New Insurance Act guide issued following Enterprise Act and Versloot/HDI Gerling ruling

The guide also takes into consideration the Supreme Court's recent decision in the Versloot Dredging BV v HDI Gerling case that refines the related sections of the Insurance Act on fraudulent claims. The Enterprise Act 2016 amends the Insurance Act 2015 that came into force in August. It introduces a new statutory "implied term" that claims will be paid in a "reasonable time". The new provisions take effect on 4 May 2017, a year after the Enterprise Act was passed, explained the LMA and IUA in a statement.hideThe association's updated guidance includes an analysis of the Enterprise Act 2016 provisions, an overview of the rules on contractual damages, information on relevant conduct of business rules of the FCA and Lloyd's minimum standards. It also provides further guidance on delegation of claims authority and the position in the subscription and reinsurance markets. The guide has been updated to include a new checklist for underwriters and claims staff on late payment of claims. The LMA and IUA joint statement also said that the guide has been revised to explain the significance of the UK Supreme Court's decision earlier this year in the Versloot Dredging BV v HDI Gerling case that related to fraudulent claims and how this refines the related sections of the Insurance Act. Expert insurance law firm Clyde & Co explained that in this case the Supreme Court held that the use of a fraudulent device does not amount to a fraudulent claim and so the claim is not forfeited. The law firm explained in a note issued after the decision this summer that Section 12 of the Insurance Act 2015 will clarify the remedy available to insurers for a fraudulent claim. But, it pointed out that the Act does not define what a fraudulent claim is. Clyde & Co argued that three categories are possible: The entire claim is fabricated. There is a genuine claim but it has been dishonestly exaggerated. There is a genuine claim but the insured supplies false information to support it either because they doubt the strength of the claim, or want to speed up payment. "The last category, known as fraudulent devices, was the subject of this (Versloot Dredging BV v HDI Gerling ) case," explained the law firm. "A vessel was incapacitated by a flood in the engine room. The insureds claimed against the defendant insurer, stating that the bilge alarm had been sounded on the day the ship was incapacitated. The judge at first instance found this statement to be a reckless mistruth, and found that the insured had a valid claim but that the entire claim was forfeited because the insured had used fraudulent devices (having recklessly misrepresented to insurers that an alarm had been heard by the Master of the ship). The Court of Appeal rejected the appeal from that decision, approving the judgment of Mance LJ in Agapitos v Agnew "The Aegeon" [2003] that a fraudulent device is a sub-species of a fraudulent claim. The Court of Appeal found that there was a public policy justification for the rule, namely to protect insurers from fraud," continued Clyde & Co. By a majority of 4:1, the Supreme Court did not uphold the appeal from that decision. It found that the use of a fraudulent device does not amount to a fraudulent claim and so the claim is not forfeit, explained the law firm. Lord Sumption said: "The position is different where the insured is trying to obtain no more than the law regards as his entitlement and the lie is irrelevant to the existence or amount of that entitlement... I do not accept that a policy of deterrence justifies the application of the fraudulent claim rule in this situation." Clyde & Co said that it was held that the lie used in a fraudulent devices claim is always immaterial to the claim, which is payable as soon as the loss arises. Lord Sumption added that the fraudulent devices rule therefore only protects the insurer "from the obligation to pay, or to pay earlier, an indemnity for which he has been liable in law ever since the loss was suffered". The Supreme Court also rejected the argument that the fraudulent claims rule is merely a manifestation of the duty of utmost good faith. "A distinction may be made, though, where a lie is told regarding a genuine claim for reasons other than claims presentation (e.g. to avoid liability to pay a higher premium). The decision also confirmed that where a claim is fraudulently exaggerated, the entire claim is forfeit, not just the dishonest element," explained Clyde & Co. "The Supreme Court's reasoning parallels the Law Commissions' reasons for the introduction of section 11 of the Insurance Act 2015. This provision provides that where there is non-compliance with a term that is designed to reduce the risk, insurers will not be able to rely on that non-compliance as a defence if the insured can demonstrate that such non-compliance could not potentially have increased the risk of the loss that actually occurred in the circumstances in which it occurred. Again, the law is concerned with what the insured is actually entitled to and seeks to remove an insurer's ability to decline a genuine claim by reason of something that is collateral to the claim," said Clyde & Co, summing up the positive news for the risk and insurance management community from this decision. As to the latest IUA/LMA guide, Kees van der Klugt, LMA's director of legal and compliance, said: "Everyone involved in preparing and agreeing policy wordings, and claims-handling, whether acting for principals or under delegated authority, should become familiar with the new law. The plan was to ensure that the updated material on the Enterprise Act was available well before the 1/1/17 renewal season, and we have achieved that." The revised guides are available to download from the LMA website at www.lmalloyds.com/act and the IUA website at www.iua.co.uk/insuranceact.

New Insurance Act guide issued following Enterprise Act and Versloot/HDI Gerling ruling

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