18 May 2015

The Insurance Act 2015 will come in to force in August 2016. Following a consultation of the Scottish Law Commission and the English and Welsh Law Commission, the Insurance Bill received Royal Assent in February 2015. The Act has three main parts, as follows:

1. The duty of fair representation
2. Warranties
3. Fraudulent claims

1. Disclosure and misrepresentation

The new “duty of fair presentation” still requires business policyholders to volunteer information, but what is required of them is made clearer. Insurers will be required to play a more active role in asking questions of the policyholder. The Act also introduces a new scheme of proportionate remedies to replace the existing single remedy of avoidance. Such remedies range from a blanket avoidance of the whole policy for a deliberate or reckless breach, to an amendment of the terms of the contract, or where a higher premium would have been paid, insurers may apply a proportionate reduction of the policy cover relative to the increased premium.

2. Warranties

Under this part of the Act, insurers will be liable to pay any claim that arises after a breach of warranty has been remedied. This would apply, for example, where a broken burglar alarm has been repaired before the claim arises. In addition, breaches of warranty that are irrelevant to the loss that occurs will no longer discharge insurers from liability. If the insured can show that failure to comply with any term in the contract (including warranties) could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred, insurers will no longer be able to rely upon the breach to exclude, limit or discharge its liability. The Act will further abolish “Basis of the contract” clauses, which can turn any statement from a policyholder into a warranty.

3. Fraudulent claims

The Act provides insurers with the ability to refuse a claim where a claim (or any part of it) is fraudulent. They will also have the right to reclaim any sums paid as a result of the claim and refuse any claim arising after the fraud (although they must still pay earlier, valid claims).

It is open to parties to contract out of the provision of the Act, but this would only apply to non-consumer insurance contracts. That said, any agreement to opt-out will be subject to compliance with transparency requirements and therefore the legitimacy of any opt-out is not certain.  

Another feature of the Act is the inclusion of various minor provisions relating to Third Parties (Rights Against Insurers) Act 2010 which received royal assent on 25 March 2010, but is still awaiting a further statutory instrument to bring it into force - Autumn 2015 is the anticipated timeframe. 

The Insurance Act 2015 will come in to force on 12 August 2016.  Going forward, insurers ought to be aware of the implications of the Act and at the outset, ensure that when entering contracts with consumers, their standard terms comply with the new requirements of transparency.