UK business insurance rules to change

UK business insurance rules to change

The UK Treasury today announced legal reforms that will prevent insurers from rejecting claims from business customers on technical grounds and for tenuous reasons.

A UK Government statement was released Thursday July 17, announcing that the reforms would cover three main areas.

On disclosure and misrepresentation in business and other non-consumer insurance contracts, the new bill amends the duty on business policyholders to disclose risk information to insurers before entering into an insurance contract. The duty of “fair presentation” of the risk is introduced. It also provides the insurer with "a number of proportionate remedies for breach of the duty of fair presentation".

On warranties, the bill abolishes “basis of the contract” clauses. The statement asserts that these clauses "have the effect of converting pre-contractual information supplied to insurers into warranties without further discussion". The bill also provides that the insurer’s liability should be suspended, rather than discharged, in the event of a breach of warranty. This would mean that a policy would not be repudiated, merely suspended until the breach was remedied.

The statement also claimed that the bill would provide insurers with "clear, robust remedies when a policyholder submits a fraudulent claims".

The Law Commission had previously criticised the current regime. In January 2014 it released, in partnership with the Scottish Law  commission, draft clauses on a reform of insurance contract law.

It stated that it proposed to retain the present duty of disclosure, but opined that "the current law does not work as well as it should. It is unclear, and the consequences of breaching the duty are harsh."

The Law Commission noted that the duty of disclosure was poorly understood, leaving the insured to struggle with the concept of what facts are or are not "material". The Commission noted that "it is difficult for an entity whose main business is not insurance to deduce what facts an insurer is likely to be interested in".

This requirement, based on an Act passed more than a century ago, "encourages data dumping". The Commission also said that the 1906 Ac t encourages "underwriting at claims stage". In other words, insurers could take a passive approach to the presentation of a risk, asking no awkward questions, and only applying themselves to the status of the contract if and when a claim comes in.

The Treasury is reported to be planning to dilute some of the Law Commission's proposals, while applying most of them. The two areas of contention relate to part 4 of the Commission's recommendations – Damages for late payment, and another that would have reduced insurers' ability to avoid payment by arguing that a policyholder had breached the terms and conditions of the contract.

Insurers had taken three main lines in opposing the reforms. One was that it could damage UK insurers' international competitiveness, because UK premiums would have to rise to compensate for the additional payments that would be made; a second was that premiums would also rise for domestic customers, and a third was that, even though the 1906 Act permitted repudiation on many grounds, insurers rarely enforced them.

However, insurers have not been unanimous in their opposition. While Lloyd's syndicates have been most vociferous in arguing for a maintaining of the status quo, leading UK regional players such as Aviva have conceded that the 1906 Act is "antiquated".

On the release of the report, Aviva UK and Ireland General Insurance CEO Maurice Tulloch said: "The bill is a very welcome development which will deliver significant benefits to both customers and the industry". 

The January proposals can be found here.

The Governmental release is here.

Commenting on the announcement, Pinsent Masons Insurance team partner Alexis Roberts said that "the changes proposed in the Bill are aimed at bringing business insurance in line with similar changes effected in relation to consumer business. Insurance contract law has needed updating for many years and this programme of development is definitely welcome."

However, Roberts noted that as a result of the bill insurers would need to make sure their policy wordings were updated in order to ensure they wsere more explicit about the types of risk that might be excluded in the event of a claim. "They will also need to make sure they ask potential policyholders the right questions at proposal stage in order to have sufficient information to assess the risk properly; not asking the right questions could make it harder going forward to decline claims which they may not have intended to cover,” said Roberts.

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