• 22 Dec 2015
  • By Bruce Hepburn and David Hertzell

The Law Commission has consulted with the insurance market over eight years prior to the Consumer Insurance (Disclosures and Representations) Act 2012 and the Insurance Act 2015. Both Acts were based on the market’s view of best practice.

The Law Commission separated consumers from businesses but, in accordance with the majority view, proposed only one business insurance law. There are, therefore, no provisions that relate specifically to small businesses at one extreme or speciality business such as marine, aviation, transport and reinsurance at the other.

The market’s desire for a single business regime placed some constraints on the Law Commission when it came to draft the new law. Clearly what is important in a sophisticated reinsurance contract will not be relevant to a micro-business insuring a van. The economic considerations behind a limited but volatile book of speciality risks will not be the same as a large book of more mainstream insurance. The Law Commission recognised that in today’s complex world it would be impossible to produce a new insurance law that could satisfy every particular business requirement.

The Insurance Act 2015, like its predecessor the Marine Insurance Act 1906, therefore, provides a basic set of rules. It is possible to contract on different terms and indeed the Law Commission believes there are circumstances in which that would be appropriate. However, both new Acts apply in full to consumers. It will not be possible to contract on different terms unless those terms are more favourable to consumers.

The Insurance Act 2015 is a default scheme for business and all “non-consumer” insureds. As it is based on best practice and was widely supported by the market, it is unlikely that insurers will wish to contract out of it on a regular basis.

However, it would be appropriate to do so if the risk insured was very specific or complex. Equally, the new regime is probably not appropriate for many reinsurance contracts.

If the insurer wishes to contract on different terms and if the term is “disadvantageous” to the insured, the insurer must:

• take sufficient steps to bring the term to the insured’s attention, and

• ensure that the term is clear and unambiguous.

This is a deliberately flexible test. What would be sufficient in a sophisticated market with well-informed and advised parties would not be adequate if the insured was a small business buying cover direct online.

Although the principle of contracting on different terms has been carried forward from the old law, the new rules provide an opportunity for insurers, brokers and policyholders to reassess what they wish to do. Insurers need to consider whether it is appropriate to contract under the Insurance Act 2015 and, if not, what cover they wish to provide. It will not be appropriate to simply contract out of the new law.

The rules impose a specific requirement to be clear about the new terms that will be imposed. Equally, policyholders will need to think about the terms on which they wish to buy cover. Are the provisions of the Insurance Act sufficient or is something else required such as an innocent non-disclosure clause or a term avoiding the average conditions in the new remedies for failing to comply with the duty of fair presentation?

There are also some mechanical steps to observe. As Mactavish highlighted in the guides we produced for the British Insurance Brokers’ Association and Federation of European Risk Management Associations, if insurers wish to contact out they must make this clear to the policyholder. The question is then: are the insurer’s processes adequate? Telling the broker may well be enough if the parties are all well informed.

Much greater care will be needed for unsophisticated policyholders or direct sales. Lastly, brokers as professional advisors will need to ensure that what is on offer is adequate for their policyholder clients and properly understood.