On 15 July 2014 the Law Commission, an advisory public body sponsored by the Ministry of Justice, and the Scottish Law Commission presented a report to Government. The report, the culmination of eight years of consultations, included certain recommendations which we’ve detailed below, together with a draft Bill – the Insurance Bill – designed to implement them.
The recommendations were intended to reform what is now considered outdated law on insurance, and covered the following areas:
- The duty of disclosure in business and other non-consumer insurance
- The law of insurance warranties
- Insurers’ remedies for fraudulent claims
- Late payment of insurance claims
The reforms are intended to become the default for business insurance with parties free to come to their own agreement on alternative arrangements in their insurance contracts, as long as it is done so transparently.
100-Year Old Law Still Governs Commercial Insurance
It may surprise you to learn that much of the law in force today surrounding insurance is governed by the Marine Insurance Act 1906. Whilst a little confusing because it appears to relate to marine law, what actually happened was the principles of the Act were adopted across all non-consumer insurance because it was felt they reflected common law.
However, it has been suggested and agreed – due to the fact that the principles date back to the 18th and 19th centuries – that this law is now seriously out of date and not in line with today’s commercial practices.
We will discuss how the Insurance Bill will affect insurance warranties, fraudulent claims and late payment of claims in future posts. For this post we are focusing on duty of disclosure, as we believe this is the most daunting issue for businesses when arranging insurance.
Duty of Disclosure: A Major Issue When Arranging Insurance
The 1906 Act puts a duty on those taking out a policy to disclose to the insurer ‘every material circumstance’ that could ‘influence the judgement of a prudent insurer’ in setting a premium or deciding whether to take on a risk.
But how many business owners could realistically know what might ‘influence a prudent insurer’? Not many and certainly the minority. Yet the penalties for failing to disclose such information when arranging insurance are tough. Say you fail to disclose something that you didn’t even consider was important or relevant; the insurer could then refuse a claim based on this law.
The Law Commission and Scottish Law Commission recognised a number of issues with the law based on the 1906 Act. These included a poor understanding of the duty of disclosure and lack of knowledge of how to comply with it. They also identified other problems including the fact that underwriting is encouraged at claims stage and that the remedy for failing to disclose is too tough.
In response to these issues, the Commission has put forward a number of recommendations, including ditching the duty of disclosure in favour of a ‘duty of fair presentation’ which would cover what should be disclosed and how to disclose it, as well as providing a regime of balanced remedies in the event of a breach by the policyholder.
The Insurance Bill was introduced in the House of Lords on 17 July 2014. A second reading took place on 30 July and the Bill has been committed to a Special Public Bill Committee.
As mentioned there are other important aspects that as a business and commercial insurance policyholder you will be interested to learn, and we will discuss those in future posts.
The Insurance Bill: Good News for Businesses
Current law really does not reflect the expectations of businesses looking to buy insurance policies and often leads to disputes between insurers and policyholders which can cost a fortune and cause unnecessary delays and ambiguity over whether a claim will be honoured.
We believe the Insurance Bill will bring clarity for business owners seeking insurance, improve the quality of insurance products available and discourage businesses from buying based on price alone.
We will round this post off with a quote from Andrea Leadsom MP, economic secretary to the Treasury, which we feel sums up the Insurance Bill:
“Britain’s insurance industry is a major success story, employing over 300,000 people across the country, helping millions of British people and businesses every day and exporting across the globe. This government wants the industry to continue to grow and provide better services to customers, which is why we need to bring insurance contract law into the 21st century. The Insurance Bill is an important step in that direction.”