The Insurance Act 2015 (“the New Act”) comes into force on 12 August 2016. This is the most significant change to insurance legislation since the Marine Insurance Act 1906. The government has described the New Act as “the biggest reform to insurance contract law in more than a century”.
The New Act principally governs the relationship between insurers and their insured, and brings long awaited reform to the ability of an insurer to refuse cover for claims against an insured defendant. A refusal means a claimant without access to an insurance pot and the insured without protection. In particular, this article addresses the effect the New Act may have on those who are seeking to make recoveries from professionals. The New Act is of particular importance in circumstances where the insured professional may not have sufficient assets to meet a claim where insurance cover is refused.
Where a professional firm has the benefit of professional indemnity insurance, a claimant has a significant degree of comfort that there will be resources to meet their claim. This position can be threatened if the insurer is able to withdraw or refuse cover for the claim against the insured. The New Act seeks to remove some of the more draconian options which are available to insurers to avoid insurance contracts.
The New Act addresses two key scenarios which have provided insurers with the ability to avoid insurance contracts in their entirety:
- failure on the part of an insured to provide all relevant information to the insurer prior to entering into a breach of contract; and
- breach of a warranty in the insurance contract.
One of the main criticisms of the current law is that an insurer is entitled to avoid the entire insurance contract if it can be shown that the insured failed to disclose all “material” information prior to entering into the insurance contract. Where the insurer would have written the insurance anyway, but with a higher premium, one might think that the insured would simply have to pay the difference between the value of the premiums, but this is not the current law. Today, in those circumstances, the insurer would be entitled to avoid the policy and leave the insured, uninsured and the claimant to pursue the defendant personally. A lose, lose situation for those involved in the legal dispute.
The New Act changes the current, quite unfair, position and means that, unless there is fraud, the insurer will only be able to avoid the policy completely if the insured acted deliberately or recklessly and the insurer can show that it would not have entered into that policy on the same terms if it had known the full facts. Where the insurer is not able to avoid the policy entirely, the New Act provides for proportionate remedies to apply which reflect what the insurer would have done if it had known about the undisclosed information prior to entering into the contract.
The situation is similar in relation to breaches of warranty. A warranty is a written term of an insurance contract in which the insured promises that certain facts are true. For example, a professional firm may have a warranty that all work of junior professionals will be approved by a senior professional.
Currently, an insurer can refuse cover for a claim if there has been a breach of a warranty even where the breach is immaterial and unrelated to the claim in question. Under the New Act, any breach of warranty merely suspends cover rather than discharging it completely. Using the example of the warranty given above, under the current regime, evidence that some work had not been approved by a senior professional could result in the insurer legitimately avoiding cover for all claims, even those where the requisite approval had been obtained. Under the New Act, the work which had not been approved would not be covered but other work would be.
The New Act will therefore improve the position of claimants seeking to obtain recoveries from an insured’s policy as it will be more difficult for an insurer to avoid a policy completely.
The New Act allows insurers to contract out of the provisions of the New Act when dealing with other businesses rather than individuals. The provisions of the New Act will not therefore automatically apply. In order to contract out, insurers are required to take specific steps to ensure that the insured is aware of the implications of contracting out. The early part of this article sets out how those implications could be severe.
It remains to be seen whether insurers will seek to contract out as a matter of course. There is hope that this will not be the case as a well advised insured will be unwilling to agree to losing the protections of the New Act .
Third Parties (Rights Against Insurers) Act 2010 (“Third Parties Act”)
The New Act also contains provisions which amend the Third Parties Act although, at present, these are not expected to come into force at the same time as the New Act. This is because the Third Parties Act itself has not yet come into force.
The Third Parties Act is designed to remedy the difficulty of pursuing a claim against an insolvent insured. At present, the claimant is required to obtain a judgment against the insured before it can pursue a claim against the insurer, without knowing whether there is an insurance policy to pursue thereafter and , even if there is, whether it will respond to the claim. A claimant faces the risk of incurring the costs of a claim against the insolvent insured (from which there will, of course, be no chance of recovering money) only to find out that the insurer has avoided the policy. The Third Parties Act bridges that gap and allows for the claimant to pursue a claim directly against the insurer without having to obtain judgment against the insolvent insured first.