The Insurance Act 2015 (“the Act”) was hailed by some as “the most profound shift in UK commercial insurance law ever”.
Despite the long run up (8 years under review by the Law Commission/Scottish Law Commission) it’s unclear how long the jump has been, and misconceptions still seem to exist that the Act has somehow abolished policy avoidance in favour of more insured-friendly remedies. Whilst it is true that the Act (as a whole) attempts to redress certain imbalances in the law between insurers and insureds, avoidance still remains a remedy for insurers that can be deployed in appropriate circumstances.
Under the old law, avoidance was an all or nothing, bilateral remedy. If, prior to policy inception, the applicant materially misrepresented any fact or circumstance, or failed to disclose any material fact or circumstance, and the underwriter was able to prove that the allegedly material misrepresentation or non-disclosure induced him/her into entering into the contract of insurance, the insurers may have been able to avoid the policy because the insured would have been said to have breached the “duty of utmost good faith”. Avoidance would erase the policy from existence and put the parties back into the same position they would have been had the contract not been formed (i.e. the insurers would not have to pay any claims, but would have to return the premium).
The new law amalgamates avoidance into a suite of remedies available to insurers if the insured breaches its “duty of fair presentation” (changed from the aforementioned duty of utmost good faith as formerly prescribed by s.17 of the Marine Insurance Act 1906). These remedies can be found in Schedule 1 of the Act () but, in summary, if the breach of the duty of fair presentation (i.e. prior to inception the insured has materially misrepresented any fact/circumstance and/or failed to disclose any material fact/circumstance):
- was “deliberate” or “reckless”, insurers may avoid the policy, refuse to pay all claims and keep the premiums paid; or
- was not “deliberate” or “reckless”, insurers may:
- avoid the policy, refuse to pay all claims but must return the premiums paid if the underwriter can prove that s/he would not have written the risk at all;
- retrospectively amend the terms of the policy if the underwriter can prove that s/he would written the risk on different terms (e.g. an exclusion of specific matters); or
- proportionately reduce the value of any claim if the underwriter can prove that s/he would have charged a higher premium (the percentage increase in the premium will correspond with the percentage discount applied to the claim).
There is currently no case law on what is or is not a “deliberate” or “reckless” breach, but it is presently considered that: (i) a breach will be “deliberate” if the insured knows that s/he is in breach (e.g. fraudulent misrepresentations/non-disclosures); and (ii) a breach will be “reckless” if the insured does not care that s/he is in breach (e.g. grossly negligent misrepresentations/non-disclosures).
So, the Act has not killed off policy avoidance, it’s just now part of a wider suite of remedies. Less black and white, more shades of grey. As far as D&O liability is concerned, there is a potential paradox here. Pre Act D&O covers (the better drafted contracts) may actually may have contained more insured-friendly language prior to the clamour to have the Act provisions hard wired into policies. Some of the residual protections remain, such as severability, but those that contained non-avoidance clauses which would only allow insurers the ability to void policies in the instance of fraud may find themselves in a theoretically better position post Act implementation than prior to it. The good news is that these kinds of disputes have always been infrequent (compared to, say, late notification disputes). The actuality is that it will take time for case law to bleed into the narrative on the Act to assess how long the leap was. In the meantime, we stand by the sand pit, tape measure in hand…