Judgments needed as interpretation of Insurance Act proves tricky

Key aspects of the Insurance Act and damages for late payment are proving difficult to interpret and will need to be tested by the courts, according to legal experts. When the Insurance Act 2015 came into force on 12 August 2016, it was the most significant change to UK insurance contract law since the Marine Insurance Act 1906. It restricted the ability of insurers to deny claims outright on grounds of non-disclosure or breach of warranty by introducing proportionate remedies. In return, policyholders are expected to disclose material risks in a proactive and clear way. The Act applies to all commercial insurance policies written in the UK since August 2016, unless insurers and policyholders agree to ‘contract out’ all, or part, of the Act. The Act has been broadly positive, according to Paul Lewis, global head of the contentious insurance practice at Herbert Smith Freehills, Airmic’s preferred service provider on insurance law issues. “The Act has created an opportunity to take a fresh look at the disclosure process, encouraging brokers and policyholders to engage and consider what to disclose and how to disclose it. That can only be a good thing for all parties. So, a cautious welcome for the Act at the moment,” said Mr Lewis. The Act has already led to improvements in disclosure, according to John Ludlow, chief executive of Airmic. “Since the Act was implemented, disclosure has become more thorough and transparent, while data dumping has now largely ceased. Progress has been slow, but pending court decisions are likely to accelerate change,” he said. Mr Ludlow warned insurance buyers not to be complacent about the Insurance Act. Despite much noise surrounding its implementation, the legislation has attracted limited attention since. However, there was always likely to be a lag between the Act’s implementation and interpretation by the courts, said Mr Ludlow. Litigation will test the Act, with implications for insurance buyers and insurers, he continued. “Only when claims go to court will the implications of the Act come to light. As the law is clarified and develops, we will see an acceleration in the change in behaviour,” he said. So far, Young v Royal and Sun Alliance is believed to be the first and only case decided in relation to a policy under the Act. The insurer denied a fire claim on the basis that the policyholder had failed to disclose material information. However, the case centred on whether the insurer had waived disclosure and did not test key aspects of the Act. But more significant judgments are likely during the next year or so, according to Mr Lewis. “As far as I am aware, there has not been a significant judgment under the Act. We are still waiting for proper analysis of the Act by the courts. I understand that there are some cases underway, but I am not aware of any that are awaiting judgment,” he said. “However, I would be surprised if we did not see some cases before the end of the first half of next year,” he added. It is almost three years since the Act was implemented, but the number of disputed commercial insurance claims has not noticeably changed, according to James Deacon, partner at DAC Beachcroft. “In my experience of settling claims under the Act, there has not been a change in the number of disputes,” he said. However, there are aspects of the Act that are open to interpretation and likely to be subject to judicial scrutiny in the next two to five years, said Mr Deacon. The application of remedies for breach of duty to make a fair presentation and damages for late payment are two such areas, he said. “Time will tell how many disputes will end up in a trial, but I expect there will be some in due course. Future judgments will give clarification as to how the Act should be interpreted and how proportional remedies are to be applied,” said Mr Deacon. The Act requires an insurer to apply proportional remedies in the case of non-disclosure, considering how they would have underwritten the risk had they known of the material facts that were not disclosed. However, the application of proportional remedies in practice is not as easy as the Act suggests, according to Mr Deacon. “In the cases we have dealt with under the Act, the application of remedies is not always straightforward. Before, it was fairly black and white as an insurer could either avoid the policy, and refuse to pay claims, or affirm the existence of the policy. But now they have to look at what underwriters might have done had they been provided with all the facts. In many cases, this will be a lot more nuanced than simply referring to an underwriting manual for the answer,” he said. The Act is intended to apply to all commercial insurance and reinsurance contracts. However, it is not always clear how it applies to niche and more esoteric areas of insurance, explained Mr Deacon. For example, provisions in the Act relating to warranties and terms not relevant to the loss are not easy to interpret in the context of, say, after-the-event insurance, he said. “I would expect future judgments to clarify how the Act will apply to particular types of policies and areas of insurance [that] were perhaps not at the forefront of the draftsman’s mind when the Act was first introduced,” said Mr Deacon. Clarification and judgments are also sought on another aspect of insurance law – the new concept of damages for late payment. Introduced by the Enterprise Act 2016, damages for late payment is new and novel in English law, according to Mr Deacon. “The Act only recently came into force, but we are likely to see judgments on damages for late payment in due course,” he said. “We have already seen claims where policyholders and brokers have sought damages for late payment. It seems this may be being used as a negotiating tool to drive up the potential settlement value of a claim,” he added. The Enterprise Act gives buyers the right to recover damages from an insurer that has not paid a valid claim in a “reasonable time”, although it is unclear what a court would consider “reasonable”. The right to recover damages for late payment is thought to be particularly relevant for small companies, where late payment could result in financial difficulties. The right is likely to be most challenging for complex or contentious claims that take time to investigate and settle. Policyholders also can only recover additional losses suffered as a result of late payment. In many cases, companies will not suffer large additional losses from late payment, although large claims can be make-or-break. For example, British Steel, which went into liquidation in May 2019, is seeking damages for late payment after its insurers denied a £30m property claim.

Judgments needed as interpretation of Insurance Act proves tricky

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