The Insurance Act: will UK insurance industry lose its competitive edge?

The Insurance Act 2015, which comes into force in the UK in August 2016, has been hailed as the biggest shake-up of insurance law in the country since 1766 and it will transform the way that insurance is conducted, say industry experts.

Insurers can no longer ‘sandbag‘ their underwriting with warranties, say lawyers specialising in this field, and to ensure ‘fair presentation of the risk‘, they will need to spend more time and money on getting to know their clients’ businesses and specific needs inside out.

In essence, the new act puts the insurers, rather than policyholders and their brokers, in the dock—responsible for ensuring that policies are right for customers and that they understand their implications fully.

Tanguy Le Gouëllec de Schwarz, a partner at law firm Goldberg Segalla’s London office and insurance law specialist in UK and French courts, believes the act represents a game-changer for the industry—and a more momentous shift than many insurers yet realise.

New rules

In line with other experts, Le Gouëllec de Schwarz outlines that the two most significant changes within the act are around (i) the diminished potential to use warranties, a very English insurance term; and (ii) ‘fair presentation of the risk’: under the new act, the onus on disclosure is no longer borne solely by the insured.

“Being able to use warranties helped the underwriter if he or she was unsure of a certain aspect of the risk. That flexibility will no longer be available. It’s something that underwriters will have to think very carefully about, especially around renewals,” says Le Gouëllec de Schwarz.
“Also, warranties will be treated very differently; it’s very likely that breach of warranty may no longer be upheld in the way it was under the Marine Insurance Act 1906 by a court. Insurers used to have the law behind them, but the act changes that.”

Essentially, this means that the amount and quality of information that policyholders, and their brokers, will be required to provide to insurers will increase exponentially—and understanding this is key to staying on the right side of the new law.

Communication between brokers and policyholders, and brokers and insurers has always been important, but under the new act the need to drill down and understand the intricacies of a policyholder’s business has been catapulted to a new level.

“At the moment, the onus is on the insured to ensure that all relevant information is provided to the insurer. With the new act, there is no longer a one-way flow, it will be a two-way system,” explains Le Gouëllec de Schwarz.

“The insurer will have to ask the right questions to make sure that all the information is provided, for example: ‘let’s look at this area in more detail … how do you handle it?’,” he says.

Implications for London

“The attraction of the London Market was that the cost of underwriting was low. Insurance currently costs less in London than on the continent. Under the new act, insurers will have to spend a lot more time and money on analysing the information and establishing systems/processes in case things go wrong,” says Le Gouëllec de Schwarz.

So, as well as recalibrating the balance of power in the insurer–broker–insured relationship triangle, the new act could be kissing London’s competitive edge goodbye.

The city, once a haven for policyholders seeking insurance with the vaguest of details, secure in the knowledge that some cover-all warranty would make up for the shortfall in their information, is now coming into line with the rest of Europe.

With the insurance industry currently a fairly soft market, insurers themselves will have to cover the increase in costs that the processes of better understanding the risk will involve.

Avoiding accountability

Sushma MacGeoch, partner in the insurance team at Bond Dickinson, explains that under the old law, insurers could avoid liability, by proving a failure by the insured to disclose all material information—even if it was unrelated to the loss, as long as it was in some way relevant to assessment of the risk.

“Under the Insurance Act 2015, an insurer will be entitled to avoid the policy entirely (in the absence of fraud) only where the breach of the duty of fair presentation is ‘deliberate or reckless’ and where the insurer can show that it would not have entered into the contract had it known the information, or would only have done so on different terms,” says MacGeoch.

“The requirement of proving that the insured’s failure to disclose information was ‘deliberate or reckless’ will be very difficult for insurers to meet.
“The burden of proof on insurers wishing to avoid policies is now significant and is likely to lead to a dramatic downward trend in insurers pursuing avoidance of policies.”

Construction and insurance barrister Paul Reed, QC, commenting on the new Insurance Act, adds: “Insurers have always appreciated the need to know their clients and understand their businesses, but after the act comes into force it will be essential, as there will no longer be any remedy for breach of the duty of good faith, and non-deliberate remedies for non-disclosure misrepresentation are likely to be proportionate.”

Reed, who has regularly instructed in complex insurance disputes, often raising multi-jurisdictional issues, says that it definitely won’t be ‘business as usual’.

“Insurers need to understand that their underwriters may be treated as having information held by the claims department or reports produced by surveyors or medical experts for the purpose of assessing the risk,” says Reed.

Under the new act, failure by a broker to ask the right questions, and prudently question any potential risks, could have dramatic consequences.

Different strokes

The new act represents varying challenges across different industry sectors.

Michael Wood, insurance lawyer at law firm Keystone Law, believes that the industries most likely to find the transition to the new law challenging will be those with large pyramid structures.

“I mean firms where the senior management are unaware of what is happening in the lower depths of the business—think Barings Bank and Nick Leeson, who busted the bank by carrying out trades in Singapore which the bosses in London did not understand or were ignorant of,” says Wood. “Those affected could be banks and companies with a global reach.”

Wood points out that as well as requiring better two-way communication between insured and insurer, internal communications within the insurance companies themselves will have to be cranked up a few notches.

“With regard to insurers, the abolition of the uberrima fides rule should mean that insurers will have to look more closely at how the insureds carry out their businesses. Also, the principle that senior management must know what is happening in the lower levels of the business will apply to insurers as well as to insureds,” he says.

Head: Insurance Act at a glance

Richard Ingleby, managing director of specialist business insurance broker Castlemead, outlines the main pros and cons of the Insurance Act for both sides.

Positives

Negatives