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.

John Curran

Partner