How will the Insurance Act play out?

Readers of Commercial Risk Europe and their insurers are likely to see several years of uncertainty as key provisions are tested in court and the market irons out all the wrinkles. The Act, which is the biggest change to UK commercial insurance contract law in more than 100 years, applies to commercial contracts under English law. It makes it harder for insurers to play hardball on claims but requires buyers to employ a more structured and rigorous approach to disclosure and presentation of risk. The Act introduces a number of concepts and requirements around disclosure, proportional remedies for breach of warranty and contracting out, but without prescriptive rules or guidance.hideDisputes are expected and, in fact, should be welcomed because they will bring clarity. It is now for the courts to interpret the new law. So, during the next few years, insurers and buyers will need to carefully watch the progress of the Act and adapt their processes and wordings accordingly. Legal disputes are just one cause of uncertainty surrounding the Act. There are fears that some foreign buyers could easily be caught out by the new law, while captives have been slow to cotton on to the implications. Many risk managers in Europe and the US may be unaware of the Insurance Act and feel it does not apply to them, or that they can at least rely on brokers to ensure they comply. But this may be a dangerous approach. The Act applies to UK contracts and those written in London, a key market for international companies buying specialty coverages, as well as excess and reinsurance protection. If an overseas buyer fails to meet its duty of disclosure under the Act, it will be disadvantaged when it comes to a dispute. Brokers outside of the UK may not have full knowledge of the Act and might not flag disadvantageous terms to the attention of insureds. It is not hard to imagine a scenario where an ill-informed overseas buyer, unaware of their duties under the Act, is unable to claim in full from their London insurers. Buyers outside the UK need to give thought to how the Act may touch on their insurance arrangements, such as excess or reinsurance capacity purchased in London. They must take their brokers to task. There also remains a degree of work to be done in the UK. A survey of Airmic members carried out in the two weeks prior to the Insurance Act’s implementation revealed that more than 90% of respondents feel they are fully or relatively prepared for the law change. They appear equally satisfied with the preparedness of the wider market – 90% stated that their brokers are at least relatively prepared and 85% that insurers are at the same level. However, insurers and brokers continue to thrash out their interpretations of the Act, while brokers are challenging carriers over clauses and wordings drafted to accommodate the new law. At the same time, some buyers have called on the industry to establish common practices, in areas like contracting out and disclosure. David Hertzell, the former UK Law Commissioner responsible for drafting the legislation, told CRE last month that disputes and differences in interpretation are to be expected. However, in the long term the Insurance Act should result in a more professional approach to insurance placement, he said. Readers of CRE will hope he is right.

How will the Insurance Act play out?

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