The Insurance Act 2015

A New Regime for Commercial and Marine Insurance Law

Malcolm Clarke, Baris Soyer, Malcolm Clarke, Baris Soyer

• Publisher: Informa Law from Routledge
• Year: 2016
• ISBN:
  9781134832958
• Edition: 1
• Topic: Law
• Subtopic: Law Theory & Practice
• Index: Law

The Insurance Act 2015 represents the first major reform of English commercial insurance law for many years. Its impact will be felt not only in England, where it will greatly affect both maritime and commercial insurance practice, but also elsewhere where English law is the law of choice in insurance contracts.

The Insurance Act 2015: A New Regime for Commercial and Marine Insurance Law analyses in depth the key aspects of the Act and extensively restates and modifies a number of legal principles applying both at common law and under the Marine Insurance Act 1906. Offering much more than the usual commentary on legislation, this book provides critical in-depth analysis of the important topics as was all coverage of areas likely to spawn disputes in future.

Written by leading practitioners and academics in the field, this book offers comprehensive, coherent and practical legal analysis of the changes introduced by the Insurance Act 2015. It is a key point of reference for practitioners, insurance professionals and academics.

Chapter 1
The Insurance Act 2015

Background and philosophy

David Hertzell*

1.1 Introduction

Over one hundred years after some of the original legislation the UK has concluded a series of insurance law reforms resulting in three new Acts of Parliament. These are based on extensive consultation with the insurance market and policyholders undertaken by the UK law reform bodies – the Law Commissions in England, Wales and Scotland. Amongst other changes the reforms have created a new framework for the provision and transfer of information when insurance is purchased and have provided new remedies for insurers. The concept of proportionality, which is familiar in many other jurisdictions, has been introduced into English insurance law. Due to the large amount of international insurance written in London the reforms are likely to have a considerable effect outside the UK.

1.2 History

Insurance allows businesses and consumers to protect themselves against risks that they could not otherwise afford to cover. It has often been described as the oil in the wheels of capitalism. By laying off unaffordable risks individuals and businesses are able to do things they would otherwise fear to do. The development of insurance in London has underpinned wider economic growth in the UK and subsequently internationally. The Marine Insurance Act (MIA) 1906, on which UK insurance law was based, has been copied widely in other countries linked to the UK.¹ The insurance industry in the UK is the largest in Europe and remains the third largest in the world.² Insurance is a crucial UK export. Its importance is recognised in the government’s Insurance Growth Action Plan published in December 2013. The size of the UK insurance market has meant that English insurance law has had a worldwide influence.

Despite this success, the law upon which the industry is based, comprising the rules which regulate insurers’ relationship with their policyholders, has been criticised throughout the second half of the twentieth century. UK insurance law has consistently been described as archaic, unclear and unfair. Sometimes this resulted in action. In 1957 the UK Law Reform Committee identified possible reforms.³ In 1980 The English Law Commission recommended changes.⁴ Reform was also urged by a report from the National Consumer Council in 1997.⁵ In 2002 an eminent subcommittee of the British Insurance Law Association (BILA) consisting of judges, lawyers, brokers, insurers and loss adjusters declared itself “satisfied that there is a need for reform” and supported review by the Law Commission.⁶ In 2006 the Law Commission took up the challenge again and began the third major review of insurance law.

How did this situation arise? To answer, it is necessary to look at the origins of insurance law in the UK. These origins lie with the practices developed by merchants in the City of London which led to the leading case of Carter v Boehm in 1776.⁷ The case concerned the goods of Roger Carter who was the governor of Fort Marlborough in Sumatra. The goods were lost when the French invaded during the Seven Years War. In a leading judgment Lord Mansfield laid out the principles of an insurance contract and the parties’ obligations when insurance was purchased. The principles set out by Lord Mansfield in Carter v Boehm were further developed during the course of the nineteenth century. Insurance law in the UK was then codified as part of the great nineteenth century series of codifications. As its title suggests, the MIA 1906 is a piece of commercial legislation largely concerned with shipping. It reflected the time in which it was conceived and the market for which it was drafted. The Act has remained the basis of the law of insurance until the recent changes.

The economic and social context in which Lord Mansfield decided Carter v Boehm was very different to that which developed during the second half of the twentieth century and continues to this day. Insurance at the time was essentially a commercial arrangement made between knowledgeable businessmen. The range of products on offer was very limited and the market was dominated by marine insurance. Communications were slow and poor. There was very limited ability to store or process information. Underwriters were vulnerable and needed to be protected by the law. It was legitimate to claim that all the relevant knowledge was held by the insured and that the underwriter could be a passive participant when the insurance contract was agreed.

Today much has changed. Like most western economies the UK is dominated by consumer activity. The concept of the consumer has developed since the Second World War and would have been incomprehensible to eighteenth century merchants or nineteenth century legal draftsmen. Communications across the globe are now virtually instant. Information is widely available. Insurers, brokers and policyholders have the ability to store, analyse and process data in ways that could not have been foreseen even a few years ago. Improvements in IT have allowed businesses to span the globe and to grow to sizes that would previously have been unimaginable.

Insurance itself has also changed. The range of insurance products available and the risks that are insured are now much wider and more diverse. Insurance is no longer dominated by the needs of the marine industries. Likewise, senior insurance lawyers, including judges, emerged in the later twentieth century with backgrounds and experience which lay outside marine insurance. Uninfluenced by marine insurance preconceptions judges began to express concern about how the law functioned in other contexts.

English law has the ability to keep pace with change by developing new precedents. Court decisions can reflect contemporary social and economic conditions and apply existing legal principles to new facts and situations in a way that produces an acceptable outcome. To an extent, this has occurred with insurance law but the courts have struggled to keep pace with rapid change and have only been able to go so far. The MIA 1906 is drafted in clear, forthright terms that hamper the ability of judges to develop the law. In addition, in recent years, consumer disputes have generally been resolved by the Financial Ombudsman Service (FOS) and many commercial disputes by arbitration. Neither of these mechanisms produces new legal precedents.

Both regulators and insurers recognised these problems. The friction between the principles in the Act and consumer insurance became increasingly intense. As a result, the insurance industry agreed a series of guides and codes to mitigate the problem.⁸ The regulators too produced rules that differed from the MIA 1906. In 1981 insurers set up the voluntary Insurance Ombudsman Bureau (IOB).⁹ In 2000 the Financial Services and Markets Act replaced the IOB with the FOS. The FOS is not a voluntary scheme and it has statutory powers. The ombudsman is not required to follow the law but can make decisions based on what is fair and reasonable in all the circumstances of the case. Over the years the FOS began to develop a framework to resolve consumer and small business disputes that owed little to the MIA 1906.

Whilst well-intentioned these initiatives had an unfortunate effect. The outcome of a dispute would depend on who decided it and whether the policyholder was classed as a consumer, small business or larger business. The law governing the formation of insurance contracts and disputes differed from the rules that the (then) Financial Services Authority would apply in a regulatory context. This did not reflect well on the governance of the insurance market and created both cost and confusion. It undermined the certainty which English law traditionally provided. Some commentators claimed that the disparity between the various rules undermined trust in insurance particularly for consumers.

1.3 The Law Commissions’ project

At an early stage in the project to reform insurance law the Law Commissions in England, Wales and Scotland concluded that attempts by the market to resolve problems without reforming the MIA 1906 had failed. However, the attempts contained good ideas and confirmed that the market itself had concerns that the status quo could not continue. The solutions on which reform could be based were, therefore, likely to come from the market rather than any particular individual source. Moreover, if reform was to be successful it had to be supported by the majority of those in the insurance market and not regarded as something imposed from outside.

The Law Commissions began an intensive round of consultation which was to last eight years. First, the Commissions published a scoping study that confirmed the areas of law most in need of change. This was followed by a series of individual Issues Papers devoted to particular topics. The Commissions published three formal Consultation Papers developing the Issues Paper themes and the market responses. These were followed by two Final Reports, one dealing exclusively with consumer issues and the other with a range of topics including business insurance.¹⁰ In addition, members of the Commissions attended numerous market and individual meetings and participated in many seminars and other discussions.

As a result of this activity the Law Commissions were able to draw a number of broad conclusions on which the final reform proposals were based:

• The market for consumer insurance had developed in a different way to business insurance. The insurance products were different, they were sold in different ways and by different insurers, social policy was often important and the impact of IT was considerable. The availability of data meant that the perceived asymmetry of information between insurer and insured that had shaped the MIA 1906 was much less relevant. At a practical level, brokers who could provide guidance to consumers were less involved than in the business insurance market. Finally, disputes were generally resolved by the FOS and in effect a separate body of jurisprudence was emerging that was not based on the Act. The Commissions decided that reform of the MIA 1906 should, therefore, have two limbs – one for consumers and one for businesses – but in cases where it was not necessary to draw distinctions, common solutions should be adopted. The market supported this division which reflected its own commercial approach.
• The risk pools for business insurance are generally smaller and potentially more volatile than those for consumer risks. Businesses also cover a much wider range of risk exposures. Insurers are less likely to know the details of business risk than they are consumer risk which by its nature and volume is more predictable.
• The MIA 1906 remained more relevant for business insurance. Some of its principles had stood the test of time even though others clearly had not. The Act had given rise to many years of legal precedent and certain expressions had acquired clear and settled meanings. Where possible, valid principles and accepted language should be carried forward into any new legislation.
• The consumer reforms should provide a mandatory regime.
• The reforms applicable to business, on the other hand, should provide a default regime. It would be open to the parties to contract on different terms if they wished to do so. This was particularly important for the London Market¹¹ in the UK where much commercial insurance is international and the relationship between the insurer and insured might be quite distant. The Commissions also concluded that it would not be possible to produce law that could be tailored to cover every eventuality and every different type of business risk, and that the parties would need to fill in the gaps contractually – as happened with the MIA 1906.
• No proposed reforms should be included in the final legislation unless there was very strong support from all sides of the insurance market.
• The reforms would apply throughout the UK.

1.4 The reforms

The Law Commissions’ insurance project resulted in three new pieces of legislation:

• The Third Parties (Rights against Insurers) Act 2010
• The Consumer Insurance (Disclosure and Representations) Act 2012
• The Insurance Act 2015.

All three Acts were enacted following the Law Commissions’ procedure for uncontroversial bills.¹² That allows bills which enjoy widespread support to be introduced into the House of Lords and considered by a specially appointed committee. Although the bill is thoroughly reviewed it spends less time on the floor of either the House of Lords or the House of Commons and, therefore, takes up less parliamentary time. The absence of available time has often resulted in the failure of necessary and worthy law reform which, whilst desirable, is not perceived to be a high political priority.

1.4.1 Third Parties (Rights against Insurers) Act 2010

The Third Parties (Rights against Insurers) Act 2010 was based on an earlier consultation and improved the mechanisms by which a party with a claim against an insolvent insured can recover compensation from the relevant insurer. It updates an earlier piece of legislation with the same name dating from 1930. It is not directly concerned with the contractual arrangements agreed between the insured and the insurer, although as a general principle the third party will have no better right against the insurer than the insolvent insured would have had.

1.4.2 Consumer Insurance (Representations and Disclosures) Act 2012

The Consumer Insurance (Representations and Disclosures) Act 2012 (CIDRA) covers the placement of consumer insurance and provides for what should happen if the consumer gives incorrect information. CIDRA also deals with group insuran...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• CONTENTS
• Biographies
• Foreword
• Preface
• Table of cases
• Table of statutes
• CHAPTER 1 THE INSURANCE ACT 2015: BACKGROUND AND PHILOSOPHY
• CHAPTER 2 THE FAIR PRESENTATION OF COMMERCIAL RISKS UNDER THE INSURANCE ACT 2015
• CHAPTER 3 THE INSURER’S DUTY OF GOOD FAITH: IS THE PATH NOW CLEAR FOR THE INTRODUCTION OF NEW REMEDIES?
• CHAPTER 4 THE FUTURE OF WARRANTIES AND OTHER RELATED TERMS IN CONTRACTS OF INSURANCE
• CHAPTER 5 REMEDIES FOR FRAUDULENT CLAIMS UNDER THE INSURANCE ACT 2015
• CHAPTER 6 LATE PAYMENT OF CLAIMS: BETTER, BUT BY NO MEANS PERFECT
• CHAPTER 7 CONTRACTING OUT OF THE INSURANCE ACT 2015 IN COMMERCIAL INSURANCE CONTRACTS
• CHAPTER 8 CONCLUSION: GENERAL REFLECTIONS ON THE LAW REFORM
• Appendix 1: Marine Insurance Act 1906
• Appendix 2: Insurance Act 2015
• Index