Newly published draft clauses include proposed changes to the current law, but disputes may arise.
The latest step in the English Law Commission’s review of insurance law was announced on 28 January, with the Law Commission publishing draft clauses for consultation. Following the enactment of reforms focused on consumer insurance, the latest proposals, once enacted, will also apply to business insureds. The consultation period is open until 21 February 2014, and the clauses cover the following four areas:
Fair presentation (disclosure and representations) in business insurance
Damages for late payment of claims
Insurers’ remedies for fraudulent claims
Opt-Out for Business Insureds
Before exploring the changes themselves, it is worth noting that the Law Commission has proposed that the new regime should operate only as a default for business insureds. It remains to be seen whether insurers will seek to opt out of a regime that will, in theory, reduce the scope for them to avoid liability. It is certainly not beyond the realms of possibility that business insureds will contract under different regimes when dealing with different insurers.
Fair Presentation of the Risk
The Law Commission found several difficulties with the current law, which requires a proposed insured to disclose every material circumstance that it knows or ought to know in the ordinary course of business. A material circumstance is one that would influence the judgment of a prudent insurer in fixing the premium or determining whether it will take the risk.
In particular, the Law Commission was concerned that the duty was poorly understood and difficult to comply with and that—in the event of a breach—the single remedy of avoidance of the insurance contract was inflexible. As things stand, if an insurer is able to demonstrate that a material circumstance was not disclosed, it is entitled to avoid the insurance and any claims. The insurer may avoid the insurance even if the non-disclosure was entirely innocent and even if the insurer would simply have increased the premium by a modest amount had it known about the circumstance.
As a starting point, the Law Commission has recommended maintaining the duty to make a fair presentation of the risk. The proposed insured has access to all of the relevant information, and the insurer is justified in trusting that it has been provided with all that is material. Many of the draft clauses seek to codify and clarify the duty, rather than make radical changes. Notably, the clauses do the following:
Provide examples of which circumstances may be considered material (these examples are non-exclusive)
Address the question of whose knowledge within an organisation is relevant when assessing whether that organisation has provided a fair presentation of the risk
Although these are context-sensitive issues, the draft clauses provide guidance and clarify the questions that need to be addressed.
One proposal that would represent a change is that an insured would be deemed to have satisfied its duty of fair presentation by providing sufficient information to put a prudent insurer on notice to make further enquiries. However, the question of when a presentation would put a prudent insurer on notice is likely to cause some debate.
The proposed reform to remedies for a breach of the duty to make a fair presentation is more radical. There is a distinction drawn between (1) deliberate and reckless breaches of the duty and (2) breaches that are neither deliberate nor reckless.
A deliberate or reckless breach would continue to allow the insurer to avoid the contract, representing no change to the law. If a breach of the duty of fair presentation was neither deliberate nor reckless, the relevant question would be what would the insurer have done if the presentation had been fair, with the remedy being based on that theoretical action. The three options are to be:
The insurer would not have entered into the contract
The insurer would have entered into the contract on different terms
The insurer would have charged an additional premium
These could be complicated issues to resolve in practice. A case on non-disclosure under the current law will often see experts arguing over whether the non-disclosed circumstance would or would not have influenced the prudent insurer’s decision whether to write the risk. With the choice of only two outcomes (either it would or would not have influenced the decision) and one remedy, the matter is relatively straightforward for a judge to resolve.
However, with multiple possible remedies that are dependent on the theoretical action of a prudent insurer, a judge could still be faced with opposing experts arguing at opposite ends of the spectrum (e.g., that the disclosure would have made no difference vs. that the insurer would not have entered into the contract at all). At that point, one option for the judge would be to adopt a middle position that neither party has advocated, potentially rewriting the terms of the contract or renegotiating the commercial payment for the policy.
Damages for Late Payment
Under the current law, an insured that suffers loss (over and above its insurance claim) as a result of the insurer’s failure to pay the insurance sums in a timely manner has no remedy in respect of the additional loss. A scenario where this is relevant would be where a company goes out of business while waiting for an insurance payment that it needs in order to repair or replace damaged equipment and to continue to trade. The rule may cause irreparable harm and is inconsistent with the applicable law under other types of contracts.
The Law Commission’s draft clauses provide for an implied term that the insurer must pay any sums due within a reasonable time. The question of what would constitute a “reasonable time” is open to interpretation. Similarly, draft clauses that provide the insurer with a defence if it can show there were reasonable grounds for disputing the claim may also cause debate. Nonetheless, in spite of the potential for disputes over these issues, the proposed change may assist insureds by providing insurers with an extra incentive to resolve claims quickly (in addition to a possible remedy for insureds if they do not).
The draft clauses propose that, where an insured commits fraud in relation to a claim, the insurer should have no liability to pay the claim and should have the option to terminate the insurance contract as from the date of the fraudulent act. Under this provision, the insurer would therefore have no liability to pay for claims arising after a fraudulent act. However, the insurer will remain liable for losses arising before the fraud.
These provisions aim to clarify some uncertainty regarding certain aspects of the fraud defence. Precisely what would constitute “fraud” would remain a question of common law.
The Law Commission has recommended retaining the overriding duty of good faith but removing the remedy of avoidance of the contract. Aside from that change, the law on good faith would be left to the courts to interpret and develop over time.
The Law Commission’s proposed clauses reflect a desire for a fairer and clearer insurance law, encouraging improved underwriting practice and providing remedies that are more proportionate to the wrong committed. Inherent to any statutory changes to the law is the danger of litigation over the interpretation of clauses, at least in the short term. Insureds will hope that litigation regarding the changes will be limited and prove to be a small price to pay for an improved position overall.