Courts yet to test key aspects of Insurance Act

Almost nine years after the Insurance Act introduced some big changes to UK insurance contract law, key principles have yet to be tested in court, experts have told Commercial Risk.

The Insurance Act has not resulted in a predicted glut of litigation to clarify its “deliberately flexible concepts”, according to Rob Smart, chief technical officer at insurance contract and claims consultant Mactavish. Surprisingly few principles of the Act have been tested by the courts, he added.

“The question remains whether this will continue or, over time, that the Act’s constituent concepts will need to be pinned down by the courts – or whether the current trend will continue that the Insurance Act sets a more balanced framework in which parties can settle commercially without ever getting to court,” he said.

While there has not been a flood of litigation related to the Act, which covers all policies bought in the London and UK market, a small number of cases have clarified some aspects, including the duty of fair representation and damages for late payment, according to Alex Rosenfield, associate partner at Fenchurch Law.

One case of note is Berkshire Assets v AXA. It considered exactly what policyholders must disclose – in this case, an allegation of substantial fraud involving one of the insured’s directors. The outcome of this case is a “sobering lesson” to insureds of the risks of failing to disclose matters relevant to their moral hazard, i.e. their character and propensity to suffer a loss, said Rosenfield.

“In Berkshire Assets v AXA, it mattered not that an allegation of fraud against the insured’s director was not ultimately proved, nor that the allegations did not involve deceit or dishonesty. The fact that the allegation of fraud raised doubt as to the insured’s moral hazard, without more, was enough to render it material,” said Rosenfield.

“Insureds would therefore be well advised to err on the side of caution when giving disclosure,” he said.

Another closely watched principle of the Insurance Act, which was introduced via 2016’s Enterprise Act, is the concept of damages for late payment of claims. “This had long been a point of judicial frustration where even grossly unreasonable delays by insurers causing insured bankruptcy went unpunished under the pre-2016 law,” said Smart.

The first case decided under Section 13A of the Act, Quadra Commodities vs XL Insurance and Others, established that for a complicated loss, “about a year” is a reasonable amount of time for an insurer to properly investigate and pay a claim, according to Rosenfield. Although the insured’s claim was ultimately unsuccessful, the decision is likely to be a useful yardstick for insureds generally, particularly those with far more straightforward claims, he said.

“As regards claims for Section 13A damages, Quadra Commodities has established that even where an insurer has declined a claim, that alone will be insufficient. An insurer need not only be wrong, but it must also be unreasonably wrong. That is a markedly high threshold, and a salutary reminder that such claims are difficult to establish,” said Rosenfield.

The Quadra case was harsh on insureds, suggesting a pretty high bar for how unreasonable insurer investigations would need to be to lead to claimable damages, said Smart. “This is one to watch though as each case is quite circumstance-specific and we would suspect a more punitive judgment for insurers is likely to come through in due course. In market-wide terms, this would be a positive development to make sure insurers are at least wary of processing claims too slowly, while obviously being rightly entitled to investigate,” he said.

By far the most well-documented aspect of the Insurance Act is Section 11 and it remains to be tested, according to Rosenfield.

“Section 11, in a nutshell, is intended to prevent an insurer relying on a breach of a warranty or condition where the breach is unrelated to the loss. The precise meaning and effect of Section 11 has been hotly debated, and specifically whether it imports a causation test or not. The impact of the first case on Section 11, as and when it arrives, will be hugely significant for both insureds and insurers, and may even fall to be determined by the Supreme Court, given its importance,” he said.