IFIC Forensic Viewpoint: The Insurance Act 2015 - 10th December 2015
THE INSURANCE ACT 2015
The recently assented Insurance Act 2015 comes into effect on August 12, 2016 and will modernise significant aspects of UK Insurance Law. The act came about following a joint review of insurance contract law by the Law Commissions of England, Scotland and Wales, which resulted in the Consumer Insurance (Disclosure and Representations) Act 2012 (UK) and the 2015 Act which encompasses a reform of business insurance.
The key areas for change are:
Disclosure and misrepresentation in business and other non-consumer contracts;
Insurers remedies for fraud.
Duty of Disclosure
The act creates a duty of disclosure on the Policyholder to make “a fair representation of the risk”. It requires them to disclose “every material circumstance which the insured knows or ought to know.”
Insurers will however be expected to take a more proactive approach to pre-contract disclosure and cannot argue that an Policyholder failed to provide relevant information, where the material representation may have put them on notice that further enquiries should be made.
A Policyholder will not be required to disclose a circumstance if:
It diminishes the risk;
The insurer already knows of the circumstance;
The insurer ought to know of the circumstance; or
The insurer is presumed to know of the circumstance.
The presentation of pre-contract disclosure will be required to be in a format that is clear and accessible to a prudent insurer, hopefully to bring an end to situations where insurers are presented with an overwhelming amount of unstructured information.
In terms of remedies, the Act provides more flexible and proportionate remedies and deals with breaches of the duty to make fair representation considering two scenarios:
If the breach is deliberate or reckless, and the insurer can demonstrate that they would not have otherwise entered into the contract, then the insurer is permitted to avoid the contract and hold the premium.
If the breach is shown to be innocent, the insurer is permitted to remedy on what they would have done had the breach not occurred (refusal, different terms, higher premium etc.).
This does however place a burden of proof onto the insurer and introduces an element of subjectivity when determining coverage. The Act contains little in the way of guidance in this respect.
From the perspective of loss adjusters, this more subjective environment is likely to require swifter and perhaps more detailed loss investigations and consideration will be required to establish whether an alleged breach even warrants investigation if the remedy for the breach is only partial.
In order to control costs, a joined up approach by insurers, claims service providers, legal and forensic experts will be required from the early stages of a claim to triage the claim.
For example, if a Policyholder declares they have had x number of fires, is that sufficient to put the Insurer “on notice”? What if one of these fires was a “near miss” which if more information was given would have led to a declension to insure, higher premium or policy warranty.
It is likely that expert opinion will be sought on whether a given set of facts presented by a Policyholder was sufficient to put an Insurer “on notice” and prompt further enquiry.
These changes have the effect of converting all statements in a proposal into warranties. The existing ‘basis of contract’ clauses are to be abolished and no longer valid. The removal of these ‘legal certainties’ will make establishment of breaches much more subjective which could make the claims process more complicated and drawn out, again requiring more detailed investigation at the outset to determine coverage.
Breaches of warranty currently allow automatic termination of a policy from the date of the breach. Such breaches will now only serve to suspend cover until the breach is remedied. Insurers will have no liability for occurrences during the suspension period.
Breaches of warranties or conditions designed to reduce a risk, will not allow an insurer to repudiate a claim if the Policyholder can show that non-compliance could not have increased the risk of the loss which actually occurred. This means that losses not attributable to the breach will be payable if the policyholder can show that the breach was completely irrelevant to the loss suffered.
If a Policyholder failed to set an intruder alarm and there was a fortuitous fire which was the result of an electrical defect, in the past the policy could be avoided if there was an unfulfilled policy warranty which required an intruder alarm to be set. Perhaps the best that could be argued under the new regime is the delay in discovery which resulted because the intruder alarm system was not set. The tricky bit of such a case is proving how quickly the fire would affect the intruder alarm system and cause it to activate either by operating a PIR detector or effecting the tamper circuit.
The Act provides that when a Policyholder commits a fraudulent act relating to a claim, the insurer will not be liable to pay a claim to which that fraud relates. The insurer can give notice to terminate the insurance from the time of the fraudulent act and, in the event that the claim has been paid and the fraud identified at a later date, the insurer may recover any sums paid under the claim.
This clarification of the law gives increased protection to insurers. The challenge however is for insurers to prove the fraud. The Act provides no clarity on the definition of ‘fraud’ or a ‘fraudulent claim’.
In America largely due to the activity of the Bureau of Alcohol Tobacco and Firearms who are responsible for fire investigation, over 50% of arson fires are prosecuted. The figure in the UK is about 2.5%. The Fire Service has the power but not the duty to investigate fires and due to growing economic pressures are reducing their fire investigation activity. The investigation of deliberate fraudulent fires is going to, and to a large extent, already relies on Insurers investigating such incidents.
The establishment of a timely, in depth forensic investigation by experienced and qualified practitioners and the provision of sound evidence, is vital for the execution of this part of the Act and potentially to assist the criminal Courts. Adjusters will therefore need to be extra vigilant at loss sites ensuring early examination and monitoring access closely.
Professor James Lygate – Chairman & Principal Investigator, IFIC Forensics