The new Insurance Act 2015, the Enterprise Bill 2016, and the preceding Consumer Insurance (Disclosure and Representations) Act 2012 will make a significant impact upon the pre-existing insurance legislation. Mr Patrick Perry and Ms Jessica Lee of Clyde & Co Hong Kong elaborate.
Over the last 18 months, the UK has undertaken a rigorous shake-up of its insurance law, and has fundamentally changed the balance of rights between insurers and their insureds, particularly where consumers are involved.
Principles of insurance legislation which have been in place for over 100 years have been (and are being) over-turned. The Insurance Act 2015, the Enterprise Bill 2016, and the preceding Consumer Insurance (Disclosure and Representations) Act 2012 make dramatic changes to the pre-existing legislation.
This will impact upon any insurance contracts (including reinsurance contracts) that are subject to English law. It may also stimulate a debate in Hong Kong, and Singapore and other Asian countries as to whether their own legislation should follow suit.
The Insurance Act 2015
The Insurance Act 2015 (IA 2015) received Royal Assent on 12 February 2015 and will come into force in England & Wales on 12 August 2016. The predominant objective of IA 2015 is to modernise and consolidate the existing law. It will apply to all contracts of insurance, reinsurance and retrocession, as well as variations, after that date.
The Consumer Insurance (Disclosure and Representations) Act 2012 severely curtailed the coverage arguments available to insurers in consumer policies. The IA 2015 applies to non-consumer contracts. It introduces significant changes to the current regime on, among others, disclosure requirements; remedies for material non-disclosure and misrepresentation; warranties; and remedies for fraudulent claims made against insurers. In general, it makes it harder for insurers to avoid claims as a result of technical breaches by the insured.
The new regime changes the disclosure duties upon an insured when purchasing insurance. There is now a requirement for businesses to carry out a reasonable search, volunteer information, and make a fair presentation “in a manner which would be reasonably clear and accessible to a prudent underwriter” (section 3(3)(b) of IA 2015).
Insurers, on the other hand, will be under a positive duty to inquire and will be presumed to know information that is common knowledge or they would be expected to know in their ordinary course of business. Under the new IA 2015, insurers will only be allowed to avoid a policy on grounds of material non-disclosure or misrepresentation if it can be shown that it was a deliberate or reckless act of the insured.
Another significant change is that all warranties will become “suspensive conditions” (Section 10, IA 2016) and the “basis of contract” clause, which turns representations into warranties, will be abolished.
Under the new regime, breaches of warranty, where remediable, will only render suspension of coverage for such period in breach. This means that coverage will not be prejudiced or discounted once the breach has been remedied.
A further, potentially very significant, amendment to the existing law is to introduce the need for a causal link between the breach and the loss. If the insured can show that non-compliance with the particular term or warranty would not have increased the risk of the loss which actually occurred, Insurers cannot rely upon that breach.
IA 2015 has also codified and strengthened insurers’ remedies against any fraudulent claim. In addition to the current option to recover any sums paid in respect of a fraudulent claim, under the new regime, insurers will have an additional option to terminate the contract from the date of the fraudulent act, keeping the premium concerned.
The Enterprise Bill 2016 - the new Section 13A of the Insurance Act 2015
On top of the above, a further provision (section 13A of the Insurance Act) concerning damages for late payment or non-payment of insurance claims (the New Provision) was introduced in the Enterprise Bill that has recently received Royal Assent. The New Provision will take effect from 4 May 2017.
At present, insurers are not liable in damages for their delay or failure to pay a valid claim. The New Provision makes it an implied term in every insurance contract (entered into after 4 May 2017) for insurers to pay any sums due in respect of a claim made by an insured “within a reasonable time”.
The New Provision will take into account the time reasonably required by an insurer to investigate and assess the claim. What is reasonable will vary depending on the size and complexity of the claim, the type of insurance, and other matters.
The remedies for breach will include contractual damages based upon what was reasonably foreseeable at the time of contracting and a claim must be brought within one year of the expiry of the “reasonable time”.
The New Provision is likely to lead to considerable argument over how quickly insurers must respond. Inevitably, there will be a flurry of correspondence threatening damages claims, as soon as the provisions come in. Insurers will want to review their internal claims handling guidelines for coverage issues. Questions will also arise as to whether privileged advice should ever be disclosed to justify insurers’ position on coverage.
The effect of the new IA 2015 may be contracted out by mutual agreement in non-consumer contracts. The contracting out provision may be of some comfort but it will not provide a safe harbour for deliberate or reckless breach by insurers. Insurers must also take sufficient steps to explain and draw to the insured’s attention the contracting out terms, which must be clear and unambiguous.
Going forward, we would expect many insurers will want to rely upon these contracting out provisions, to limit their potential exposures.
What it means for the insurance industry in Hong Kong?
At present, lawmakers in Hong Kong have not indicated any plans to follow the recent legislative developments in the UK. We would expect they will carefully monitor how these new proposals are received before deciding upon what domestic changes should be made.
However, as set out above, the changes in the IA 2015 will come into force for contracts entered into after 12 August 2016 which are expressly or impliedly subject to English law. Whilst local policies are likely to be subject to Hong Kong law, it may well be that any reinsurance contracts entered through the London market are subject to English law, and so the act could have immediate relevance.
Insurers who wish to contract out of the IA 2015 provisions will need to do so expressly, and ensure adequate notice is given. We would also anticipate insurers will want to rigorously review their internal procedures on coverage investigations, in advance of s. 13A of the Insurance Act coming into force, to give themselves the best available protection against a damages claim for late or non-payment.
Mr Patrick Perry is a Partner and Ms Jessica Lee is an Associate, both at Clyde & Co Hong Kong.