Business insurance contract law reform – the Insurance Bill

  • Changes are being made to reform commercial insurance contract law
  • A new Bill is proceeding through Parliament and aims to update laws to apply to modern-day insurance practices
  • Zurich Municipal believes the core principles of the Bill should be adhered to with immediate effect, to the benefit of customers

Update – The Insurance Act received royal assent on 12 February 2015, paving the way for the most significant change to insurance contract law in over 1000 years.  The Act will come into force in August 2016.

Since 2006, the Law Commission of England and Wales and the Scottish Law Commission have been engaged in a joint project to reform commercial insurance contract law.

Issues had been raised with the current law as it enables insurers to take severe action (such as cancelling the policy from inception) for minor non-disclosures or un-related breaches of warranty.

The current rules and subsequent remedy available to insurers is codified in the Marine Insurance Act 1906 and apply to commercial insurance.

The 1906 Act imposed a duty to disclose every material circumstance which would influence the ‘prudent underwriter’ and this potentially gave insurers the opportunity to decline claims where there may be no material impact on the claim, for example intruder alarm failings on a flood claim.

The opinion is that the law is now out of date and does not apply to modern-day insurance practices.

This overview confirms our approach to dealing with claims and our intention to implement the spirit of the Bill with immediate effect.

Where are we looking to make changes?

Following on from the Consumer Insurance (Disclosure and Representations) Act 2012, the latest Bill reforms commercial contracts in the following main areas:

  1. Non-disclosure and misrepresentation in non-consumer insurance contracts (fair presentation)
  2. The law of insurance warranties

Although the proposed Act largely codifies current industry (including Zurich Municipal’s) best practice and has yet to be passed, we believe the core principles should be implemented right away to benefit our customers.

Our approach is based on the proposed principles of the law reform and we will continue to monitor the Bill’s progress through to legislation.

We’ve put together a high level overview for you covering the changes we will be making relating to the business insurance contract law reform Bill.

What changes are we making?

Change 1: Non deliberate or non-reckless non-disclosure / misrepresentation
There remains a responsibility for full disclosure of material circumstances by you to enable us to make an informed decision when it comes to offering insurance cover and the premium required. Currently, failure to disclose any material circumstances can lead to the avoiding of the policy as though it did not exist.

The law is moving to a ‘fair presentation of risk’ basis which still requires you to undertake a disclosure of material circumstances which you know or ought to know. This provides us with sufficient information to make further inquiries as required to make an informed decision.

Prior to the Bill becoming effective, we will be operating as follows:

  • Where we would have charged a higher premium, we will charge you (the insured) the additional premium straight away when the non-disclosure or misrepresentation becomes known to us (not offsetting at the claims stage), with your agreement.
  • Where we would NOT have written the risk, or we would have written with imposed terms:
    • If we would not have written the cover, we can treat the insurance as if coverage was never attached but must return the premium.
    • If we would have imposed terms, we can treat the insurance as if it had been entered into on those different terms (from the date of the breach).

Change 2: Deliberate or reckless non-disclosure / misrepresentation

  • Where non-disclosure or misrepresentation is deliberate or reckless, we have the right to avoid the policy, refuse claims and retain the premium, which is set out in the proposed insurance Bill.

Change 3: Warranties

A warranty is a condition of the policy which must be complied with literally. It is an undertaking that is stated in a policy which must be either done (eg. maintenance of equipment) or not done (eg. introducing a hazardous process such as hot work for a building contractor).

Warranties can currently be used to void the policy (so no insurance cover at all is in place) even when the breach is unrelated to the loss, as in the intruder alarm failings on a flood claim example.

Also, warranties are not suspensive which means that even if the burglar alarm was broken (so breaching the warranty) and was then fixed, a subsequent claim can be avoided as there has been a breach during the period of insurance.

  • We have for some time been removing the phrase ‘it is warranted that‘ from our range of policies and we will remove all warranties from our policies and replace with Conditions Precedent to Liability and Conditions, if appropriate and linked to damage or liability. A Condition Precedent to Liability will only be applied in specific circumstances to reflect the risks presented and will be agreed with you before commencing cover. An example might be a high security cash or fine art risk where it is not insurable without an agreed alarm or guarding in place, therefore, such provisions would be a condition precedent to liability attaching.
  • Whilst we envisage most policies will be ‘warranty free’, we may apply by exception. In these instances we will explain the rationale to you

Change 4: Basis Clause

The Basis Clause converts a proposal form and declaration in to the whole basis of the contract and in doing so turns the insured’s pre-contractual representations (including answers to questions on a proposal form) into warranties. At this stage, any non-disclosure or misrepresentation will impact on the basis of the contract, even when they are believed to be true and accurate. They can be used to decline a claim, regardless of whether the statement is material to the loss, which highlights the importance of full disclosure.

Under the changes, the Basis Clause will be removed from our wordings. The Basis Clause occurs in the policy preamble which states ‘you have made a proposal to us which is the basis of and forms part of this contract’.

How will we be implementing these changes?

Due to the scale of the changes required we will be making these changes to customer documentation on a phased approach starting in 2015. During this implementation phase we will operate in accordance with the key parts of the Bill and subsequent legislation.
In practice this means:

  • We will treat the basis of contract clause as having no effect in all documentation
  • We will not void the policy or refuse indemnity where the breach of condition is not causally related to the loss
  • In the event of misrepresentation or non-disclosure we will act as shown above

Having defined areas of specific changes impacting individual accounts or schemes, we are now engaging with our trading partners and system providers to agree implementation plans. We will also wait until the Bill is finalised before actually implementing the changes in our wordings.