1wasanindividuallyagreedspecialconditionand,assuch,GC7,whichwasastandardpolicyterm,mustbesubordinatetoit.Further,PW1itselfdidnotapplytothelossasthedamageinquestionwasnotcaused

by“Theft and/or attempted Theft”.Accordingly,itwassaid,neitherPW1norGC7wasrelevant.

The decisionTheCourtofAppealconfirmedthatwhentherearetwocontractualprovisionswhichcoversimilarground,thetaskofthecourtistogiveeffecttoeach,saveinsofarastheyareactuallyinconsistent.Theburglaralarmservedtwopurposes:toreducetheriskoftheftandalsotoprotectagainsttheriskofanintruderwhocoulddamagethepropertybyfire.Sincethelosswascausedbyfireandnottheft,itwasclearthattherequirementsofGC7applied.

TheCourtheldthattheClaimantwasinbreachofbothrequirementsinGC7.Businesshoursendedat20.30ontheeveningofthefirebutthefirealarmwasnotsetinthepartofthecomplexthatsufferedthefire.Thefactthattwopeopleweresleepingindifferent,butlinked,partsofthecomplexdidnotpreventtheClaimantfromsettingthealarminthepartwherethefireoccurred,aswasitsdutyunderthepolicyandasithaddoneinthepast.

TheCourtwentontoholdthatalthoughtwopeopleweresleepingatthepremises,thepremiseswereinfact“unattended”.Itheldthat“attended”wasakinto“under observation”andthusthetwosleeperscouldnotinanymeaningfulsensebeheldtobe“attending”atthebuilding.

TheClaimantwasalsoheldtobeinbreachofthesecondlimbofGC7.ByfailingtopaySECOM’sinvoicesandpermittingthemonitoringservicetoend,Miltonwasinbreachofastrictobligationtoavoidthewithdrawalorvariationofaprotectionthatbenefittedunderwriters.


How the case might have been decided under the Insurance Act 2015WedonotthinkthatthecasewouldhavebeendecidedanydifferentlyunderthenewAct.Section11oftheActpreventsaninsurerfromrelyingontheinsured’sbreachofanycontractualprovision(includingconditionsprecedent)whichisintendedtoreducetheriskofalossofaparticularkindorataparticulartimeorplaceiftheinsuredcanprovethatitsbreachcouldnothaveincreasedtheriskofthelosswhichactuallyoccurredinthecircumstancesinwhichitoccurred.

Inthiscase,theClaimantmaywellhavesoughttoarguethatitsbreachesoftheburglaralarmwarrantycouldnothaveincreasedtheriskoflossbyfire.Inresponse,theinsurerswouldnodoubthavearguedthat(a)astheCourtofAppealpointedout,theburglaralarmwarrantyalsoprotectedagainsttheriskoflossbyfirestartedbyanarsonist;accordingly,thebreachoftheburglaralarmconditionprecedentcouldhaveincreasedtheriskoftheloss;and(b)dependingontheprecisesystem,thefiremayhavebeendetectedearlieriftheburglaralarmhadbeenworking.ThislatterpointinparticularhighlightssomeofthelikelypracticaldifficultiesofimplementingSection11.


Inducement in the reinsurance contextThequestioninAXA Versicherung v Arab Insurance GroupwaswhetherAXAwasentitledtoavoidtworeinsurancetreatiesenteredintowithArabInsuranceGroup(ARIG).

AXA’spredecessorintitle,AlbingiaVersicherungs-AG,enteredintothetworeinsurancetreatieswithARIG.Thefirstwasafacultative/obligatory‘firstlosstreaty’coveringthefirstUS$500,000oflossesforanyoneaccidentoroccurrenceonARIG’sbookofinwardsmarineenergyconstructionrisksattachingbetween1January1996and30June1997;thesecondwasarenewalofthattreatythefollowingyearforafurther12months.

In2012,AXAsoughttoavoidthetreatiesandrecoverwhatithadpaidtoARIGunderthetreatiesonthegroundofnon-disclosureoflossstatisticsfortherisksinquestionfortheyears1989to1995or,alternatively,formisrepresentationthattherewerenolosses.AXAcontendedthathaditknownofthelossstatisticsitwouldnothaveenteredintothefirsttreaty.AXAsoughttoavoidtherenewalofthetreatyonthesamegroundsand,inaddition,fornon-disclosureofthreeincidentswhichhadresultedorwerelikelytoresultinaclaimunderthetreaty.

The decisionItwasheldthatAXAwasnotentitledtoavoidthetreaties.TheJudgeheldthat:

1. Therewasnomisrepresentation.ARIGhadnotmadetheallegedrepresentation(thattherewerenolossstatisticsforenergyconstructionrisksofthetypethatwouldbedeclaredtothetreaty)toAXA.ARIG’scasewaspreferredonthebasisthatthestatement“This is a new Treaty for the Reassured and as such does not have a corresponding loss record”wasinrelationtothenewtreaty,notARIGitself.

2. Therewasnon-disclosureofmaterialfacts.Therewasnodoubtthatthatpastlossrecordswerematerial.

3. However,eveniftherehadbeenafairpresentationofARIG’slossstatistics,theunderwriterwouldnothavedeclinedtowritethetreatyorwouldonlyhavedonesoondifferentterms–sotherewasnoinducement.

How the case might have been decided under the Insurance Act 2015ItisunlikelythattheoutcomeofthiscasewouldhavebeenanydifferenthaditbeendealtwithunderthenewAct.UndertheAct,justasnow,ifthereinsureristohavearemedyforbreachofthedutytomakeafairpresentation,itmustshowthattheunderwriterwouldhavedonesomethingdifferenthadheorshereceivedafairpresentation.Theevidencehereseemstohavebeenthattheriskwouldstillhavebeenwrittenandonthesameterms.Accordingly,eventhoughtherewasabreachofthedutytomakeafairpresentation,hadthenewActapplied,theresultwouldinalllikelihoodhavebeenthesame.Thecasedoes,however,illustratethedifficultythatunderwritersarelikelytofaceindemonstrating,years,aftertheevent,inwhatrespecttheirunderwritingdecisionwouldhavebeendifferenthadtheyreceivedafairpresentation.Thisisoneofseveralreasonswhyunderwriterswillbewelladvisedtokeepafullerrecordoftheunderwritingprocessinthefuture.

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