Commissions welcome new insurance law

The Scottish Law Commission, and its England & Wales counterpart, have welcomed the passing into law of a bill enacting reforms recommended in a joint report to modernise and simplify insurance contract law across the UK.

Receiving royal assent yesterday, the Insurance Act 2015 gives effect to reforms recommended by the two
Commissions in their 2014 report, Insurance Contract Law: Business Disclosure, Warranties, Insurers’ Remedies for Fraudulent Claims, and Late Payment.

Under a new “duty of fair presentation”, business policyholders will still have a duty to volunteer information, but what is required of them is made clearer, and insurers will have to play a more active role in asking questions of the policyholder. A new scheme of proportionate remedies will replace the existing single remedy of avoidance, which allows insurers to refuse the whole of a claim.

Insurers will be liable to pay any claim that arises after a breach of warranty has been remedied, such as where a broken burglar alarm has been repaired before the claim arises. And they will no longer be able to escape liability on the basis of the policyholder’s breach of a contract term that is shown to be completely
irrelevant to the loss suffered. “Basis of the contract” clauses, which can turn any statement from a policyholder into a warranty, will be abolished.

The Act also provides insurers with clear, robust remedies when a policyholder makes a fraudulent claim. Where any part of a claim is fraudulent, they will be entitled to refuse the whole claim. They will also have the right to refuse any claim arising after the fraud, but must pay earlier, valid claims.

Provisions relating to the Third Parties (Rights against Insurers) Act 2010 will enable that Act to be brought into force. The 2010 Act, which also derived from recommendations made by the two Law Commissions, simplifies the procedure by which third parties can claim against an insurer when the insured is, in broad terms, insolvent or has been dissolved.

The Government did not include in the bill the Law Commissions’ recommendations relating to late payment, but has asked the Commissions to continue to work with stakeholders with a view to introducing a solution to this issue in the future.

Professor Hector MacQueen, Law Commissioner leading on the project for Scotland, commented: “The existing law that governs business insurance contracts is weighted in favour of insurers, giving them wideranging powers to refuse claims. These powers, even if rarely used, can undermine trust between insurers and policyholders.

“Our recommendations received strong support from across the insurance market, and we were pleased to see these urgently needed reforms complete their passage through Parliament following the Law Commission procedure for uncontroversial bills. We look forward to the Insurance Act 2015 coming into force and delivering for the UK a legal framework fit to support our world-leading insurance industry.”

The Act is expected to come into force in August 2016, in order to give the industry time to prepare.