UK’s Insurance Act benefitting buyers but fails to stem tide of litigation

The Insurance Act has put buyers in a much stronger position when negotiating claims but it has not stemmed the tide of claims litigation in the hard market, legal experts have told Commercial Risk Europe.

The Insurance Act 2015, which came into effect in August 2016 and affects all policies bought in the UK and London market, has been largely beneficial for commercial insurance buyers, although not to the extent, or in all the ways, that were intended, said Rob Smart, chief technical officer at insurance contract and claims consultant Mactavish.

According to Smart, the Insurance Act has not resulted in an expected spate of litigation to pin down its deliberately flexible concepts, such as the need to carry out a reasonable search.

“Part of it is because the courts, and insurance bar, are at capacity dealing with the normal hard market dispute uptick and the ongoing glut of Covid BI. But part of it is that the Act creates a more balanced framework in which to resolve claims without needing to go to court, and this must then be viewed as a success from a legislative point of view,” he said.

But while the new rules have not sparked a flood of related litigation, they have also failed to radically reduce claims disputes, Smart said. In fact, recent Mactavish research shows that litigation to recover rejected claims from insurers tripled between 2018 and 2022.

Neither has Fenchurch Law seen a reduction in commercial insurance claims disputes since the Insurance Act was implemented. “From our perspective, it doesn’t feel as if there are fewer coverage disputes. Rather, we suspect, the number of claims is broadly the same – it’s simply that insurers have tailored their arguments accordingly to fit within the scope of the Act,” said Alex Rosenfield, associate partner at the policyholder law firm.

However, the Insurance Act is leading to fairer outcomes for buyers, according to Mactavish, which advises companies on insurance contract wordings and law.

“We have seen insurers take non-disclosure arguments into arbitration that may have sufficed pre-Insurance Act 2015, but are no longer adequate,” said Smart. “They need to prove that their underwriting was sufficient and the impact of any allegedly non-disclosed information. If they can’t do this, the insurer’s ability to deny the claim is much weaker than it was before, and this filters directly into the level of commercial settlement,” he said.

On conditions and warranties, if an insured has failed to follow the terms of the policy in a way that is relevant to loss, their position is still undermined. But insurers are much less likely to be able to rely on a purely technical condition breach, or something that does not affect the relevant risk, explained Smart. “This doesn’t just affect outcomes in court, it filters down into every claim negotiation and helps shape a fairer outcome,” he said.

Rosenfield also believes the Act has had a positive impact for buyers. “In relation to claims, we are seeing more insurers seeking to apply proportionate remedies involving alleged non-disclosures, as opposed to the previous position where insurers’ only remedy was avoidance of the contract from inception, so there’s certainly been a levelling of the playing field in that sense,” he told Commercial Risk.

In cases involving non-disclosures, insurers are also taking heed of the fact that they, rather than the insured, bear the burden of proving what they would have done differently, according to Rosenfield. “Far more are putting their cards on the table at an early stage by providing their underwriting guidelines or criteria. That’s good news for insureds, as it means that they’ll be much better placed to assess the strength of the insurer’s position,” he said.

Surveys from the likes of BIBA and the CII suggest that there has been an improvement in the quality of risk information disclosed during insurance transactions in the years following the Insurance Act. While this rings true, there was a huge shortfall between the starting point of “standard” insurance information versus what is material for a large, complex risk, according to Smart.

“If anything, improvement has been greater in terms of presentation than it has been in terms of the breadth of information or extent of enquiries. There is still work to be done here,” he said.

Following the inception of the Insurance Act, there was an initial period when wordings were a “real mess” as the market adapted to the new regime with inconsistent and conflicting terms, unclear attempts to contract out, and mis-statements of remedies, according to Smart. While this took several years to resolve, the situation is now much more sensible, he said.

Overall, wordings are more “reasonable” because of the Insurance Act, he explained. But there are key limitations to what the Act covers, added Smart. For example, it outlawed basis of contract clauses but still permits other “unfair terms” provided they are explicit, such as “conditions precedent”, so that even a wholly immaterial breach of an insignificant term can be fatal to cover, he said.

The Act makes it easier to negotiate out unfair terms, Smart added. “A buyer still needs to be very wary before buying an off the shelf policy without checking it carefully, but once they do stipulate what’s needed they are more empowered to negotiate,” he said.

Several areas of insurance, such as warranty and indemnity (W&I) or marine have mainly sought to contract out of the Act wholesale. They have either imposed the previous, insurer-friendly regime, as with marine, or put in place their own bespoke requirements around disclosure and knowledge, such as with W&I, according to Smart.

“We often see this done incompletely and think it will be interesting if, and when, such intention is directly challenged in court in the context of the Act. Though we are not aware so far of any cases of this type,” he said.

Despite being billed as “policyholder-friendly”, the Insurance Act remains a demanding piece of legislation to comply with and shouldn’t be taken lightly, according to Smart. “The trap is that there is no consequence unless you have a claim, but once you do the impact of failing to comply can be disastrous and it’s too late to fix,” he said.

The Act sets out a framework for how all parties – buyer, broker and underwriter – should conduct an insurance transaction professionally and rewards those who do. “A huge elephant in the room is that most clients look first to their broker to advise them on what disclosure is required, yet almost all broker terms of business completely exclude advice relating to the Insurance Act,” said Smart.