October 13, 2017
Has the Enterprise Act Expanded the Duty of Fair Presentation?
For more than a century after the Marine Insurance Act of 1906, the law relating to insurance contracts was a territory into which parliament did not venture, ceding it instead to the courts. By 2015, though, Parliament was launching a full-scale invasion. The Insurance Act of that year replaced the old duty of disclosure with a new “Duty of Fair Presentation” and fundamentally reformed the remedies prescribed by law both for breach of the Duty of Fair Presentation (by introducing the concept of proportionality) and for breach of warranties.
A year later the Enterprise Act 2016 introduced a brand new right to claim damages from insurers for unreasonable delay in the payment of claims. On the face of it, each of the two Acts creates its own seemingly unrelated code of rights, obligations and remedies with no obvious interplay or knock-on effect. However, the question arises as to whether circumstances particular to the insured, which make the insurer vulnerable to a damages action if it delays in paying claims, are circumstances which, in the wake of the Enterprise Act 2016, fall within the Duty of Fair Presentation created by the Insurance Act 2015.
Legal Ingredients of a Claim for Damages for Late Payment
In assessing whether the information encompassed within the Duty of Fair Presentation has been broadened by the Enterprise Act, one first has to consider what is needed to found a claim for late payment.
A number of ingredients must be present if an insured is to be entitled to damages for loss caused by breach of an insurer’s duty to pay claims within a reasonable period. Aside from showing it has a valid claim under the policy in the first place, that the insurer’s delay was unreasonable, that the loss for which compensation is sought was caused by the insurer’s delay and that it has taken steps to mitigate its loss, the insured also has to show that the loss suffered as a result of the delay was foreseeable or contemplated by the parties at the time the policy was entered into.
The classic case for late payment damages is likely to be a property loss – e.g. at industrial premises where, say, a particular item of machinery is crucial to production and, unless it is quickly replaced following an insured event, the insured will suffer significant loss of production or even be put out of business. To found a claim for late payment damages, such eventualities must have been forseeable as at the date the policy was entered into. The insured would have to show, for example, that it was or should have been in the contemplation of the insurer at the time the policy was taken out that production turned on the availability of a particular machine and that the insured would rely on insurance proceeds if that machine were damaged because it would not be able to finance replacement through any other means. This means that the prospects of establishing a claim for damages will be greatly enhanced if the insured informed the insurer of these particular vulnerabilities when the policy was taken out.
Impact on the Duty of Fair Presentation
The question then arises as to whether it is simply prudent to tell the insurer about such vulnerabilities or whether the insured has a duty to do so.
The information that must be contained within the “Fair Presentation” of the risk by the insured is defined in section 7(3) of the Insurance Act 2015 as that which would “influence the judgment of a prudent insurer in determining whether to take the risk and, if so, on what terms”.
The “risk” in question is the risk of damage from an insured peril. In our classic case it is the risk of damage to or destruction of the insured property from insured perils. On the face of it, the importance of the property to the insured’s business or the ability of the insured to raise finance for replacement of the property if damaged has no bearing on the risk of damage from an insured peril occurring (although different considerations could well apply if the insurance had business interruption cover attached to it). These particular vulnerabilities wouldn’t seem to have any bearing on the pure underwriting decision as to the susceptibility of the insured to suffer damage from an insured peril.
What these vulnerabilities do have a bearing on is the insurer’s risk of exposure to a late payment damages claim. The key point is whether the risk of exposure to such a claim is part of the “risk” contemplated by section 7(3), so that the insured has a duty to disclose such circumstances to the insurer (rather than simply being well advised to do so in order to enhance the prospects of a claim for late payment damages should such a claim become necessary).
Until the courts look at the question there is no clear answer. On the one hand section 7(3) is ostensibly dealing purely with the insured risk. This is the risk upon which the judgment of the underwriter is exercised, be that the risk of flood, fire or storm. Since the risk of exposure to late payment damages is not an insured risk and instead one to which the insurer exposes itself by its own unreasonable delay rather than by reason of some fortuity over which neither insured nor insurer has control, there is good reason for saying that section 7(3) does not extend to circumstances relevant only to the recoverability of late payment damages.
On the other hand, section 7(3) contemplates the provision by the insured of any and all information relevant to the insurer’s willingness to provide a policy at all or, if so, on what terms. It may be that an insured with particular vulnerabilities that would set up a late payment damages claim is not the sort of insured the insurer would want to write cover for at all, making such information “material”. Even if the insurer would still be prepared to write cover notwithstanding such knowledge it might be prompted to require a term in the policy excluding the application of the Enterprise Act (the Act allows an insurer to contract out when not insuring consumers) or a term that caps exposure to late payment damages or it might simply charge a higher premium.
Perhaps the most significant consideration is the provision in section 7(4) which defines as material “any particular concerns which led the insured to seek insurance cover for the risk”. In some cases the vulnerabilities of the insured that would be the basis for a claim for late payment damages may be precisely what led the insured to take out the insurance in the first place.
Certain brokers are recommending that their clients tell insurers about circumstances that would make them vulnerable if claim payments were delayed because it helps lay the foundation for any late payment damages claim that might become necessary. In light of the uncertainty around whether such circumstances are material to the “risk” for the purposes of section 7(3) of the Insurance Act and thus encompassed by the insured’s Duty of Fair Presentation (and since insurance policies are riddled with conditionalities as it is), insureds should err on the side of caution and include information about such vulnerabilities in their presentation of the risk.
John Curran is a partner at Fenchurch Law
February 9, 2017
Insurance Act 2015: Some Insurers Crying Foul
When the Insurance Act 2015 came into force in August 2016, it was hailed as the biggest reform of this area of law in over a century. The old law had been criticised by the Law Commission as “out of date” and “no longer reflecting the realities of today’s commercial practices”.
The Act addressed those criticisms head-on. It repealed the archaic “duty of utmost good faith” and created a new, fairer, “duty of fair presentation” designed to clarify precisely what is required from policyholders during the disclosure process, and to increase the burden on Insurers to ask the right questions about the risk they wish to write.
Likewise, the Act softened many of the harsh remedies available to Insurers under the pre-Act regime. Where policyholders innocently omitted to disclose a material piece of information (for a wide variety of unfortunate, but quite understandable, reasons), the old law afforded Insurers the draconian remedy of avoiding the policy in its entirety, even if they would have still written the risk in one way or another.
The Act, on the other hand, asks the very sensible question brokers and coverage lawyers have been asking for decades, which is: “What would you have done had you known?”. If the Insurer would have written the risk in any event, the Act’s new system of proportionate remedies provides a more measured redress mechanism to alter policy terms or the premium retrospectively to reflect what ought to have happened in the absence of the Insured’s oversight.
Uncertainty for Brokers and Policyholders
On the face of it, therefore, the Act generally works in favour of policyholders. However, as with all change (even one for the better), the move from a complex, but established, body of law to a more rational, but nonetheless new and untested, set of rules has created much uncertainty for brokers and their clients over the past six months.
In particular, many brokers now ask themselves and their advisors: “Does the Act really put my clients into a better position than they were in under the old law, and, if not, can I use the prevailing market conditions to improve their position in some way?”
The answer, of course, is that it in many cases the Act puts Insureds in a worse position than under the old law, leaving brokers with the challenge of finding an appropriate solution to protect their clients’ interests.
The best (and most controversial) example of this is the use of “Innocent Non-Disclosure” clauses on certain lines of business. Pre-Act, clauses such as the following were largely uncontroversial and commonplace protections against the risk of avoidance:
“Insurers shall not avoid this Policy as a result of any non-disclosure or misrepresentation by the Insured save in respect of a fraudulent non-disclosure or misrepresentation”.
In other words, under the old law Insurers were prepared (for a variety of reasons, not least their eagerness to write business) to agree that nothing short of a fraudulent non-disclosure or fraudulent misrepresentation would give them opportunity to remove that client’s cover in its entirety.
Under the Act’s new proportionate remedies regime, even an innocent breach of the duty of fair presentation might, for example, entitle Insurers to retrospectively increase an Insured’s premium significantly, or to exclude the type of loss that has unearthed the innocent non-disclosure. In the absence of an Innocent Non-Disclosure clause (tweaked to reflect the new order of things), an Insured therefore has far less protection on certain lines than they might have secured in previous years.
Tension between Brokers and Insurers
It is unsurprising, therefore, that many brokers have continued to insist on the inclusion of Innocent Non-Disclosure clauses (as well as a variety of other protections) to ensure that their clients remain protected against non-disclosure remedies under the Insurance Act, much as they were protected under the old law. The reality is that Insurers today continue to compete fiercely, and many are therefore prepared to maintain these same protections afforded to Insureds that were available when the old law applied.
Many Insurers, however, have cried foul-play, arguing that these clauses should no longer be necessary in the post-Act world. Some go further and argue that taking advantage of soft market conditions to include them is in some way “unfair” to Insurers, given the Insurance Act was designed to “level the playing field”.
Such arguments are unlikely to hold water with brokers. One of the principal reasons the Law Commission recommended changing the law was to ensure that the rights generally afforded to Insurers on all lines of business reflected the realities of today’s market practice. Changing the inherent dynamics of the market was never on the agenda. If soft market conditions mean that Insurers, in competing for business, remain prepared to offer greater certainty and protection to Insureds, then brokers are duty bound to try and secure those things for their clients.
Under the pre-Act regime, the balance of power lay firmly with Insurers. At worst, policyholders might have found themselves without cover for either perfectly innocent non-disclosures or for breaches of terms wholly irrelevant to a particular loss. Market conditions pre-Act gave brokers the ability to protect their clients from those harsh remedies.
While those remedies no longer exist, brokers will continue to use those same market conditions to find ways to eliminate some of the uncertainty the Act has created. Some Insurers will see that as the insurance market working as it should. Others will say that gaining such protections flies in the face of the spirit of the Act.
To those latter Insurers, I can only assure them their own brokers are very probably striving to achieve precisely the same protections for those Insurers’ own exposures. Every cloud?
James Morris is a senior associate at Fenchurch Law.
October 30, 2015
THE INSURANCE ACT 2015: WHEN EXCELLENCE WAS THE ENEMY OF THE GOOD
In December 2014 a Special Public Bill Committee of the House of Lords took evidence on proposals in the Insurance Bill which, earlier this year, became the Insurance Act 2015. The Bill approved by the Committee saw revolutionary changes to insurance law which, as the law commissioner put it, had not received legislative attention since the period in which the first series of Downton Abbey was set.
The Insurance Act (effective August 2016) does much to realign the power balance between policyholders and insurers:
- The new duty on the policyholder to make a fair presentation (which replaces the old duty of disclosure) will introduce welcome transparency for policyholders in a process in which they were previously left to feel their own way (albeit hand in hand with their broker if they had one).
- Even more importantly, the remedies for breach of the new duty to make a fair presentation are to be proportionate. The new regime will mean that if the policyholder breaches the duty the remedy for the insurer will be proportionate to the breach rather than imposing an indiscriminate remedy of avoidance of the policy regardless of the significance of the breach. If, therefore, the insurer can show that the policyholder breached the new duty, the remedy available to the insurer will depend on what difference that would have made to the writing of policy. For example if the insurer would still have written the policy but have charged twice as much premium, the policy remains valid but the amount the insurer has to pay in claims is reduced proportionately i.e. in this example the insurer would only have to pay half the value of any claims made under the policy.
- Basis of contract clauses are outlawed. Under a basis of contract clause, information contained in the proposal or otherwise provided to the insurer is treated as having been warranted to be true and accurate. A basis of contract clause is a wolf disguised in sheepish lawyerly language and has caught out countless unsuspecting policyholders. lt does not describe itself as a warranty (but it is) and it does not say what the consequence of a breach is (it would be catastrophic to coverage). If it is breached the policy is treated as if it never existed but the insurer gets to keep the premium – regardless of whether the inaccuracy was material to the risk and regardless of whether the insurer paid any attention to it or otherwise relied on it. In 1927 Lord Wrenbury described the use of these clauses as “contemptible”. Now they are to be consigned to legal history.
- The law relating to warranties is significantly reformed. Previously a policy was vitiated from the moment of a breach of warranty regardless of whether or not the breach was remedied and regardless of the relevance of the breach to the type of loss actually suffered and claimed under the policy. Lord Mance was asked about this at the Special Public Bill Committee. He had considerable sympathy for a change in the law and gave a personal example of its unfairness:
“When I moved a very long time ago into our present house, I observed that there was in our household insurance a warranty that the cellar pump would be kept in working order. That seemed to me rather stringent if there was a burglary and I insisted that they confined the warranty in its operation to flooding in the cellar”
Lord Mance’s self-help exercise with his household insurance will now be applied generally under the new Act.
Insurance Act: good but not excellent
On its way through Committee the Lords asked why a proposal to make insurance companies liable to policyholders for losses they suffer as a result of unreasonably late payment of claims was not contained in the Bill (as the law commission had originally suggested). The problem with the law as it stands is that a Policyholder who suffers loss as a result of a valid insurance claim being paid unreasonably late is not entitled to compensation for that loss beyond interest on the policy claim amount. The problem with including this proposal was that the parliamentary fast track procedure being used for the Bill was suitable only for “uncontroversial” proposals. Among some sections of the insurance community (in particular Lloyd’s and those in the London Market writing US business) an obligation to pay claims within a reasonable time was controversial. The proposal was, therefore, jettisoned because it could have stymied the bill as a whole. As Lord Lea said “Excellence can be the enemy of the good”.
Is excellence honing into view?
The Insurance Bill having become law without any provision for damages for late payment of claims it seemed that this particular reform of the law was deep in the long grass. In the Enterprise Bill currently in Parliament, however, the government is striving to turn the ”good” reforms in the Insurance Act into “excellent” ones by now adding a provision relating to damages for unreasonably late payment of claims. This new provision is no less controversial than it was. Lloyd’s and others in the London Market oppose it and are understood to be trying to water down the proposed rights of policyholders by suggesting that damages for late payment should be limited to circumstances where the delay by the insurer is deliberate or reckless. That would leave the policyholder with the risk of incompetent or careless claims handling by the insurer. To some this may appear like an inappropriate allocation of risk. Shouldn’t the insurer bear responsibility in damages for its own negligence or unreasonable behaviour? Insurers may well face uncertainty if the proposal is introduced: for example as to whether this potential additional liability will be covered under reinsurances. But does this matter? Claims handling is part of the professional service insurers are providing. Other service providers protect themselves against negligence with professional indemnity insurance. Why can’t insurers? It might be a profitable new line of business for PI insurers – after all, they should understand the business!
The Enterprise Act is currently in committee in the House of Lords (the committee hearing commenced on 2 November). It may be worth watching to see if Lord Lea’s “excellence” does now have its day.
April 26, 2010
Financial Services Act 2010 – class actions removed
The Financial Services Act 2010 received Royal Assent on 08.04.2010, being amongst the last few pieces of legislation rushed through parliament before it was dissolved.
One of the most interesting and controversial parts of the bill had been the introduction of collective actions for consumers allowing them to bring American style class actions against financial services firms, including banks and insurers as well as smaller firms providing financial advice.
However, these proposals received stiff opposition from Tory peers and the government dropped the measures in order to see the bill through parliament.
What has been included in the Act though is an amendment to previous legislation which now allows the FSA to draw up consumer redress schemes where it considers there has been “widespread or regular failure” from financial services firms and that as a result consumers have lost, or may lose, money. Previously such schemes had to be approved by the Treasury before being implemented.
Appetite remains high amongst the Labour party though for such class actions and redress schemes and it has been suggested that the proposals would be looked at again in the new parliament. How they would fare in an increasingly likely hung parliament is difficult to predict though.
Third Parties (Rights Against Insurers) Act 2010
The Third Parties (Rights Against Insurers) Act 2010 which received Royal Assent on 25.03.2010 has amended previous legislation governing the relationship between insurers and claimants. Its intention is to make it easier, quicker and cheaper to make a claim against the insurers of insolvent defendants.
The previous Act required a claimant to establish an insolvent defendant’s liability before being able to pursue a claim against insurers. This meant issuing proceedings against the defendant before being able to issue (separate) proceedings against the insurer. The 2010 Act now allows claimants to issue proceedings directly against the insurer in which all issues, including the defendant’s liability, can be established.
Insurers are now no longer entitled to rely on conditions in the policy made impossible by the insured’s insolvency or terms which render the policy ineffective due to the insured’s insolvency. The insurer is still though entitled to rely on defences against the claimant which it could have used against its own insured.
February 16, 2010
Financial Services Bill progress
The Financial Services Bill is due to receive its second reading in the House of Lords (when all aspects of the bill will be debated) on 23.02.2010. In its current form the Government bill, which has so far remained intact throughout its progress through the House of Commons, proposes to allow consumers to join together to bring claims against FSA-regulated professionals (such as financial advisers and insurance brokers) in cases where there has been a mass failure of practice which has affected significant numbers of consumers. If the proposals become law, they will reduce the cost to consumers of making claims against financial services professionals which arise out of endemic (as opposed to “on-off”) mistakes or bad advice.
We’ll be tracking the progress of the bill until it receives Royal Assent on the Fenchurch Law twitter feed.