It was hailed as the biggest shake-up in the insurance industry in over a century. Sarah Rundell drills down into the details of the recently implemented Insurance Act 2015.
The Insurance Act 2015 applies to all commercial insurance contracts and has introduced substantial changes to the laws governing disclosure, warranties and other contractual terms. A key objective was to create a new and fairer balance between policyholders and insurers, clarifying what customers have to tell their insurers and making it more difficult for insurers to get out of paying claims.
Almost a year on from its introduction last August, GTR talks to three experts to gauge the implications of the act for trade: Charles Berry, chairman of emerging market specialist insurance broker BPL Global; Andrew Grant, partner at law firm Clyde & Co, where he heads up the speciality insurance practice; and Olivier David, head of special products, trade credit and political risks at trade credit insurance group Atradius.
GTR: What is the background to the act and why was it introduced?
Grant: The new act updates certain parts of the Marine Insurance Act that dates back to 1906. It was a reform process driven by the central question of whether the existing act was fit for purpose in the 21st century, given that London is the largest insurance market in the world. Another consideration behind its introduction was the concern that English insurance law was too favourable to insurers as opposed to their customers, in contrast to other legal systems.
Berry: We regard the new act as a good thing for our clients because there hasn’t been any development in the law governing insurance contracts since the Marine Insurance Act of 1906. There were various anomalies in this law that were considered unfair and which needed tidying up; the new act has ironed out some of these legal anomalies.
GTR: What has the law changed?
Grant: An insured still has to disclose material information; this hasn’t changed. But a new limb has been bought in that an insured can legitimately fall short of disclosing all information – giving a fair presentation – if they have given sufficient information in what they do disclose that would put underwriters on notice to ask more questions. In short, an insured can fall short of disclosing all information and not invite action from the underwriters.
Berry: Taking just one significant change, the law has been modified so that if non-disclosure and material misrepresentation happens, a customer does not necessarily lose the whole policy. In case of unintentional non-disclosure the insurer can now adjust the claim amount under the policy to reflect, for example, the premium or deductible it would have applied had the client fully complied with its obligation to make a fair presentation. This is fairer than the draconian penalty under the old law of voiding the whole policy, even where the non-disclosure was unintentional.
If a client breached a warranty under the old law it would void the policy. This is why we always tried to resist any policy warranties, preferring everything to be a condition. Under the new law, they have modified the penalties for breaching a warranty. Cover is suspended during the time a customer is in breach of a warranty, but at the point the breach is remedied the client’s cover is reinstated. Unlike under the previous law, a breach of warranty has to be relevant to the loss before penalties kick in; again this is fairer.
The law has been modified so that if non-disclosure and material misrepresentation happens, a customer does not necessarily lose the whole policy.
Charles Berry, BPL Global
GTR: Where will these rules around disclosure have most impact?
Grant: Disclosure is critical to all insurance, but trade credit and political risk insurance is the one area where you always see issues around disclosure arise. Disclosure obligations are absolutely critical for insurers providing political risk and trade credit insurance because much of the cover is in emerging markets, where all of the information about what is going on is in the hands of the insured.
GTR: So, have these new rules made the act more balanced between insurers and the insured as intended?
David: In our market the insured parties are already well protected by the law, so I would argue the need to better protect the insured through the new act was not really necessary. Insurance is often perceived as insurers imposing their own wording – namely terms and conditions – on the insureds, but in our market it is the brokers, acting on behalf of the insured, who are drafting the policy and asking the insurers to agree on the conditions they wish to have.
Our insureds are large, powerful corporations and banks who have a battery of lawyers to ensure their interests are safeguarded. I can only imagine that this law was meant for other classes of insurance where individuals have a weaker negotiating position. For us as an insurer, the spirit of the act was already embodied in our policies. I believe that the policy wordings since August 2016 are less balanced than they were before, and power is vested significantly more with the insureds and brokers than the insurers.
Moreover the act doesn’t have to fully apply to all insurance policies. The insured and insurer can agree to leave aside parts of the act, in full transparency. The insureds often demand to restrict the part of the act that is the most vague and onerous to them, the duty of fair presentation.
GTR: Can insurers and insureds opt out of the act?
Grant: One of the problems with the act is that you can contract out of all of it bar one section. The other problem is that we are in the softest insurance market that anyone can remember. It has put all the power in the hands of buyers and brokers, who are demanding contracting out of the bits they don’t like – namely protections for insurers. The act untouched is fairly fair, but when you start removing parts it becomes unbalanced; it is too far in favour of the insured now, whereas the balancing act Parliament struck was to make it fair between the two. Brokers are plucking out things that aren’t pro-insured and leaving in that which is: it’s as you’d expect, they work for their clients.
What is happening is that traders and people involved in trade finance are buying insurance – particularly banks who are looking for capital relief under Basel regulations – and looking to dis-apply large provisions of the act they don’t like. Insurers have shareholders; they need to turn a profit. If it does, as it probably will, lead to more claims paid than would have happened in a balanced act that will feed into price at some juncture.
One of the problems with the act is that you can contract out of all of it bar one section.
Andrew Grant, Clyde & Co
GTR: So how can insurers ensure fair presentation?
Grant: This act means that protection for insurers has been watered down; it is crucial that insurers know their insured, and trust what they tell them about the risk. Insurance companies must now only accept information from those with real knowledge around disclosure within a company: employees in senior management positions, those that make day-to-day senior decisions.
Berry: Our aim when placing a policy is to try to ensure that in the event of a claim there will not be a legal dispute. We have generally been very successful in achieving this. We think the new Act will help further this aim. It requires a little more thought on both sides at the time of placement to agree and record what constitutes a fair presentation in the context of the business. The criteria may be very different, for example, when addressing a global investment insurance programme versus a bank non-payment policy. But if this all involves a bit more work at the front end, and even less problems when a claim comes in, is that not a good thing for both sides?
GTR: Do you expect more litigation?
Berry: It is far too early to see any trend in litigation either way. Litigated claims are extremely rare in any case. But frankly, I don’t buy the idea that we will see more litigation with the new act. Of course there are some areas of the law which will no doubt be clarified in litigation in different classes of insurance. But I do not accept the general argument that because the penalties for breach are less draconian, there will be more litigation, and that under the old law there was greater commercial pressure to avoid litigation.
Most of our claims, particularly for non-payment, are not contentious and even when disputes arise, the pressure to reach a commercial settlement remains. Where litigation arises, disclosure is often involved. But if the new law encourages better, clearer disclosure, as we think it might, that is good news.
David: The devil is in the detail in terms of how it will be interpreted in court. Until we have decisions sent down from court cases we won’t know how the terms of the act will play out, the repercussion of those clauses and how they should be understood.
GTR: Is it affecting trade?
Berry: I do not think the new law will have an appreciable effect. I think there is a net benefit for clients because it should marginally improve the whole insurance process, but it will not dramatically change the performance of policies. Problem cases will get resolved in a subtly different way, but most of the cases we have are not contentious claims in the first place. It has not affected the willingness of underwriters to write the business, and it has not affected the willingness of clients to buy the policies. But it has generated a lot of work for people like us who are very interested in policy detail.
David: I do not believe it will affect international trade. The biggest impact so far has been on the workload for brokers and insurers who have had to revisit thousands of single policy documents, tailor-made for insureds. It has been a very good year for lawyers!
Another point to note is that the act only applies to policies issued subject to UK law – which includes many countries. Even though more and more insureds wish to have insurance policies under their local country regulation, single situation structured credit and political risks brokers and insurers are keener on using UK law for policies, wherever the insured is located. This means the impact of the act is far wider than the UK and those insureds in the UK.