Assessing the Insurance Act 2015 – challenges, opportunities and evolving ambitions

Last week, the Lloyd’s Market Association (LMA) co-hosted an event discussing the reforms brought about by the 2015 Insurance Act, identifying both its aims and its impacts.

Arabella Ramage (pictured), legal and regulatory director at the LMA, was the then junior barrister who assisted the LMA to coordinate the Lloyd’s market response to the Law Commissioner when the new Insurance Act was proposed.

“There was initially very little case law on the new Act but recently there have been some important cases, so it is time for some reflection,” she said.

What are the major innovations introduced by the Act?

The main innovations introduced by the Act included changes to:

• disclosure requirements by the implementation of the duty of fair presentation of  risks,
• remedies for non-disclosure,
• warranties, and
• the abolition of the “Basis of Contract” clause within insurance policies.

Ramage highlighted that it was enacted following calls for major reforms to the Marine Insurance Act (MIA) 1906, which was the foundation for Insurance Law in England and many other jurisdictions. “It was enacted in a time when there was very little information available to underwriters at the time of placement so they were reliant upon the information given to them by the insured.” 

As the world and, in particular, communication methods developed so did commercial and legal practices. Therefore, she said, there was a need to update the MIA 1906 to ensure that the law remained relevant to modern commercial practices and aligned with other key jurisdictions who were modernising their local insurance legislation to put more onus upon underwriters and less reliance upon the insured to feed information to the insurers.

“It was, in particular, felt that remedies like the contract being discharged for breach of a warranty had become unfair to the insured,” she said. “There was also a feeling that avoidance of the contract for breach of the duty of good faith at placing was too draconian.

“Generally, this all fed into a concern that insureds might start using other systems of law in preference over English law. Or even a concern that the English market was not a place in which it was beneficial for policyholders to take out cover.”

As a result, she said, the Law Commission introduced the Insurance Bill at the time to establish a “default regime which provides a fair balance of interests between most commercial policyholders and insurers”.  The UK Government intended to make legislative changes to promote the UK insurance market as an attractive location for international business.  

How have the ambitions of the Act evolved?

Ramage emphasised that the Act has by and large been a success.  The ambition was to modernise the law and achieve better alignment with other jurisdictions which has been achieved. 

“The fact that there has also been very little case law on the Act also suggests that people understand the main provisions and they are clear,” she said. “There were initial costs and friction as brokers and insurers strove to put together clauses dealing with disclosure and also to change warranties and basis of contract clauses within existing products.”

Ramage outlined some of the major successes of the Act to act as:

1. The fact that the remedy for a breach of warranty is not ‘all or nothing’ achieves a better balance between underwriters and insureds.
2. The fact that avoidance is no longer the only remedy for breach of the duty of fair presentation is generally thought to be a great improvement. The law is now less of a blunt instrument. It seems more balanced.
3. The abolition of ‘basis clauses’ – which made factual statements into warranties, meaning that if any of the facts were wrong – however irrelevant – the insurer was off cover – is on any view a success, and something that was badly needed.
4. English law retains its position as the most used law in Lloyd’s policies;
5. There has been an effort to improve the way in which disclosure is made to underwriters to ensure that it is more useful and less of a “kitchen sink” exercise.

Where has the Insurance Act 2015 fallen short?

As to where the Act has fallen short, she emphasised:

1. Confusion where underwriters are using conditions precedent where prior to the Act they would have used a warranty – although the recent Court of Appeal decision in Scotbeef essentially makes it clear that this will not work, and that conditions precedent will be viewed as warranties);
2. Indiscriminate use of clauses by brokers which waive the right to a proper presentation;
3. The implied term under Section13A which requires insurers to make payment within a reasonable period of time or can be ordered to pay damages by the Court.

There were concerns that this section, which was introduced later than the original Act, would result in the insured threatening to claim damages in most cases where underwriters rejected a claim similar to the threat of bad faith in the US.

There has been a move towards this being thrown into all claims against underwriters, but no judgment has actually yet been found against underwriters   

On this last, she added: “The concern is that if this is pleaded in every case, underwriters and insureds will waste money on this part of the case where the Court has not yet determined whether underwriters are liable under the main claim.”  

Where should the Act go next?

Ramage said that given English law is in alignment with most common law jurisdictions at this stage, she would not want to see significant changes or reforms.  These are always costly in the initial implementation, she said - there is simply no real need for further reforms at the moment.

“I would suggest that for s13A cases, the Courts and arbitrators should always bifurcate the case so that the parties only spend legal costs on damages for late payment cases when underwriters have been proved to be liable for the insurance claim,” she said. “The insurance market is beginning to experience a softer market, so it will be interesting to see if more disputes arise out of the Act.”