Insurance Act 2015

MASTER OF SCIENCE IN MARITIME SCIENCE MASTER DISSERTATION

Academic year 2015 – 2016

Insurance Act 2015

Student: Annelies De Boever

Submitted in partial fulfillment of the Supervisor: Prof. Dr. Kristiaan Bernauw requirements for the degree of:

Master of Science in Maritime Science Assessor: Patrick Allary

Acknowledgements

The dissertation you’re about to read has a special meaning to me. It is the end of a seven-year period that contained many moments of hard work but also brought a lot of joy. It is the beginning of a new chapter in my life and new challenges entering the business world and the working life. I can most sincerely say, that the past year, was the most interesting and inspiring year of my academic studies. Applying for the inter-university master programme of Maritime Sciences was one of the best decisions I have ever made. Not only have I learned about the legal aspects of the dynamic maritime business world, I also went out of my comfort zone to discover more economical and technical aspects, which were more interesting than I had ever imagined. Next to this, I loved the ‘family feeling’ of this master programme. I have met new people, made a lot of new friends and for the first time had a real connection with professors and assistants. I would advise every person interested in the maritime world, to follow this programme.

I also want to thank some persons that helped, supported and inspired me during this year. First of all I would like to thank my promotor professor Kristiaan Bernauw for his guidance with regards to this dissertation. I want to thank all the other professors and assistants for sharing their knowledge with me during the programme and helping me to grow mine. I also want to thank my parents for giving me this opportunity and for their great support and encouragement throughout my entire academic career. At last I want to thank my brother Gertjan and my friend Michiel, who encouraged me to exceed my own limits.

List of Abbreviations

BIBA British Insurance Brokers’ Association

CIDRA Consumer Insurance (Disclosure and Representations) Act 2012

EA Enterprise Act

IA Insurance Act

IUA International Underwriters Association

LMA Lloyds’s Market Association

MIA Marine Insurance Act

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Table of Contents

Acknowledgements ...... i List of Abbreviations ...... iii Table of Contents ...... v Introduction ...... 1 Part 1 Marine Insurance ...... 3 Chapter 1 Definition of marine insurance ...... 5 Chapter 2 The nature of marine insurance ...... 7

2.1 Contract of indemnity ...... 7

2.2 Losses caused during marine adventure ...... 8

2.3 Sea and land risks ...... 8

2.4 Insured object ...... 8 2.4.1 Ship ...... 9 2.4.2 Freight ...... 9 2.4.3 Goods ...... 10

Chapter 3 Fundamental Principles ...... 11

3.1 The insurable interest ...... 11

3.2 Good faith ...... 12

3.3 Non-disclosure ...... 12

3.4 Misrepresentation ...... 12

3.5 Warranties ...... 13

Chapter 4 The history of marine insurance legislation ...... 15

4.1 From the Rhodians and Romans till the MIA of 1906 ...... 15

4.2 The Marine Insurance Act of 1906 ...... 16

4.3 The Insurance Act of 2015 ...... 17

Part 2 Marine Insurance Act Reform ...... 21 Chapter 5 Non-disclosure and misrepresentations ...... 23

5.1 Explanation of the concept ...... 23

5.2 Current legislation ...... 24 5.2.1 Section 17 MIA 1906 ...... 24 5.2.2 Section 18 MIA 1906 ...... 24 5.2.3 Section 18 (3) MIA 1906 ...... 27 5.2.4 Section 19 MIA 1906 ...... 29 5.2.5 Section 20 MIA 1906 ...... 30 5.2.6 Conclusion ...... 31

5.3 Reform under IA 2015 ...... 31 5.3.1 The change of the concept...... 32 5.3.2 The introduction of a second limb in the duty of disclosure...... 32 5.3.3 The disclosure must be in a manner which would be reasonably clear and accessible to a prudent insurer ...... 33 5.3.4 The disclosing of information forming the subject of a warranty ...... 34 5.3.5 The reasonable search regarding the knowledge of the insurer and the insured...... 34 5.3.6 How to prepare on these changes? ...... 38 5.3.7 Conclusion ...... 39

Chapter 6 Remedies for non-disclosure ...... 43

6.1 Explaining the concept ...... 43

6.2 Current legislation ...... 43

6.3 Future changes under IA 2015 ...... 44 6.3.1 Deliberate or reckless breach ...... 45 6.3.2 Non deliberate or reckless qualifying breaches...... 46 6.3.3 How to prepare on these changes? ...... 48 6.3.4 Conclusion ...... 49

Chapter 7 Warranties and other terms ...... 51

7.1 Current legislation ...... 53 7.1.1 Explaining the concept of warranty ...... 53 7.1.2 Expressed and implied warranties ...... 53 7.1.3 Identification of a warranty ...... 54 7.1.4 The compliance rule and the consequence of its breach ...... 55 7.1.5 Breach of warranty excused ...... 57 vi

7.1.6 Breach of warranty remedied ...... 58 7.1.7 Conclusion ...... 58

7.2 Future changes under IA 2015 ...... 59 7.2.1 A breach of warranty only suspends the warranty till remedied...... 59 7.2.2 Refusal of claim when loss is due to the breach of warranty ...... 60 7.2.3 No contractual transformation of the duty of disclosure into warranty ...... 61 7.2.4 How to prepare on these changes? ...... 62

7.3 Conclusion ...... 62

Chapter 8 Fraudulent claims ...... 65

8.1 Explaining the concept ...... 67

8.2 Current legislation ...... 67 8.2.1 The remedies of fraud ...... 67 8.2.2 Conclusion ...... 69

8.3 Changes under IA 2015 ...... 70 8.3.1 Liability of insurer at time of the fraud ...... 71 8.3.2 Recovery of payment for fraudulent claims...... 71 8.3.3 Termination of the contract ...... 71 8.3.4 Liability of insurer before the fraud ...... 71 8.3.5 Remedies for fraud in group insurance ...... 72 8.3.6 How to prepare on these changes? ...... 72

8.4 Conclusion ...... 73

Chapter 9 Contracting out and transparency...... 75

9.1 Contracting out ...... 75 9.1.1 Contracting out regime for consumer contracts ...... 76 9.1.2 Contracting out regime for non-consumer contracts ...... 77

9.2 Transparency ...... 77 9.2.1 Attention requirement ...... 78 9.2.2 Clear and unambiguous requirement ...... 79

9.3 How to prepare on these changes? ...... 80

9.4 Conclusion ...... 80

Chapter 10 Direct action right against third party liability insurer...... 83

10.1 The third parties rights against insurers Act of 2010 ...... 83

10.2 The third parties (rights against insurers) Act 2010 and the MIA of 2015 ...... 84 10.2.1 Section 19 of the IA 2015 ...... 84

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10.2.2 Section 20 of the IA 2015 ...... 86 10.2.3 Conclusion ...... 86

Chapter 11 Removed propositions of the Law Commissions ...... 89

11.1 Clause 14 of the Draft Bill 2014 ...... 89 11.1.1 Report of the Law Commissions July 2014 ...... 89 11.1.2 The Enterprise Act of 2016 ...... 92 11.1.3 Conclusion ...... 92

11.2 Clause 6(3)(b) of the Draft Bill 2014 ...... 93

11.3 Clause 11 of the Draft Bill 2014 ...... 93

Conclusion ...... 95 Annexes ...... 97 Annex I ...... 97 Annex II ...... 99 Annex III ...... 107 Annex IV ...... 108

Bibliography ...... 111

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Introduction

International transport of goods by sea is one of the main modes of goods carriage all over the world. Around 90% of all products you find at home, in the local supermarket or at work, has been carried by the international shipping industry. The laptop on your desk, the telephone in your hand, and the car you drive, most probably have enjoyed, at a certain period in their existence, a cruise over the oceans or seas. These goods are thus transported overseas by ships. There are various types of vessels, such as container, tanker, roll on roll off and break bulk vessels. At this moment more than 50 000 vessels are trading internationally. The price of one container vessel can raise to 600 million dollar and more. Shipping routes are literally worth billions of dollars. Not only the goods are worth a huge amount of money, but also the vessels itself. In case of loss of cargo and vessel, the costs will be very high and the shipping companies will sometimes not be able to pay the damages for losses . Because of the high risks inherent to this business, most people are not eager to undertake marine operations. This was already the case hundreds of years ago and is still the case today. To overcome the restraints and risks of transporting goods by sea, the marine business tried to find a solution. They found their solution in insurances, whereby risks are being taken over by insurance companies in return for insurance premium payments. Insurance companies are dealing with very expensive claims and therefore charge high premiums. It was a fragile and important business which needed to be foreseen in a law. Therefore most countries already created legislation on marine insurance not just decades ago but centuries ago. This master dissertation will focus on marine insurance legislation and more specifically on the Act of 1906 and the Act of 2015. First, I will give the definition of marine insurance and describe the main characteristics. Secondly, I will draw a short explanation of the history of this legislation with a focus on the Act of 1906 and 2015.The third aspect, will contain the six important modifications in the New Act of 2015 compared to the Act of 1906. Then, I will have a look at the subjects that were not addressed in the New Insurance Act, but were proposed by the Law Commissions. Last but not least I will try to make a critical conclusion on the changes and try to predict future behaviour of the insurance companies on the new Act as it is possible to contract out of some of the provisions

Part 1 Marine Insurance

Chapter 1 Definition of marine insurance

In the MIA 1906 (Marine Insurance Act), the marine insurance contract has been defined as “a contract whereby the insurer undertakes to indemnify the assured, in manner and to the extent thereby agreed, against marine losses, that is to say, the losses incident to marine adventure.” 1 This definition has not been taken over in the new IA 2015, but can still be used as a reference as the Act of 2015 will only come into force in August 2016.

It is important to note here, that insurance for sea voyages, was one of the first types of insurance ever, all the other types of insurances such as road insurance, life insurance etc. derive of the example of marine insurance. Off course we cannot state with 100% certitude that marine insurance was the first insurance ever, but it certainly was the first type of transport insurance. The reason for the latter is due to the fact that maritime transport operations always have been very dangerous, even more dangerous than today. There was no proper navigation aid, there were no cell phones, no type or other form of telecommunication. Because of the dangerous aspect of this operation and the huge financial risks, entrepreneurs were not eager to undertake maritime transportation. As a result of this, they started to look for manners to reduce financial risks. There are several types of limitations such as bottomry and general average which I will explain in the history description of marine legislation.2

1 Section. 1 MIA 1906 2 K. Bernauw, “Transport Insurance Law”, Ghent University, Gent, 2015, 8-10 and completed with student notes Annelies De Boever.

Chapter 2 The nature of marine insurance3

Above we have seen the definition of the marine insurance contract. The contract foresees in covering a risk - against a premium - for losses incident to a marine adventure. In marine insurance we can distinguish some special characteristics: 1) The contract of insurance is a contract of indemnity 2) The losses need to be incident to marine adventure. 3) Marine insurance in not only based on risks at sea but also includes land risks. 4) Different types of losses can form the object of marine insurance. These characteristics as a part of the nature of marine insurance will be discussed below.

2.1 Contract of indemnity

A contract of marine insurance is a contract of indemnity. A contract of indemnity means that the insured will be put back in its original financial position as before the loss. The insured cannot gain more by an insurance contract than what he already had. There are a lot of examples in the marine insurance law where we can find this principle.

For example the provisions that the insured needs to have an insurable interest as foreseen in sections 4 to 15 of the Act of 1906. When there is no insurable interest in the subject matter insured, then it will not be covered under the insurance contract. When there is no interest, there is no loss and thus no duty to indemnify.

3 E.R. Hardy Ivami, “Marine Insurance”, London, Butterworth, 1969, 4-11.

2.2 Losses caused during marine adventure

Another important aspect of a marine insurance contract, is that the loss(es) in a marine insurance contract need to be the cause of a marine adventure. This, according to the definition of a marine insurance contract as mentioned in the Act of 1906. Therefore some insurance contracts will not fall under the Act of 1906 f.e. when there is a cover for a total loss with the risk that there will be no peace declared between two countries. This has nothing to do with the marine adventure and will thus not fall under the scope of the Act.

2.3 Sea and land risks

“A contract of marine insurance may, by its express terms, or by usage of trade, be extended so as to protect the assured against losses on inland waters or on any land risk which may be incidental to any sea voyage.”4 Thus not only losses for incident at sea, but also losses for incident on land will be covered as transport on land forms a part of the complete sea voyage. In case a marine contract has been concluded to ship goods from Antwerp to a town in Brazil, transport by train or truck in Brazil will also be covered by the marine contract. This section has a second limb: “Where a ship in course of building, or the launch of a ship, or any adventure analogous to a marine adventure, is covered by a policy in the form of a marine policy, the provisions of this Act, in so far as applicable, shall apply thereto; but, except as by this section provided, nothing in this Act shall alter or affect any rule of law applicable to any contract of insurance other than a contract of marine insurance as by this Act defined.”5 This second part of section two refers to a ship in building and thus not yet capable to sail. and makes insurance cover under the Act of 1906 for marine risks such as fire on board possible.

2.4 Insured object

Two types of losses can be covered. The first type concerns property and second one liability.

4 Section 2 (1) MIA 1906. 5 Section 2 (2) MIA 1906.

Property losses are losses of ship, goods, freight, profits and commissions, wages, loans advances and disbursements. Liability losses are the liability of a ship owner or of the owner of the cargo. Later in the dissertation we will look more in detail into some of these insured objects, especially for ship, goods and freight

2.4.1 Ship

“The term “ship” includes the hull, materials and outfit, stores and provisions for the officers and crew, and, in the case of vessels engaged in a special trade, the ordinary fittings requisite for the trade, and also, in the case of a steamship, the machinery, boilers, and coals and engine stores, if owned by the assured.”6 The above definition clearly states what exactly is insured on a ship. The definition includes almost everything on board.

2.4.2 Freight

“The term “freight” includes the profit derivable by a ship-owner from the employment of his ship to carry his own goods or moveables, as well as freight payable by a third party, but does not include passage money.”7

Three different aspects of freight are included in the above statutory definition:

1)‘Ordinary freight’ or freight related to the employment of the ship being payed to the ship-owner for carrying goods on the ship to a certain destination. This aspect also includes the chartering for carriage of goods by third parties whereby freight is being paid by the third party to the charterer. 2) ‘Chartered’ freight or the rental money being paid by the charterer to the ship-owner if the latter rents out his vessel to a charterer, is also a part of the definition of freight as foreseen in the Act of 1906. 3) Owner’s trading freight. This is the money or profit earned by the ship-owner for carrying his own goods. The profit being the difference in value of the goods between the port of loading and the port of discharging. This also includes the charterer who carries his own goods in a ship he charters.

6 Schedule 1 rule 15 MIA 1906. 7 Schedule 1 rule 16 MIA 1906.

2.4.3 Goods

There is also a definition foreseen in the Act of 1906 for goods: “The term “goods” means goods in the nature of merchandise, and does not include personal effects or provisions and stores for use on board.”8

The goods insured are only the merchandise subject to the transport contract. All other goods on board are not included.

8 Schedule 1 rule 17 MIA 1906.

Chapter 3 Fundamental Principles9

Marine insurance has next to the above characteristics some other fundamental principles. These are: 1) The insurable interest 2) Good faith, 3) Non-disclosure 4) Misrepresentation 5) Warranties.

3.1 The insurable interest

The provisions on the insurable interest are being found in sections 4 till 15 in the MIA 1906. Insurable interest is the interest of the insured to cover his risks of financial losses in case of incident. This means that the insured must have a financial interest in the object of the insurance. Insurable interest must be present in every insurance contract including marine insurance contracts. It is one of the foundations of insurance because, in its absence, insurance would be no different from gambling and (even if legal) would not constitute a binding agreement. The insurable interest in marine insurance is being expressed in financial interest. When one loses the property of an object one feels that own assets are being attacked, so there is an financial impact in loss insurance.10 It is important to note that, unlike in other insurance contracts, the insurable interest in marine insurance must not be present at the moment the insurance contract is being concluded as insurance contracts are frequently stipulated before the commercial transportation takes place

9 H. A. Turner and E.V.C Alexander, “The principles of Marine Insurance”, London, Stone and Cox (publications) limited, 1986, 20-27. 10 K. Bernauw, “Transport Insurance Law”, Ghent University, Gent, 2015,46 and completed with student notes Annelies De Boever.

or cover a longer period in time. The insurable interest must certainly be present at the time a claim occurs. In the Act of 1906, many examples of insurable interest are given such as the insurance of a ship by a ship-owner for himself or on behalf of his mortgages.

3.2 Good faith

When an insurance is being concluded, the insurer needs to have all relevant information with regards to the insured risk in order to define the premium and the type of risk etc. For this, the insurance company must rely on the honesty of the insured and his wiliness to provide all necessary information. In general insurance law, we note that insurance companies can use standard proposal forms that need to be filled out by the insured. Based on the information supplied, the insurer has all relevant information to issue the insurance contract. There are no standard proposal forms in marine insurance. There is however a duty of disclosure for the insured to disclose all necessary information concerning the risk(s) or all the information he is supposed to know. Thus the contract is based on the utmost good faith that the insured will give all the necessary information. When this is not the case, the contract of insurance may be void. The insurer is also obliged to observe the utmost good faith f.e. he may not ask a higher premium then what is suitable for the risk. If he does, than he will breach the utmost good faith

3.3 Non-disclosure

In marine insurance, not only all necessary information related to the risk must be given to the insurer. The insurer is obliged to disclose all information of his own knowledge as well as any other material circumstance related to the risk. On the other hand an insurer also needs to know everything an insurer is ought to know in course of his business. The insurance Act gives us all the information that needs to be disclosed by the insured and what the consequences are when there is a breach of the duty of disclosure. We will discuss this more in detail in chapter 5

3.4 Misrepresentation

Section 20 of the MIA 1906, deals with the aspect of presentations. In every insurance contract the insured will make presentations aside from the duty of disclosure. This provision

states that the presentations may not be false. It states that a presentation can be a matter of fact or a matter of expectation or belief. It also mentions that a matter of fact is only true when it is substantially correct and that a presentation as a matter of expectation or belief is true when it has been made in good faith. Important to note is that the presentation needs to be material to the contract.11 More information will be given in chapter 5.

3.5 Warranties12

The warranties are a specific characteristic in the common law legal system. They will not be found in other legal systems such as the one in Belgium. The warranties are a commitment that a certain condition will be provided. The insured needs to assure that the warranty will be respected but, sometimes the insured will not be in the position to fulfil the warranty. For example, when concluding the contract, he warrants vis a vis the insurance company that the cargo will be packed in crates. This is a commitment, a guarantee that the insured is able to control. This is not the case for all warranties, as in some situations the insured has no control. When a warranty is not fulfilled the insurance company does not have to pay any compensation for loss or damages occurred. Even in case the cause of loss or damages was not related to the warranty provided. There does not need to be a causal link, the sanction is absolute. This is a rather unfair system vis a vis the insured. The law concerning warranties will be discussed in more detail further in this dissertation.

11 Section 20 MIA 1906 12 K. Bernauw, “Transport Insurance Law”, Ghent University, Gent, 2015, 91 and completed with student notes Annelies De Boever

Chapter 4 The history of marine insurance legislation

4.1 From the Rhodians and Romans till the MIA of 190613

The international trade of goods over sea already exists for a long time. From the moment men were able to build ships, the trade over sea began. Most people believe that the transport of goods, in every available mode, would not be possible if there was no insurance. But how did the concept of insurance came to life in the marine world? It is obvious that it did not start with the insurance contract as we know it today i.e. one person has a risk of financial losses and wants to transfer this risk to a third person ( the insurance company), but in return for this transfer he pays an amount of money known as a premium.

It all started with the Rhodians and Romans who were well-know with a simplified form of the general average principle that ensured that in case of unexpected losses the costs were spread between all the parties involved in the marine transport operation. Not only the general average principle was a popular way of spreading the risk, also a system of contingent loans known as bottomry occurred. In the latter case the ship-owner goes to a third person who provides a loan to finance the transport operation. In case of loss occuring during the transport over sea, the ship-owner does not have to refund the sum he loaned, but when the operation is successful, the ship-owner has to reimburse the third person and pay him a bottomry fee. Later these Bottomry fees became too high and Pope Gregorius the 9th forbid these excessive fees. In the 12th and 13th century the concept of marine insurance as we know it today came to life. It originated in Northern Italy - Lombardy. The word policy is even derived from the Italian word polizza which means a promise or undertaking. Those northern Italian traders even have a famous London street named after them: Lombard street. They were the ones who persuaded Henry IV, king of England, to carry on the English sea trade in security. The above also explains why the Insurance Act of 1906 comes with the Lloyd’s policy as an annex and states that the policy “shall be as much force and effect as the surest writing or policy of assurance heretofore made in Lombard street, or in Royal exchange, or elsewhere in London.

13 D. O’may and J. Hill, “O’may on marine insurance”, London, Sweet & Maxwell, 1993, 1-7.

Later in a preamble of Elizabeth I, they acknowledged the principle of spreading the risk, which is directly related to insurance. There even came a special mercantile tribunal for insurance disputes ‘ The court of policies of insurance’. Later this court disappeared and was replaced by arbitration. In the same period a hull policy was developed in another part of Europe, more specifically in Northern Italy. It formed the basis of the code applied in England in the 16th and 17th century when London became the seat of an insurance market as result of the English expanded seaborne trade. Later in the 18th Century, a man called William Murray also known as Lord Diplock, incorporated the ancestry law into common law. He was the president of the court of King’s Bench from 1759 to 1788 and many of his decisions in marine insurance were interpretations of the Lloyd’s policy. The Lloyd’s S.G. policy was used for many centuries in the Marine insurance throughout the world. There was no other document of international commerce that survived as long as this one. The Lloyd’s S.G. policy was upheld until 1906, so until the 20th century. Then the Marine Insurance Act of 1906 came to life. The text fir the Act was drafted by Sir Mackenzie Dalzell Chalmers. He completed the draft in 1894 and it was accepted in 1906. This Act was not seen as a change in law, it was rather a codification of 200 years of judicial decisions.14

4.2 The Marine Insurance Act of 190615

The MIA of 1906 was thus a codifying act. It was the final flowering of the Victorian movement for codification of the English law. It was the final work of the draftsman Sir Mackenzie Dalzell Chalmers. He desired to bring more clarity in the law. Sir Mackenzie Dalzell Chalmers did not want to improve the law, his ambition was to organise the existing law. That is why the Act of 1906 did not represent a reform in the marine insurance legislation. The codification movement in the late 19th and the early 20th century, was driven by the will to serve the commercial community. One wanted to put an end to the situation in which during a process first the legal principles needed to be defined before these could be applied to the facts that were in dispute. One wanted to speed up the process and to lower the costs. But the political reality was different, proposals for new legislation presented in parliament, were most of the times very unlikely to pass. This is the reason why codification was based on ‘the reproducing’ of existing law. This decision was thus not based on a reflection or a perception of legal perfection it was rather the result of political reality.

14 R. Merkin, “Marine Insurance Legislation”, London, Essentialaw, 2000, xxxvii. 15 H. Bennet, “The Marine Insurance Act 1906: reflections on a century”, Singapore Academy of Law Journal September 2006, Vol. 18, Issue 3, 669-673.

The MIA 1906 was thus a new codifying Act with a certain scope of rules. The scope of the Act had not the intention to isolate the general contract law. It included only a set of principles that needed to be used on marine contracts. However, for all subjects not handled by this set of principles one had to revert to the general contract law. The principles of the marine insurance contracts, apply to all types of insurance contracts, also non-marine contracts. In practice, the Act of 1906 operates as a codification of general insurance contract law. This has the advantage that the correct classification of an insurance contract has no relevance and will not introduce any costs. But, the system is not unified in its whole. The insurance for consumers, has been separated from the non-consumer contracts as there is the need for consumer protection. There also has to be made a distinction between a direct cover and reinsurance. It needs to be noted that some of the rules of the marine insurance law, do not apply to the non-marine insurance law. The codification of the marine insurance law was of high importance, but the Act is a non- mandatory one. The rules are only applicable when the parties decide to use them or have no other provisions foreseen in their contract. Only the provisions concerning the public policy are mandatory. The non-mandatory nature of the Act, is the result of the purpose of the codification, i.e. to help the commercial community. The economy world wants to be free in concluding contracts and only wants to know which rules will be applicable when they don’t make a contract or when they forgot to put something in the contract. The latter really points out the commercial character of the Act and the certainty it was supposed to provide to the commercial community, i.e. a clear set of game rules to create an atmosphere of certainty in the commerce of goods trading.

We can conclude that the MIA 1906 was of main importance for the marine insurance world, however over the years, the Act has been subjected to a lot of criticism. Words as ‘harsh’ and ‘unfair’ were often used which will be discussed later in part 3 of this dissertation. This has led to a reform of the marine insurance law in the Act of 2015.

4.3 The Insurance Act of 2015

The intention to reform the MIA 1906, was already present in the 1950’s. The English Law Reform Commission issued in 1957 a report with recommendations of change. Later in 1980 the British and the Scottish law commission wrote down their findings in a report. This report contains several issues where the insurance industry was struggling with at that time, including issues related to the marine insurance. The report addresses reforms about the law of disclosure, warranties and others. But it was not until 2002 that the British Insurance Law Association issued a recommendation to the Law Commissions to study a reform of the insurance law. In 2006, the Commissions started a joint review of insurance contract law as they are obliged to do this. After eight years of hard work, negotiations, investigations etc. the

joint review was finished. During these eight years they issued several reports. The first report was published in 2007, followed by a second and third in 2011 and 2012. The final report was published in July 2014. This last report addresses all the developments of the joint review and is an important source for interpretations.16 The insurance Bill 2014, was brought before parliament in July 2014. This Bill got an Royal Assent on February, 12th 2015 and became the Marine Insurance Act 2015. The new provisions will come into force on the 12th of August 2016 so the stakeholders have enough time to adjust. The new Act addresses the criticism given on the Act of 1906.17 The main changes and reasons of the reform in the insurance law will be discussed below. It is also important to point out the scope of the IA 2015. The Act is applicable on all consumer and non-consumer contracts, except for the second part relating to the duty of fair presentation. The latter only applies to non-consumer contracts as the consumer contracts are being protected under the CIDRA (Consumer Insurance Disclosure and Representations Act 2012).18 It is thus important to define the terms consumers and non-consumers under the Act of 2015 and the Act of 2012 to know to whom the Act will be applicable. 1) Consumer under IA 2015: According to section one IA19, the consumer insurance contract definition is the same as in the CIDRA”20 When we look at the Act of 2012, the provision tells us: “consumer insurance contract” means a contract of insurance between—(a)an individual who enters into the contract wholly or mainly for purposes unrelated to the individual’s trade, business or profession, and (b)a person who carries on the business of insurance and who becomes a party to the contract by way of that business (whether or not in accordance with permission for the purposes of the Financial Services and Markets Act 2000)”21 The first part of the definition, seems to be very broad. This has the result that also ‘mixed-use’ contracts i.e. contracts which are both used in private and business relations, fall under this scope. However, the main condition states that the main purpose for concluding the contract, needs to be private use. We can conclude that businesses are included when private use is the main objective of the contract, but there are some questions related to micro-businesses.22 The Law Commissions were of the opinion that micro-businesses needed the same protection as consumers in the context of pre-contractual information, but they did not agree that the micro- businesses can fall under the regime for consumers as a whole. They stated that the regime of consumers is not suitable, especially when the small businesses have 50

16 A. M. Costabel, “ The UK insurance Act 2015: A restatement of Marine Insurance Law”, St. Thomas L. Rev. 2015, 137- 139. 17 Bloomsburry professional, “Insurance Act 2015”, H.S. at W. 2015, 21(2), 1-3. 18 Explanatory notes MIA 2015, para 30 and 37 19 See Annex II 20 Section 1 IA 2015 21 Section 1 CIDRA 22 J. Lowry, P. Rawlings and R. Merkin, “Insurance law: Doctrines and principles”, Bloomsbury Publishing, 2011 and https://books.google.be/books/about/Insurance_Law.html?id=Xm2BZwEACAAJ&redir_esc=y

employees or more. These are generally set up as companies and will most probably use agents when buying insurance.23 2) Non-consumer under IA 2015: A “non-consumer insurance contract” is a contract of insurance that is not a consumer insurance contract”24. We can think of the insurance contracts that are concluded with the main purpose for business use. 3) Consumer under CIDRA: See 1

Where the MIA 1906 failed to cover the concept of reinsurance the IA 2015 includes this in its scope. According to the Act these contracts need to be treated as contracts of insurance at common law and need to be seen as non-consumer insurance contracts. The insurer or the reinsurer (the party purchasing the insurance) is thus the insured and the reinsurer or the retrocessionaire (the party providing the insurance) is the insurer.25

23Law Commission and Scottish Law Commission, Reforming insurance contract law Issue paper 5: micro-businesses published April 2009 http://www.lawcom.gov.uk/wp-content/uploads/2015/06/ICL5_Micro-businesses.pdf 24 Section 1 IA 2015 25 Explanatory notes MIA 2015., para 36.

Part 2 Marine Insurance Act Reform

Chapter 5 Non-disclosure and misrepresentations

The first important change in the reformed insurance law is based on the duty of disclosure. We will explain the meaning of duty of disclosure without addressing every single aspect related to this duty Hereby I will mainly focus on the law concerning the material circumstances that are known or should be known by the insured. The main changes are to be found in this part of the provisions. There will thus only be an explanation of the current law related to the changes in the MIA of 2015.

5.1 Explanation of the concept

“the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him”26

“Every material representation made by the assured or his agent to the insurer during the negotiations for the contract, and before the contract is concluded, must be true...”27

This means that the assured has the legal duty to spontaneously disclose all the relevant aspects to the insurer, during the negotiations for the contract. This information must be related to the risk for which the insured requires cover. Next to this, all the information the insured gives to the insurer must be true.

This duty is a pre-contractual duty and therefore ends once the contract has been concluded. A contract is concluded at the moment of acceptance by both parties This means that all information related to the risk coming to the knowledge of one of the parties after conclusion

26 Section 18(1) MIA 1906 27 Section 20(1) MIA 1906

of the contract, does not have to be communicated to the other party, even when the information is material.28

5.2 Current legislation

5.2.1 Section 17 MIA 1906

The general doctrine of utmost good faith is being found in section 1729. This section defines that a contract of insurance is uberrimae fidei. This means that both parties of the marine insurance contract must upheld the utmost good faith. In absence of good faith by either party the contract may be avoided by the other party.

This duty is very broad and can be seen as a general doctrine. Judges even stated that sections 18, 19 and 20 (disclosure and representation) are specific duties that form part of the utmost good faith doctrine.30

The doctrine of utmost good faith in common law and in the provisions of the MIA 1906 finds its most common and practical expression in the obligation for the insured to disclose information.31 The insured must supply to the insurer all information related to the nature of the risk and is obliged to give only true information.

5.2.2 Section 18 MIA 1906

We can find the general duty of disclosure for the insured in section 18 (1)32. From this provision we may derive that there is a duty to disclose every material fact the insured knows and every circumstance the insured is supposed to know in the ordinary course of business. When there is no full disclosure by the insured, the insurance contract can be avoided by the insurer.

How can be defined what the insured knows or ought to know? When the insured is a natural person, the answer to the above question is easy. The natural person knows what he or she knows and nothing more. For corporations the question becomes more complex. The traditional approach is to search for the ‘directing mind and will’ of the corporation. This is

28 L.C of Kendal and C.T. Bailhache, “ British Shipping Laws volume 9: The law of marine insurance and averages II”, London, Stevens&Sons Ltd, 1961, 592. 29 See Annex I 30 H. Bennet, “The law of marine insurance”, Oxford, Oxford University press, 2006, sec. ed., 103. 31 A.A. Tarr and J-A. R Tarr, “Utmost Good Faith in Insurance: Reform Overdue?”, Asia Pac. L. Rev., Vol. 10, Issue 2, 2002,177. 32 See Annex I

the management that sets out company rules and policies and controls these. The attributed knowledge for purposes of section 18, is applied in a broader context. in the case PWC Syndicates in which not only the knowledge of management is relevant, but also the knowledge of employees and agents as their task lays in the insurance arrangement.33

5.2.2.1 Every material circumstance Every material circumstance the insured knows, needs to be disclosed. But was is a material circumstance? How do we proof its materiality?

According to section 18(2) MIA 1906 “every circumstance is material which would influence the judgement of a prudent insurer in fixing the premium determining whether he will take the risk” The act does not define what is meant by prudent insurer, but this is widely accepted to mean a reasonable insurer. In general, a fact is to be considered material if it has influence on a prudent insurer’s assessment of the risk We can conclude that the materiality is an objective concept as it concerns the judgement of a hypothetical prudent underwriter and not the actual underwriter. But this does not tell us what degree of significance the non-disclosure must have in the mind of the prudent underwriter before it becomes material.34 Section 18(1) of MIA 1906 brings also a second element of proof. A circumstance is not only material when there is an ‘objective materiality’. Also “…the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured…”35 The second element is not an objective one, it is subjective. This latter is based on the influence of the non-disclosing information on the behaviour of the actual underwriter. These two elements of proof were objects of discussion in the case Pan Atlantic Ins. Co v Pine Top Ins. Co. The decision of the judges in this case, forms the base for the current law of duty of disclosure. When Pan Atlantic reinsured their excess of loss with Pine Top, they - seeking for a reduced premium - did not disclose important parts of their history of losses. Information that would have been relevant and important for Pine Top to decide on the premium and the underwriting of a contract. Based on the non-disclosure by Pan Atlantic of their complete history of losses, Pine Top declined payment. Mr Waller ruled that the information, that should have been given by Pan Atlantic, influenced the decision-making process of the prudent underwriter, The court of appeal opted for proof merely that the prudent underwriter would want to have been told in connection with reaching a decision on the risk, a lower threshold indeed. It rejected the ruling in first instance of the ‘decisive influence’ test whereby the insurer has to prove that a prudent insurer would have made another decision if there had been full disclosure.36

33The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014) 82-85. 34 H. Bennet, “The law of marine insurance”, Oxford, Oxford University press, 2006, sec. ed., 109. 35 Section 18(1) MIA 1906 36 H. Bennet, “The law of marine insurance”, Oxford, Oxford University press, 2006, sec. ed., 110-111

In appeal: the court of appeal upheld the decision that the errors and omissions clause did not apply to the pre-contractual disclosure duty. If the clause would be interpreted the other way, it would be void for uncertainty.37 They upheld the decision by J. Waller. The bare majority upheld the CTI-case confirming the rejection of the ‘decisive influence’ test. 38 The threshold that is being set for the materiality by the courts is rather low.

We have seen that the judgement by the house of lord in the case Pan Atlantic had two limbs. As seen above, the first limb was the objective limb. We will now have a closer look at the decision making concerning the subjective limb. The House of Lords initially ruled that if there is a breach of disclosure under the Marine Insurance Act, the insurer can avoid the contract. There was no need for a causation according to the ruling in the CTI case. The House of Lords found this situation rather unfair and stated a new causation or inducement requirement in the Pan Atlantic case whereby there must be a causation between the non- disclosure and the underwriting of an insurance contract. The House noted that under the common law, the plaintiff must show proof that it was actually induced to enter the contract based on a breach of non-disclosure in order to avoid the contract. But when you read the text of section 18, the insurer is not required to give any form of an inducement before it can avoid the contract. The House of Lords however argued that there must be at least the same applicable standards to a common law claim for breach of non-disclosure, and thus there needs to be an inducement. When an underwriter has not induced the non-disclosure of a particular material fact, he cannot rely on the consequence of avoiding the contract39.

From the above we can conclude that if an insurer wants to use the ground of non-disclosure for avoiding the contract, he needs to prove two points. First he needs to demonstrate that a reasonable prudent insurer would not have entered the contract on the same terms if he had been aware of the non-disclosure before accepting the risk. Secondly, he must justify that this non-disclosure would have induced the actual underwriter to enter the contract on the specific terms offered.40 Thus the insured needs to give all the information related to the risk to avoid the possible avoidance of contract and he or she needs to make sure that the insurer will not be able to prove the above two points.

37 X, “Material non-disclosure”, I.B.F.L. 1994, 13 (4), 33-35. 38 H. Bennet, “The law of marine insurance”, Oxford, Oxford University press, 2006, sec. ed., 113. 39 J.E. Feeley, “The non-disclosure/misrepresentation defence: UK and California law regarding the "materiality" requirement”, Int. I.L.R. 1995, 3(3), 78-81 40 J.E. Feeley, “The non-disclosure/misrepresentation defence: UK and California law regarding the "materiality" requirement”, Int. I.L.R. 1995, 3(3), 78-81

5.2.2.2 Every circumstance in the ordinary course of business ought to know41 The case of Pan Atlantic was only focused on the question of materiality and inducement. It did not mention the circumstances in the ordinary course of business. Section 18 (5) says further that circumstance “includes any communication made to, or information received by, the assured.”.

It is not clear what the legislator means with “ought to know” in the ordinary course of business. There are two possible issues that could arise in this context.

1) The ‘blind eye’ knowledge i.e. the things the insured would have known if he had not deliberately avoided acquisition of information. 2) Discussion whether the test of “ought to know” needs to be objective or subjective.

More information about this ‘blind eye’ test in current law, is to be found in court decisions. The courts have accepted that the ‘blind eye’ knowledge needs to be included in the knowledge of the insured. They ruled that the insured needs to disclose the information that was deliberate avoided out of fear of a negative outcome. This, to avoid the consequence of the breach of the duty of disclosure. An example is the Dora case whereby the insured did not mention that their skipper had a criminal record. The judge ruled that this was a breach of the duty of disclosure as the insured is required to disclose such important information based on the normal course of business.42 But the question also arose how the enquiries need to be judged. There is some discussion whether this must be judged in a subjective i.e. how the insurer normally runs his business, or objective i.e. how does a reasonable insurer runs his business, way. The recent opinion of ARNOULD is that it must be judged in an objective manner, only the fact that the insured is a member of a class such as a Lloyd’s syndicate, can be judged in a subjective manner. But there are other cases that are still judged in a subjective way. We can conclude that there is no certitude about the outcome of such cases under the current law.

5.2.3 Section 18 (3) MIA 1906

Even though a circumstance may be material and its concealment may induce the insurer to enter into a contract of insurance, there are occasions where the assured will not be held responsible for the lack of disclosure. These occasions or exceptions are largely encapsulated by section 18(3)43 of the Marine Insurance Act 1906, Part 3 of section 18, states four exceptions related to the duty of disclosure by the insured in absence of inquiry by the insurer.

41The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014) 85-88. 42Law Commission and Scottish Law Commission, the Business Insured’s Duty of Disclosure and the Law of Warranties ( Law Commission Consultation Paper No 204; Scottish Law Commission Discussion Paper No 155, 2012) 75. 43 See Annex I

5.2.3.1 Diminishing the risk The first of these four exceptions is to be found in section 18(3)(a) and relates to circumstances diminishing the risk. Circumstances that reduce the exposure of the risk for the insurer do not have to be disclosed by the insured.44

5.2.3.2 Known or presumed to be known by the insurer45 The second exception found in section 18(3)(b), forms subject for discussions. According to this exception the insured does not have to disclose information that is commonly known or is supposed to be known by the insurer. These circumstances need to be proven by the insured. There has been a lot of discussion about the information falling under the scope of this part of section 18(3). It is a complex and unclear matter. The Law Commission of England and Wales and the Scottish Law Commission, have made a three leg distinction: 1) general public knowledge, 2) industrial knowledge, 3) other knowledge. The term general public knowledge speaks for itself; generally known by the public. This relates to ‘common notoriety’ and forms an objective standard. Industrial knowledge relates to matters which an insurer should know in the line of ordinary course of business. Insurers need to actively acquire information about the risks they insure. Other knowledge relates to information about the individual circumstances of the insured. Insurers are supposed to acquire specific personal knowledge of the insured. This can lead to several issues. 1) When the insured gave information to the insurer that is related to another claim of the insured, but this information was never given to the underwriter of the insurance contract. 2) The information received by an agent of the insurer who is under obligation to give the information to the underwriter is to be known to the insurer. 3) Information that has been recorded in the files of the insurer relating to previous negotiations with a prospective insured. The Law Commissions here note that we can expect from an insurer that he would check the computer about previous information of the insurer, but when it is almost impossible to acquire the previous information, than this should not be a part of the information the insurer should know. We can conclude that the courts, based on the current law, are reluctant to find that an insurer needs to be aware of the information that is filed about previous insurance contracts with the insured.

5.2.3.3 Waiver The third exception to the obligation of disclosure in absence of inquiry relates to waived information. All the information that has been waived by the insurer does not have to be disclosed by the insured. The insurer may waive the disclosure of a material circumstance through an express term in the insurance contract. However, not everything can be waived

44 H. Bennet, “The law of marine insurance”, Oxford, Oxford University press, 2006, sec. ed., 137. 45The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014) 115-119.

such as fraudulent non-disclosure as a matter of public policy.46 Many judges used the waiver possibility to overcome the harsh rule of section 18(1). They developed the regime whereby the insurer is required to ask further questions. This is the case when the information disclosed by the insured encourages the insurer to make further inquiries. We will discuss this further in 5.3.2.47

5.2.3.4 Warranties The last and fourth exception relates to the warranties. There is no need for a special protection for warranties in respect of the insurer by the duty of disclosure. Warranties have enough protection on their own. This subject will be dealt further in this dissertation in the chapter 7.

5.2.4 Section 19 MIA 1906

This provision defines the duty of disclosure of the insured’s agent to the insurer.48

Section 1949 seems to put a duty of disclosure on the insured’s agent. There is no penalty for the agent when he fails to disclose, there is only a penalty for the insured or avoidance of the contract. There is also no possibility for the insured to claim against his agent when there is no disclosure. This is the reason why this provision can be treated as an extension of the insured’s duty to disclose. The insured must thus not only disclose the information he knows or is ought to know, but he must also disclose the information his agent knows or is ought to know, only then he can avoid the strict penalty.50

The disclosure of the agent exists out of three categories of material circumstances: 1) The material circumstances the agent needs to know. Here the knowledge concerns the knowledge of the agent who needs to disclose all material circumstances. The question of materiality is the same as we have seen above with the insured.51 2) The material circumstances the agent is ought to know in the ordinary course of business. This is again the same reasoning as the insured’s knowledge as described above. 3) The material circumstance related to the circumstances which the insured is bound to disclose under section 18. The agent needs to disclose the latter, except when it comes too

46 H. Bennet, “The law of marine insurance”, Oxford, Oxford University press, 2006, sec. ed., 140-141. 47 The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 37 48 Section 19 (1) MIA 1906 49 See Annex I 50 The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014),103. 51 H. Bennet, “The law of marine insurance”, Oxford, Oxford University press, 2006, sec. ed., 150.

late to the insured’s knowledge to communicate to the agent. This part of section 19 seems to displace section 18, but needs to be seen as a co-operation.52 The first two circumstances seem to go further than section 18. Even when there was no reason for the insured to be aware of the information, this information needs to be disclosed. In case of non-disclosure the contract can be avoided. Another issue that arises here is if the agent needs to disclose all the information he knows, including the confidential information with regards to other clients? The courts have judged that the duty of disclosure is limited to the information which the broker received or held as an agent of the insured.53 We can conclude that the scope of this provision is not clear and the law is rather confusing with regards to the duty of the agent and the possible consequences for the insured. This is why it has been revised under the IA 2015.

5.2.5 Section 20 MIA 1906

This section relates to the pre-contractual representations.54

As mentioned above, the obligation of good faith does not only involve the duty of disclosure. It also holds the duty to provide only information that is true. This latter is provided in section 20.55

Here again the question of materiality rises. We can use the same reasoning of materiality for the duty to represent as seen above in the case Pan Atlantic v Pine Top Insurance 56 The materiality will be judged before the contract is concluded. It is not relevant whether the representation loses its materiality. The consequence of avoiding the contract can still be used.57

There are two types of representations, first you have the representations as to a matter of fact and second you have the representations as to a matter of expectation or belief.58

5.2.5.1 Representation of fact Out of section 20(4) we can derive that there is no perfect truth required for a representation as to a matter of fact. It does not have to be literally true, it is enough to be substantial correct. This is being judged at the time before the contract was concluded, thus the period after the

52 H. Bennet, “The law of marine insurance”, Oxford, Oxford University press, 2006, sec. ed., 151. 53 The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014) 104-105. 54 Section 20(1) MIA 1906 55 See Annex I 56 J.E. Feeley, “The non-disclosure/misrepresentation defence: UK and California law regarding the "materiality" requirement”, Int. I.L.R. 1995, 3(3), 78-81. 57 H. Bennet, “The law of marine insurance”, Oxford, Oxford University press, 2006, sec. ed., 152. 58 Section 20(3) MIA 1906

conclusion is not relevant.59 When there is a change of information from true to false after the concluding, than the consequence cannot be used.60 This is the result of the fact that a representation can only be withdrawn or corrected before the contract is concluded.61

5.2.5.2 Representation of expectation or belief Section 20(5) tells us that this type of representation is based on honesty. It is not because the exception is not fulfilled or the belief is not justified or correct, that we can speak of a misrepresentation. However when, the representation is fraudulently represented, it will be considered as a misrepresentation.62

5.2.6 Conclusion

Out of the above analysis of the pre-contractual duty of disclosure, we can conclude that there is a need for the insured to disclose information, as he is the one who possesses the knowledge of the risk. We will see later, that this reasoning will not change, but that there is a need for better co-operation between the insured and the insurer’s knowledge. The insurer is a professional and therefore should know how the business is run. It is important that he plays a more active role in the disclosing. However, the current law is not clear. There are a lot of uncertainties. The law dates from the early 20th century and is no longer up to date. Today, we are confronted with a lot more information and data then before. The insurer is also better informed. This is the reason why the duty of disclosure was one of the main aspects of the change in the MIA of 2015.

5.3 Reform under IA 201563

The Act of 2015 has made three important changes with regards to the duty of disclosure. It replaced the concepts of ‘duty of disclosure’ and representations by ‘duty of fair presentation’. A new limb was introduced in the duty of disclosure. Finally the law concerning the material circumstances that are known or ought to be known by the insured is undergoing a big alteration.

59 Section 20(4) MIA 1906 60 H. Bennet, “The law of marine insurance”, Oxford, Oxford University press, 2006, sec. ed., 152. 61 Section 20(6) MIA 1906 62 P. M. Eggers “The past and future of English insurance law: good faith and warranties”, UCL J.L J. 2012, 1(2), 211-244. 63 H. Wright, “The Insurance Act 2015: A practical guide to changes in UK Insurance Law”, lmalloyds.com published 11 June 2015, 5-13 and http://www.lmalloyds.com/Act2015

5.3.1 The change of the concept

The new concept of ‘Duty of Fair Presentation’ contains changes in the disclosures and representations through the whole Act. There are no longer two concepts, the duty of disclosure and duty of representation are being pushed together in the concept fair presentation. These two concepts were brought together in one new concept by the Law Commissions since there is almost no difference between the duty of disclosure and the representations. When there is a breach, this mostly concerns the same information. Both concepts have the same inducement test and remedy for breach. It was only a logical step to merger them. The Law Commissions also decided not to change the provision of section 20 MIA 1906, as it never resulted in problems in practice.64

We can state that the base of the two duties (duty of disclosure and representations) has not been changed. This does not mean that everything remains the same. There were four big alterations. 1) The introduction of a second limb in the duty of disclosure. 2) The disclosure must be in a manner which would be reasonably clear and accessible to a prudent insurer. 3) The disclosing of the information which is subjected to a warranty 4) The reasonable search regarding the knowledge of the insurer and the insured.

5.3.2 The introduction of a second limb in the duty of disclosure.

The first limb covers the fact that the “disclosure of every material circumstance which the insured knows or ought to know”65 needs to be fulfilled. This is the limb that was already present in section 18(1) of the Act of 1906 and has not been changed. However, in the new Act a second limb has been introduced as a plan-b or back-up plan. This is being found in section 4(4)(b) of the Act66. As a result of the second limb, the insured can fulfil the duty even without disclosing all the material circumstances. As long as he provides sufficient information to put a prudent insurer on notice that it needs to ask further questions, the duty has been fulfilled. This reflects the approach that was already taken by the courts in their judgements.67 The question arises, what action of the insured is a big enough sign to make sure that the insurer will ask further questions? The act clearly states that the insured is obliged to disclose “in a manner which would be reasonably clear and accessible to a prudent insurer”68. So the signs given by the insured need to be reasonably clear and accessible to the insurer. Hereby

64 The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 76-79. 65 Section 4 (4)(a) IA 2015 66 See Annex II 67 Explanatory notes IA 2015, para 45. 68 Section 4 (3)(b) IA 2015

we can also rely on the fact that a contract of marine insurance should be based on utmost good faith as defined in section 14. The insured may not deliberately use this limb to mislead the interpretation of the risk by the insurer. If this happens, it can be considered as a breach of the duty of fair presentation.69 If, in the current law, the insured puts the insurer in the clear position that it needs to ask further questions and the insurer does not do so, the insured may use the argument of waiver. Under the new Act, the insured will be discharged for the duty of fair presentation. This is putting the insurers in a worse position than before, offering better protection to the insured. The insurers should remain alert to the risk presentation and ask questions if necessary. The intention of this second limb was to include the underwriters more in the disclosure process asking questions during the presentation of the risk rather than when the loss has occurred. It was to fulfil the trend in case law whereby it is not possible or necessary to disclose all material circumstances. It is also important to note that the Law Commissions still consider the first limb of the duty of disclosure as the primary duty.70

5.3.3 The disclosure must be in a manner which would be reasonably clear and accessible to a prudent insurer

Section 4(3)(b)71 stipulates that the disclosure must be in a manner which would be reasonably clear and accessible to a prudent insurer. The act describes in a practical way how the risk must be presented. This change does not address the substance of the presentation, it only relates to the form72. This form of disclosing was designed to encourage a better quality of presentation. In the current law there is no limit in the amount of information that can be given to the insurer. In practice the insured often used the method of ‘data-dumping’ i.e. the practice where the insured is dumping huge quantities of information to the insurer with the intention to protect itself against a breach of the duty of disclosure. This practice puts the insurers in a difficult position whereas they had too much, not always relevant information, to digest.73 This new section in the insurance law is beneficial for the insurers, as they can ask to represent the information that has not been presented in a reasonable clear and accessible manner. On the other hand it is putting a heavier burden on the insured. It should be noted that the breach of this duty to present information in a clear an accessible way, may possibly result

69 H. Wright “The Insurance Act 2015: A practical guide to changes in UK Insurance Law”, lmalloyds.com published 11 June 2015, 7 and http://www.lmalloyds.com/Act2015 70 The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 74-77. 71 See Annex II 72 Explanatory notes IA 2015, para 46 73, The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014) 77.

in an actionable breach of the duty in its own right. This test of clear and accessible, is an objective one. The presentation of the information is clear and accessible to a ‘prudent insurer. This means that the presentation is not necessarily accessible to a particular underwriter who may be less than ‘prudent’.74 Important to note here is that the Law Commissions are of the opinion that this form of disclosure will be breached when an insured seeks to abuse the ‘sufficient information’ limb of the disclosure test as seen above. When an insured only gives certain information in the hope that the insurer will fail to make further enquiries, than this is not clear and accessible.75

5.3.4 The disclosing of information forming the subject of a warranty

In current law, the insured does not need to disclose information that forms the subject of a warranty. Under the Act of 2015, the exception of duty of disclosure for warranties has been abolished. The breach of warranty has in the current law the consequence of avoiding the cover by the insurer. If there was no disclosure by the insured about a problem with the warranty, this did not lead to a problem cause the insurer was protected by the warranty. In the new Act the warranty will be changed into a suspension. Because of the change of the nature of warranty into a suspensory condition, the insurer loses his protection and therefore is in need of information about the warranty by the insured.76

5.3.5 The reasonable search regarding the knowledge of the insurer and the insured.

The knowledge of the insurer and insured are also subject to changes in the new Act. We can find the alterations in section 4 and 6 of the new Act77. These sections describe in detail what must be disclosed by the insured and what the exclusions are for the insured individuals and non-individuals. The whole idea of these changes was to make the duty of disclosure easier for the insured.

5.3.5.1 The knowledge of the insured It was the intention of the Law Commissions that the individuals, whose knowledge attribute to the duty of disclosure for the insured, must be identified, especially when the insured is not

74The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 78. 75 The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 78. 76 H. Wright “The Insurance Act 2015: A practical guide to changes in UK Insurance Law”, lmalloyds.com published 11 June 2015, 8 and http://www.lmalloyds.com/Act2015 77 See Annex II

an individual, but an organisation. In the organisation not only the directing ‘mind and will’ is important for the knowledge, but also the knowledge of people who arrange the insurance as seen above. This should be put in the law and has been done.78

We will start by looking at the individual insured and what he knows. The law tells us the following: “An insured who is an individual knows only: (a) what is known to the individual, and (b) what is known to one or more of the individuals who are responsible for the insured’s insurance.” 79 This does not only include the matters where the insured is certain about, but also the matters that the individual suspects. This is almost the same as in the current law with the actual knowledge and blind eye knowledge, but the difference lays in the fact that the knowledge of the insured’s agent will no longer represent as being done to the insured as seen above, except if the agent is involved in the purchase of the insurance.80

This knowledge is different in case the insured is not an individual but e.g. a company. The law states: “An insured who is not an individual knows only what is known to one or more of the individuals who are: (a) part of the insured’s senior management, or (b) responsible for the insured’s insurance.”81 This includes also the matters that the non-individual insured suspects. This is also not a big change compared to the Act of 1906 in which actual knowledge and blind eye knowledge are included. However, the concept of senior management is new and narrower than “directing mind and will of the company”. In the current law we have the same observation concerning the knowledge of the insured’s agent, it will no longer represent as being done to the insured.82 The knowledge of the individuals who do not fall under the scope of senior management, but that have a managing role or any other role that has relevant information about the insured risk, can be captured by the ‘reasonable search’ term.83

5.3.5.1.1 The senior management The senior management are “those individuals who play significant roles in the making of decisions about how the insured’s activities are to be managed or organized.”84

78 The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 91. 79 Section 4 (2) IA 2015 80 H. Wright “The Insurance Act 2015: A practical guide to changes in UK Insurance Law”, lmalloyds.com published 11 June 2015, 9 and http://www.lmalloyds.com/Act2015 81 Section 4 (3) IA 2015 82 H. Wright, “The Insurance Act 2015: A practical guide to changes in UK Insurance Law”, lmalloyds.com published 11 June 2015, and http://www.lmalloyds.com/Act2015 83 The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 94. 84 Section 4(8)(c) IA 2015

In the context of corporations, this includes the members of the board of directors, but it may extend further. This depends on the structure and the management arrangements of the insured.85 This does not mean that the information of employees and other people in the company is not relevant, sometimes their information is even of high value. But their knowledge will be caught by the ‘reasonable search’ which we will discuss in 5.3.5.1.86

5.3.5.1.2 Individuals responsible for the insured’s insurance Section 4(8)(b) is expected to catch any employee that assists in the collection of data or negotiates the terms of the contract.87 So each person who participates in the process of the insurance contract.

The definition also specifically mentions the insured’s agent. Important to note is, that it only relates to the individual agent and not to the collective knowledge of large brokerage firms. In the MIA 1906, section 19 (the knowledge of the agent) was rather confusing and unclear. There was an obligation of disclosure for the agent, but when there was a breach, the insurer could not use his remedy against the agent. It could however been used against the insured. In section 4 IA 2015, the knowledge of the agent is still important, however there is no longer a specific duty for the agent. The knowledge of the agent is now seen as a subset of the insured’s knowledge. The new provision clarified the blurriness of section 19 MIA 1906.88

5.3.5.2 What the insured is ought to know The new provision is taking into account both the individual and non-individual insureds. This puts a big burden on the insured and was not foreseen in the Act of 1906. The ‘ought to be known information’ has been changed drastically. “…an insured ought to know what should reasonably have been revealed by a reasonable search of information available to the insured”.89 This new ‘reasonable search’ contains a much broader concept than the knowledge the insured ought to know ‘in the ordinary course of business’ as explained in section 18(1) MIA 1906. The Act has no limit on where the information needs to be found in the term ‘reasonable search’. The information does not need to be in control of the insured, it can be in control of ‘any other person’ as defined in section 4(7) of the Act. The only parameter we can rely on is reasonableness. This allows that the amount of information the insureds need to know varies, even when the insureds are in the same category of risk. This ‘reasonable search’ needs to be judged in an objective manner, it

85 Explanatory notes IA 2015, para 54 86 The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 92-94. 87 Explanatory notes IA 2015, para 53. 88, The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 106-107. 89 Section 4(6) IA 2015

is based on the information that ‘should’ have been found during a reasonable search. The constructive knowledge of information that cannot reasonably be discovered, should not be taken into account. This leaves no place to take into consideration the subjective characteristics of the insured, which was possible under the Act of 1906 (‘what is ought to know in the ordinary course of business’). The degree of the reasonable search will vary depending of the size of business of the insured. In case the insured is an individual, there might be no employees to ask, but there can be records available that need be looked at or external advisors to consult.90 This change will raise the burden on the insured. On this moment the reasonable search is not well defined. This will probably result in the need of guidelines to determine what constitutes a reasonable search. It is possible that these guidelines will become the object of an agreement between insureds and agents, this to overcome future discussions on this subject. The provisions also state that only the information that was available to the insured must be disclosed. This is a matter of fact and needs to be judged in the circumstances of the particular case.91 We can expect that future interpretations of section 4(6) and 4(7), will be guided by existing case law.92 We have dealt with what the insureds ought to know, but there is an exception in section 4(4). This provision relates to the ‘confidential information’. Information will only be confidential by the fulfilment of two conditions. First the individual must be the agent of an employee or the agent of the insured and secondly the information must be received by one of the latter through a business relationship with a person that has no connection to the contract of insurance. Any other information is not confidential. The act does not state how information needs to be determined as confidential. But we can expect that this needs to happen in an objective manner as otherwise it would be possible to exclude to much information on basis of the subjective view of the agent.93 This provision is expected to be relevant to the agent of the insured who is holding confidential information for other clients.94 This provision is codifying the opinion of the courts as discussed above in the current law.

5.3.5.3 Knowledge of the insurer We have dealt with the information an insured ought to know, now we will take a closer look on the information the insurer needs to know. This is to be found in section 5(1)95 and reflects the current law in section 18(3)(b) MIA 1906. But the current law was in need of clarification.

90 The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 98. 91The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 99. 92 Explanatory notes IA 2015, para 57; 93 H. Wright, “The Insurance Act 2015: A practical guide to changes in UK Insurance Law”, lmalloyds.com published 11 June 2015,11 and http://www.lmalloyds.com/Act2015 94 Explanatory notes IA 2015, para 59. 95 See Annex II

This now happens in section 5(2)96. It stipulates what the insurer is ought to know. Here we find the change in the law compared to the Act of 1906. The first part of this provision is practically the same as in the current law, the change in the law lays in the section 5(2)(b) of this provision, “the relevant information… and is readily available to an individual mentioned in subsection”. The law now requires that the insurers take a look at the information that is ‘readily available’ to them. Although ‘readily available’ is not exactly defined. It should be noted that section 5(2) clearly states that the information in question must be ‘held by’ the insurer. This is in order to limit ‘readily available’ information that is in the possession of the insurer. Any information found outside the hands of the insurer such as information in a public library or on the internet, is not considered relevant. But what about information that is available on the insurer’s own intranet or on databases on which the insurer has a subscription? This information is not actually in the possession of the insurer, but held by the provider of the resource. One could however easily argue that it is even so held by the insurer based on its right and ability to get information from the database, which non-subscribers do not have.97 We have seen what the insurer knows and what the insurer is ought to know, now we will look at what the insurer is presumed to know. Section 5(3)98 reflects again the act of 1906 in this aspect. The insurer is presumed to know information which is common knowledge. There is no material change in the provisions.

5.3.6 How to prepare on these changes?

5.3.6.1 Insureds99 1) The insured needs to investigate which policies will be affected by above mentioned changes. The scope of the IA 2015 is limited to the policies governed by the law of England, Wales, Scotland and Northern Ireland. But it is possible that the insured has placed policies abroad or overseas which are governed by one of the applicable laws of the new Act. 2) The insured needs to prepare now in order to have enough time for the necessary gathering of data. He/she should also pre-agree with the insurers on which information is relevant and in which manner the insured will have to search for this information and how it needs to be disclosed. The insured also needs to give the insurers enough time to make inquiries. 3) The insured needs to identify ‘senior management’

96 See Annex II 97 H. Wright, “The Insurance Act 2015: A practical guide to changes in UK Insurance Law”, lmalloyds.com published 11 June 2015, 12-13 and http://www.lmalloyds.com/Act2015 98 See Annex II 99X, “Adviser: The Insurance Act 2015 – issue 2”, marsh.com July 2015, 2-3 and https://www.marsh.com/content/dam/marsh/Documents/PDF/UK- en/Adviser%20The%20Insurance%20Act%202015%20Issue%202-07-2015.pdf

4) The insured needs to identify the persons responsible for placing the insurance. 5) The insured needs to raise internal awareness in their companies. 6) The insured needs to raise awareness of their boards. 7) The insured needs to review his/her existing data-gathering process. 8) The insured needs to identify who will be responsible for the information that is ‘ought to know’ and which is related to the ‘reasonable search’. The reasonableness of the search will depend on different factors. The company Marsh100 worked together with the BIBA (British Insurance Brokers’ Association) and made some guidance recommendations for the insureds. 9) The insured needs to prepare for personnel and broker changes by capturing information. A change of these persons can form some challenges regarding the disclosing duty of the insured, especially concerning the knowledge of the insured. It will be important to record all the relevant information before changes take place. 10) The insured needs to agree on what information his/her agents will keep. 11) The insured needs to think how he/she will present the information. This relates to the required ‘reasonable and clear manner’ for presentation of information.

5.3.6.2 Insurers101 The insurers will have to be more active. They should consider establishing systems and processes to identify if further inquiries need to be made before they underwrite a risk. They should review what information is readably available to those who accept the risks and terms.

5.3.7 Conclusion

We have seen all the changes in the law handling the new duty of disclosure i.e. the fair presentation. We can conclude that the biggest changes are lying in the newly added limb of section 4(4). This back-up plan is protecting the insured from the harsh section 18(1) in the MIA 1906. But as we have seen, this new limb has some uncertainties. It is putting a bigger burden on the insurer to perform more proactive research and to perform additional administrative work. A more active role of the insurer is central in the duty of disclosure. If an insurer wants to have a proper fulfilment of this duty, co-operation is necessary. However, it is possible that the insurer will be more cautious in giving out insurance. The latter can result in higher premiums prices covering the risk of any non-disclosure. There is also no

100 Marsh is a world leading company that is specialised in insurance broking and risk management. 101 X, “The Insurance Act 2015: practical changes for insurers to consider”, out-law.com, last updated March 2015 and http://www.out-law.com/en/topics/insurance/insurance-regulation/the-insurance-act-2015-practical-changes-for-insurers-to- consider/

consequence for the insurer when he does not follow the added second limb. Therefore it is doubtful if this new provision will be effective.102 The new law also holds changes with regards to the knowledge of the insured and the insurer. Relating to the insured, it seems that this has been narrowed down with the new definitions of senior management and individuals responsible for the insured’s insurance. However, the ‘reasonable search’ in the context of what the insurers ought to know, the information that needs to be disclosed, has been broadened. The knowledge of the persons that fall out of the scope of section 5(1) will fall under the scope of section 5(2). This is making the burden higher for the insured compared to section 18(1) MIA 1906 regarding ‘in the ordinary course of business’. There are also uncertainties of what can be seen as reasonable, guidelines will need to be established. I can agree that it is important that the insured needs to disclose as much information as possible, as he is the person that has the knowledge of the risk, but I don’t think this burden is fair compared to the burden of the insurer. The insurer will have more duties based on the second limb and his knowledge, but not as much as the insured. The Law Commissions is definitely striving to achieve a better co-operation from both parties, but in my opinion the insured is still required to take the lead. The knowledge of the insured, is the knowledge that is available on computers or in a database, this does not require much work. Overall, the new law seems to offer more clarity than the law of 1906. In the doctrine, there is also the fear of litigation as the concept of fair presentation is not clear in every aspect.103 Another important issue to note are the problems that could arise from the applicability of some of the provisions on the reinsurance. First we have the term senior management related to the knowledge of the insured and information out of a ‘reasonable search’. It is unclear how this needs to be translated in the reinsurance. For instance, does the requirement of ‘reasonable search’ extends to a requirement of asking appropriate questions to the original insured? How should ‘senior management” be defined in a whole account treaty? Does it conclude the senior officers where the reinsured is a Lloyd’s syndicate? There are more questions that arise. These questions need to be put on the agenda of the reinsured, the reinsurer and their brokers. It will be necessary to have agreements on different scopes such as the knowledge of which persons will be relevant and thus contract out of the provisions with respect of the transparency requirements.104

We also need to take into account the possibility to contract out of the regime. In non- consumer contracts it is possible to contract out when the transparency requirements are fulfilled. The future will show how the insurance companies will react. I think they will try to

102 L. Reeves, “the duty of pre-contractual disclosure in English insurance law: Past and future – does the law need to be changed?”, SSLR 2015, vol 5, 9.-10. 103 L. Reeves, “the duty of pre-contractual disclosure in English insurance law: Past and future – does the law need to be changed?”, SSLR 2015, vol 5, 10. 104S. Cooper, “The Insurance Act: the final countdown”, INCE&Co law firm Februari 2016 and http://www.incelaw.com/en/knowledge-bank/publications/the-insurance-act-2015-publication-february-2016

contract out when the burden to fulfill the requirements, will be lower than the extra burdens in the fair presentation.

Chapter 6 Remedies for non-disclosure

6.1 Explaining the concept

When the insured breaches the duty of disclosure, of utmost good faith or of representation, the insurer can use a remedy against this based on the law. A remedy is the manner in which a right is enforced or satisfied by the courts of law.

6.2 Current legislation

The remedy defined in section 18(1)105 for failure of disclosing material circumstances is very clear. For every breach, small or big, the insurer may avoid the contract. The same remedy applies in case the duty of fair presentation has been breached. In both cases the contract must be treated, as it had never been concluded. This sanction seems justified when the insured deliberately decides not to disclose material circumstances, i.e. fraudulent behaviour, or does not give a fair presentation of the risk to the insurer. This cannot be said for a breach of non- disclosure by the insured that was not deliberate and thus innocent. The current law is very strict and unfair, it only offers the remedy of avoidance regardless the severity of the breach.106

We need to note that consumer insurance contracts, are governed under the CIDRA. The latter foresees more than one remedy against the breach of the duty of disclosure by the insured. As the knowledge of the consumer is much smaller than that of a non-consumer, consumers need to be protected in a different way requiring more proportionated remedies depending on the severity of the breach of disclosure. Large enterprises and corporations, have sufficient money to challenge issues of non-disclosure as it can be difficult to find whether a firm is innocent or

105 See Annex I 106 L. Reeves, “the duty of pre-contractual disclosure in English insurance law: Past and future – does the law need to be changed?”, SSLR 2015, vol 5, 6.

fraudulent in its non-disclosure .107 The remedies that can be found in the Act and the law concerning the remedies, are the same as the ones in the Insurance Act of 2015. I will discuss this in 6.3.

6.3 Future changes under IA 2015108

The remedies of non-disclosure are probably the most significant alteration in the new insurance Act. As described above, the only remedy for breaching the duty of disclosure was the avoidance of the policy, even when the breach was small. This ‘harsh’ consequence for the breach is unfair and was therefore criticized on a high scale. In practice most insureds are not aware of the full extent of the duty of disclosure, and for large companies it is almost impossible to disclose all relevant information. Next to this, the remedy makes no difference between persons that breached the duty deliberately and those who did it not on purpose. Both are treated in the same way, which is of no doubt not proportionate. The remedy also does not take into consideration the impact of the non- disclosure or misrepresentations on the insurer’s assessment of the risk. In some cases the insurer would probably have accepted the risk when there was full disclosure by means of charging a higher premium. The current law only offers the remedy of avoidance. This does not compensate the insured for the loss of the benefit of a valid insurance contract. Another disadvantage of the current law lays in the fact that insurers will not try to give better presentations, although the fair presentation of the risk requires a co-operation from both the insured as insurer. We can also note that the remedy is essentially one sided, as in many cases the insured will be in breach109. This does not mean that the remedy of avoidance should be completely banned, it should still be used when the insured was reckless or deliberately breached the duty.110 The Act of 2015 replaces the old remedy of contract avoidance with several new, more fair and proportionate, remedies for non-disclosure.

107 L. Reeves, “the duty of pre-contractual disclosure in English insurance law: Past and future – does the law need to be changed?”, SSLR 2015, vol 5, 6. 108 H. Wright, “The Insurance Act 2015: A practical guide to changes in UK Insurance Law”, lmalloyds.com published 11 June 2015, 14-18 and http://www.lmalloyds.com/Act2015 109 P. M. Eggers, “The past and future of English insurance law: good faith and warranties”, UCLJLJ 2012, 234. 110 The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014, 132.

Before we deal with the remedies, I will explain the conditions an insurer needs to fulfil, before he is entitled to use a remedy against the insured. From section 8(1)111 we can derive that the insurer is offered two possible ways to exercise a remedy against the insured.

1) The insurer brings enough proof that shows that he would not have concluded the contract if he had received all the information within the duty of disclosure. 2) The insurer can proof that he would have concluded the contract, but on other terms.

These two conditions reflect the current law on inducement as seen in the case Pan Atlantic.112

In the new Act the remedy against the insured is being referred to as a ‘qualifying breach’.113 Thus when the insurer has fulfilled the condition of section 8(1), he can use a qualifying breach against the insured. There are three types of qualifying breaches set out in section 8(4)114.

1) A deliberate qualifying breach, whereby the insured is well aware that he has breached the duty of disclosure. 2) A reckless qualifying breach whereby the insured does not care if he is in breach. 3) A qualifying breach that is neither deliberate or reckless and therefore can be seen as a rest category.

Deliberate or reckless breaches include fraudulent behaviour.115 We can state that the breaches do not have to be deliberate or reckless to be actionable. ‘Innocent’ breaches of the duty will also give an insurer a remedy if the insurer can show inducement. This reflects the current law. This latter differs from the law of the CIDRA. The idea is that the duty of the consumer is to reasonable care not to make misrepresentations, otherwise it is not actionable.116

6.3.1 Deliberate or reckless breach

Unlike the current law, the new Act does not only focus on the single remedy of avoidance. It focusses on the severity of the breach to determine the remedy and imposes different types of remedies depending on the type of breach and according to its severity. A deliberate or reckless breach is seen as a very severe breach. We can find the remedy in Schedule I §2117 i.e. the avoidance of the insurance contract and paid premiums will not be refundable. Section

111 See Annex II 112 Explanatory notes IA 2015, para 77. 113 Section 8 (3) IA 2015 114 See Annex II 115 Explanatory notes IA 2015, para 80. 116 Explanatory notes IA 2015, para 81 117 See Annex II

8(6)118 determines that the burden of proof lays with the insurer. The definitions of reckless or deliberate breaches are the same in the CIDRA.

6.3.2 Non deliberate or reckless qualifying breaches

These breaches are far less severe than the deliberate or reckless ones. For this type of breaches, the new law offers a range of more proportionate remedies. To know which remedy can be used one needs to answer the question: What would the underwriter have done if there would have been a fair presentation by the insured about the risk? This is referred to as the question of inducement that will play an important role in the new Act. The possible remedies for breaches that are neither deliberate or reckless are as follows:

1) If the insurer would not have concluded the insurance contract, the used remedy is avoidance of the contract. Even if the breach was neither deliberate nor reckless, the insurer may avoid the contract but must return the premium. This in contrast to a case of deliberate or reckless breach of duty whereby the premium is not refundable. Avoidance will only be permitted if the insurer can prove that the underwriter would not have contracted if the insured had given a fair presentation of the risk. This is to be found under Schedule I §4119. 2) The second remedy is to be found in Schedule I § 5120 and is named varying the terms of contract. It is applicable to situations whereby the insurer would have concluded the contract but on different terms in case there would not have been a breach of duty. In such cases the courts will treat the contract as if it was concluded based on the terms the underwriter would have written if there would have been a fair presentation of the risk. The contract will therefore be rewritten by the courts and becomes retroactive. If the insurer has already paid for losses, and the new terms provide for a reduced or burn out liability for these losses, the insured will have to reimburse the insurer for the losses he paid too much. 3) The third remedy of proportionate reduction of the claim is described in schedule I § 6121. If in absence of breach the insurer would have concluded the contract under a higher premium, the insurer may proportionate reduce the claim. This reduction remedy can be a stand-alone remedy, but it can also be used alongside ‘the rewriting’ of the contract as seen above.122

The new well considered and proportionate remedies are not free of criticism. The first point of criticism lays in the fact that there is no provision that takes in account all relevant

118 See Annex II 119 See Annex II 120 See Annex II 121 See Annex II 122 Schedule 1 (10) IA 2015

circumstances. The courts are not able to use a discretion when for example there is a very minor deliberate breach with inconsequential consequences for the insurer. In such a case the only possible remedy remains avoidance of contract although it seems not proportionate. The second form of criticism is related to the provisions of compensation. These ignore the fact that the consent of the insurer was affected with the breach of disclosure or representation and that the avoidance of the contract is the proportionate consequence in non-insurance cases. The courts have the right to override the avoidance, if it were thought that compensation is more desired. This is the case as under the misrepresentation Act of 1967. It needs to be said that in most cases the breach of duty of fair presentation will only be discovered after the conclusion of the insurance contract, when the right of avoiding the contract will almost never be useful. The fact remains that the new remedies are a substantial improvement compared to the harsh remedy of avoidance in the MIA 1906. But they still do not reach far enough to put an end to all possible injustices and to obtain consistency with the common law of misrepresentation.123

Next to the above criticism in the doctrine, there were also 4 of the 44 consultees in the Law Commissions who disagreed with the proportionate remedies:124

The first concerns the burden of proof that lays with the insurer relating to the deliberate and reckless breaches. This limitation for the remedy of avoidance is too strict because dishonesty is hard to prove. Secondly, the proportionate remedies could increase uncertainty and litigation. Thirdly, the proportionate remedies could undermine the intention of the insured to fulfil the duty of disclosure. Finally, in practice insurers will negotiate fair settlements without paying attention to the law, so one could say that reform is not quintessential.

The commissions have replied to every single aspect of these concerns. About the first concern (burden of proof) the Law Commissions argued that many insurers associate the deliberate and reckless breach with the criminal standards of proof and thought they would be very rarely in a position to prove that the insured acted deliberately or reckless. This idea came from the fact that the Law Commissions described the dishonesty as fraudulent. But they say the following to calm the tempers: “It is not our intention that the insurer’s task of proving that a breach of the duty of fair presentation was made deliberately or recklessly should be unduly onerous, or require an exceptionally high standard of proof.” The judges can take this interpretation of the burden of proof into account when they have to settle a case where there is a deliberate or reckless breach. The second concern was also answered, the question of proving what the insurer would have done was discussed on high scale. It was said that for cases to more bespoke risks such as risks for which there are no pricing tariffs, the evidence of how the insurer would have acted may be derived from a number of sources such as pricing manuals and models. The Law Commissions are of the opinion that the courts are

123 P. M. Eggers, “The past and future of English insurance law: good faith and warranties”, UCLJLJ 2012, 236. 124The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014) 135-136 and 142-143.

best placed to decide which evidence is admissible and sufficient, as they make similar decisions when deciding about issues of materiality and inducement. Relating to the third concern, the Law Commissions argued that the remedies are still designed to compensate the insurer adequately, so it is in the interest of the insured to make a fair presentation. The fourth criticism was refuted by the argument that the remedies should not rely on gestures of goodwill by insurers. The law should reflect the commercial practice and accept that negotiations for good settlements will occur.

6.3.3 How to prepare on these changes?

6.3.3.1 Insureds125 1) The insureds need to review together with their agents the terms of their existing insurance contracts. They need to make amendments to all terms related to avoidance in contracts by negotiations with the insurers. 2) The insureds need to reflect on the fact if they wish to limit the range of available remedies to the insurer. 3) The insureds need to determine whether they prefer to pay an additional premium insurers would have charged by failure of fair presentation over taking proportionate reduction of claim payments. 4) The insureds need to examine if amendments are necessary to excess layer policies to deal with the situation where the primary insurance policy limit is not exhausted due to the proportionate remedies by the primary layer insurers (important for reinsurance). 5) The insureds need to check if the reinsurers remedies are consistent with the insurer’s remedies. 6) The insureds need to put in place a process to address the duty of fair presentation prior to inception. That way insurers will not be able to argue if there was a breach or not.

6.3.3.2 Insurers126 To obtain an action for breach of the duty of disclosure, the insurers need to prove how they would have acted differently if there had been no breach. Therefore it can be necessary to disclose information of underwriting guides and other documents that are related to the decisions of the underwriter. The insurer needs to consider if he desires to disclose such commercially sensitive information.

125X, Adviser: “The Insurance Act 2015 – the new regime of proportionate remedies”, marsh.com March 2016, 5 and https://www.marsh.com/content/dam/marsh/Documents/PDF/UK- en/Insurance%20Act%20Adviser%20New%20Regime%20of%20Proportionate%20Remedies-03-2016.pdf 126 X, “The Insurance Act 2015: practical changes for insurers to consider”, out-law.com, last updated March 2015 and http://www.out-law.com/en/topics/insurance/insurance-regulation/the-insurance-act-2015-practical-changes-for-insurers-to- consider/

6.3.4 Conclusion

We can conclude that the sole avoidance remedy of MIA 1906, was to narrow and too harsh for all the circumstances of non-disclosure. Proportionate remedies were urgently needed and we can clearly identify that the CIDRA was used as a source of inspiration. The new remedies are still not sufficient to overcome all the issues and all the circumstances, but which law does? There will always be situations that fall out of the scope. We also have to note that there are some uncertainties present that will need to be dealt with in court. Hereby I refer to the question: “What would the underwriter have done if there would have been a fair presentation by the insured about the risk?”. We will have to wait to see which forms of proof by the insured the judges will allow once the law comes into in effect (12/08/2016) .

Chapter 7 Warranties and other terms

In English common law, a contract is made out of terms. These terms can be divided in conditions and warranties. The conditions are the essence and form the most important characteristics of the contract. When a condition in a contract has been breached, the contract will be rescinded. A warranty controls less important aspects of the contract. When a warranty has been breached, the contract will not end, but there will be a right of compensation. This above general English contract law on the concept warranty, differs from the meaning of a warranty in the insurance law127. In this part we will discuss the identification, the meaning and the importance of a warranty in an insurance contract. Further in this dissertation the consequences of a breach of warranty in the current law and the changes resulting from the new IA of 2015 will be specified.

127 M.I. Hendrickse, “Verzekering en de (internationale) handel: de transportverzekering en de kredietverzekering”,in S.E. van Hall & M.L. Hendrikse & N.J. Margetson & H.P.D. den Teuling & G.J.P. de Vries, “Capita internationaal handelsrecht”, Parijs, Zutphen, 2013, 231-232.

7.1 Current legislation

7.1.1 Explaining the concept of warranty

In English marine insurance contracts, you have two kinds of warranties:1 Warranties that describe the scope of the cover e.g. the warranted fee of capture and seizure clause, where war risks are being excluded. These clauses are formulated as warranties, but are nothing more than exclusions. The warranties in the MIA 1906 are not the same. These are called a promissory warranty.

We also find warranties in legal systems outside the common law countries, but in a different form. From the definition in section 33(1)2 we can derive that the promissory warranty is a commitment that a certain characteristic or a certain condition will be fulfilled e.g. if, during conclusion of the contract, the insured warrants vis a vis the insurance company that the cargo will be packed in crates, the warranty lays in the fact that the merchandise will be packed in crates.3 The insured promises that he will fulfil the condition that is contained in the warranty or he will make sure that a certain situation or condition will not occur.4 The warranty serves as a shield against liability for the insurer, it is given to reduce the risk underwritten by the insurer.5 The warranties are commitments made by the insured to the insurer. There are a lot of discussions that these warranties are a rather unfriendly system for the insured. Before we explain this further, we will discuss how these warranties are organised in the 1906.

7.1.2 Expressed and implied warranties

Section 33(2)6 states that there can be expressed and implied warranties.

An expressed warranty, is a warranty that needs to be written in the contract in an explicit way. When it is not incorporated in the contract, it will not apply. This is the opposite for an

1 M.I. Hendrickse, “Verzekering en de (internationale) handel: de transportverzekering en de kredietverzekering”,in S.E. van Hall & M.L. Hendrikse & N.J. Margetson & H.P.D. den Teuling & G.J.P. de Vries, “Capita internationaal handelsrecht”, Parijs, Zutphen, 2013, 232. 2 See Annex I 3 Bernauw, K “Transport Insurance Law”, Ghent University, Gent, 2015, 91 and completed with student notes Annelies De Boever 4 M.I. Hendrickse, “Verzekering en de (internationale) handel: de transportverzekering en de kredietverzekering”,in S.E. van Hall & M.L. Hendrikse & N.J. Margetson & H.P.D. den Teuling & G.J.P. de Vries, “Capita internationaal handelsrecht”, Parijs, Zutphen, 2013, 233. 5 T.J. Schoenbaum, “Warranties in the law of marine insurance: Some suggestions for reform of English and American law”, Tul. Mar. L.J. 1999, Vol. 23, Issue 2, 279. 6 See Annex I

implied warranty. The latter is being applied by virtue of law, even when the warranty is not stipulated in the insurance contract, it will apply. In the MIA 1906 we have two implied warranties. The legality and seaworthiness. This means that a marine transport operation always needs to be legal and that the vessel needs to be seaworthy.7 Most of the implied warranties apply as a matter of law by reason of the MIA 1906, unless they are inconsistent with the terms of the contract or with an explicit warranty. A warranty can be implied by reason of a parties’ agreement. This can be found under section 35(3).

8 7.1.3 Identification of a warranty

We can identify a certain aspect of the contract as a warranty by examining the intention of the parties reflected in the contract. This is written down in section 35(1) as: “An express warranty may be in any form of words from which the intention to warrant is to be inferred”. The word warranty can be used in a contract without a link to the warranties explained in section 33(1). There are some tests to identify a warranty: In a non-maritime case HIH casuality and general insurance v New Hampshire insurance, the judge proposed three tests to define if a clause was to be considered as a warranty or not. According to the judge the “presence or absence of the word warranty was not conclusive”. The word warranty or warranted does not determine whether it is a warranty or not. He defined following tests: 1) Does the clause goes to the root of the transaction? 2) Is the clause only descriptive or does it also contain materiality on the risk? 3) Test if the ‘damages would be an unsatisfactory or inadequate remedy’. The explanation of a clause in marine insurance contract does not differ from a non-maritime contract. This case is the prevailing doctrine but, there are some doubts related to the second test i.e. the materiality on the risk of loss. One could argue if this is compatible with section 33(3) which states that a warranty does not have to be relevant for the risk. Based on section 35(1) we can say with certitude, that identifying the warranties is always a matter of explanation.

Warranties can also be created by ‘basis of the contract clauses’. When an insured signs a proposal form of an insurance contract containing the clause that all answers provided, form the ‘basis of the contract’, then all the given answers are converted into warranties. This

7 W. Han, “Warranties in Marine Insurance”, (master thesis) http://www.aida.org.uk/docs/warrantiesmarineins.pdf, 112. 8 M.I. Hendrickse, “Verzekering en de (internationale) handel: de transportverzekering en de kredietverzekering”,in S.E. van Hall & M.L. Hendrikse & N.J. Margetson & H.P.D. den Teuling & G.J.P. de Vries, “Capita internationaal handelsrecht”, Parijs, Zutphen, 2013, 234.

clause allows the insurer to avoid the liability for any mistake, even if it is not material one. This clause is a pitfall for insureds and thus a very unfair practice.9

7.1.4 The compliance rule and the consequence of its breach

We can find the compliance rule and consequence of its breach in section 33(3).10

7.1.4.1 The compliance rule

7.1.4.1.1 Strict compliance The compliance rule was introduced in the old English cases, by Lord Mansfield. The rule contains the obligation to follow the warranties in marine insurance contracts in a very strict way. There is no possible excuse for non-compliance with the warranty.11 An example of a case is Kenyon v Berthon of 1779. The ship in question was warranted in port on 20th July but, instead the vessel started to sail two days earlier. Lord Mansfield here concluded that “the underwriter is not liable”12 Today this compliance rule of 1906, is still applied in the same strict way. An example hereof is the case of Bank of Nova Scotia v. Hellenic Mutual War Risks Ass’n also called the Good Luck case. The court ruled that the cover was terminated due to non-compliance of warranty.13 This case was ruled in 1992, this is over 20 years ago. But, judges still have the same idea of strict compliance as in the first cases around 1780. This is more than 200 years ago. However, sometimes the strict compliance requirement can be mitigated by a judge. This was the case in Simmonds v Cochell where a warranty that requires for the premises ‘always occupied’ was interpreted as requiring the premises to be occupied as a residence, and thus not as never leaving unattended. But, the softening by the courts is limited, because the main idea is still the requirement of strict compliance.14

The strict compliance also means that there is a heavy burden upon the insured due to the absolute compliance rule. It is not relevant if the insured committed a fault or not.15

9 The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 158. 10 See Annex I 11 T.J. Schoenbaum, “Warranties in the law of marine insurance: Some suggestions for reform of English and American law”, Tul. Mar. L.J. 1999, Vol. 23, Issue 2, 282. 12 Q. Rares, “The Marine Insurance Act: Out of warranty?”, A&NZ Mar LJ 2013, 37 13 T.J. Schoenbaum, “Warranties in the law of marine insurance: Some suggestions for reform of English and American law”, Tul. Mar. L.J. 1999, Vol. 23, Issue 2, 282 14 S. Tester, “The use and limitations of warranties in insurance contracts under English law”, Int. I.L.R. 1994, 2(9), 344-348 15 C.C. Rösiö, “Warranties in marine insurance: An unpleasant necessity?, Juridisk Publikation 2010, nr 1, 37.

7.1.4.1.2 Materiality Section 33(3), also states that there needs to be compliance with ‘whether it be material to the risk or not’. This offers a better protection for insurers than seen in the current law of the duty of disclosure, whereby only material circumstances needed to be disclosed..16

7.1.4.1.3 Causation There is no need for causation between the breach of warranty and the loss of the insured claim. This means that the consequence of the breach of warranty will be available for the insurer, even if there is no causation between the warranty and the claim. This practice confirmed in several cases such as Grogan v London & Manchester Industrial Life (1885) and Holmes v Scottish Legal Life (1932).17

7.1.4.2 Breach of warranty Section 33(3), does not only describe the compliance rule. It also explains the consequence of the breach of the warranty. This remedy is called the rule of automatic discharge. This automatic discharge starts from the date of breach, whereby it is not relevant if the insurer was aware of the breach. 18 As mentioned above, the compliance rule finds its origin in the old case law. This also applies to the consequence of the breach which was also introduced by the famous Lord Mansfield. He claimed that a contract is automatically discharged in the event of breach of warranty. This idea was very controversial and some opponents stated that a breach of warranty did not automatically put an end to the risk. This discussion was settled by the House of Lords in the case Bank of Nova Scotia v. Hellenic Mutual War Risks Association.19 The House of Lords needed to examine the meaning of the MIA and also the meaning of the consequence of the breach. The facts of this case were the following: the Good Luck was a ship insured for war risks with the Hellenic Mutual War Risks Association (the club). The ship was given in mortgage to the bank Nova Scotia (the bank) and the benefit of the insurance contract was given to the bank. Under a Letter of Undertaking, the club was obliged to inform the bank immediately when it wanted to end the contract of insurance. In November 1981, the club heard that the ship- owner of the Good Luck gave, without prior notice to the club and the bank, the order to sail in territories that were forbidden by warranty. The club gave no reaction to the intentions of the ship-owner and did not inform the bank of this knowledge. On 6th of June 1982, the ship was hit by Iraqi missiles in the Gulf of Arabia, a by warranty forbidden territory. The ship was lost and the owner submitted a claim for compensation with the club, which was refused. Before the incident the bank had increased the loan to the ship-owner. The bank would not

16 S. Tester, “The use and limitations of warranties in insurance contracts under English law”, Int. I.L.R. 1994, 2(9), 344-348 17 S. Tester, “The use and limitations of warranties in insurance contracts under English law”, Int. I.L.R. 1994, 2(9), 344-348 18 P. M. Eggers, “The past and future of English insurance law: good faith and warranties”, UCLJLJ 2012, 238. 19 T.J. Schoenbaum, “Warranties in the law of marine insurance: Some suggestions for reform of English and American law”, Tul. Mar. L.J. 1999, Vol. 23, Issue 2, 286.

have increased the loan if it had known about the breach of warranty as a result whereof the claim against the club was rejected. The bank argued that the club had breached its obligation to inform the bank and asked a compensation from the club in the amount by which the loan had been raised. The House of Lords decided that the sailing in forbidden territory was a breach of warranty and as a result of this, there was an automatic discharge of liability. This was going against the ruling from the court of appeal that the MIA of 1906 had not the intention to bring the risk automatically to an end.20

7.1.5 Breach of warranty excused

A breach of warranty can be excused in three circumstances. These are written down in section 34.21 The first part of section 34, stipulates an exception on the strict compliance rule of section. 33(3) as discussed above. An insured needs to be incompliant with the warranty. But, when circumstances change in such a way that the warranty becomes inapplicable to the new situation or when the warranty is not in line with a subsequent law and becomes unlawful, this is no longer the case. The insurer can also waive the breach of warranty as described in the third part of section 34.

7.1.5.1 Ceasing applicability The first excuse, the ceasing of the applicability can be very clear in cases where there is a clear intention of the insurer for the use of warranty e.g. not sailing in a forbidden territory may be excused on cessation of the hostilities. In other cases the intention for the use of the warranty by the insurer is not so clear. In such cases the judge will likely choose the side of the insurer based on the strict compliance rule with warranties.22

7.1.5.2 Illegality with subsequent law The second excuse, the supervening illegality and invalidity, is based on the illegality with any subsequent law23.

7.1.5.3 Waiver The third and last excuse is the waiver by the insurer. Normally such a breach does not put an end to the contract. The insurer may choose to discharge himself from future obligations. However, this system does not apply on the breach of an insurance warranty. This is the result of the ruling of the House of Lords in the Good Luck case. Originally the judge ruled that any breach automatically discharges the insurer. The breach cannot be waived since the insurer could claim against the insured for a breach of contract, without recreating the obligations of

20 Bank of Nova Scotia vs. Hellenic Mutual War Risks Association (Bermuda) Ltd., [1992] (Good Luck), 1 A.C. 233,262-263. 21 See Annex I 22 F.D. Rose, “Marine insurance: law and practice (sec.ed.)”,CRC press, 31 July 2013,195. 23 F.D. Rose, “Marine insurance: law and practice (sec.ed.)”,CRC press, 31 July 2013,195

the insurer. The House of Lords ruled differently; they declared that a waiver of the breach of warranty by the insurer was possible. When the insurer decides to waive the breach, he needs to stop the automatic discharge. When a judge needs to decide if there was a waiver of the breach of warranty by the insurer, he needs to check whether it was the utmost intention of the insurer to rely no longer on his legal right of being discharged from his liability. This is an objective legal concept.24

7.1.6 Breach of warranty remedied25

Section 34(2)26 gives us the answer on the question of a breach can be remedied before the loss by the insured. The section is clear and states that the insured cannot walk away from the breach of warranty and that the consequence of discharge automatically applies. A breach of warranty cannot be remedied. This was created in the cases of the late 18th and 19th century e.g. in cases De Hahn v Hartley and Quebec Marine Insurance Co v Commercial bank of Canada.27. For example: a captain of a ship is sailing in waters that are forbidden by warranty. Upon receipt of this information, the ship-owner forbids the captain to sail in these waters. The captain immediately leaves the forbidden waters. Later the ship lands in a severe storm and gets lost in territories where the vessel was allowed to sail. The insurer will not be obliged to compensate these losses because of the breach of warranty. This part of section 34 MIA 1906 is very hard and unfair for the insured.

7.1.7 Conclusion

The law of warranties in the MIA 1906 is very clear. However, it is very strict, harsh and in many cases totally unfair for the insured. There is an automatic discharge of liability which is not only related to the loss in causation with the breach of warranty, but for all liabilities. In case of breach of warranty the insurer can refuse a claim even if there is no direct link between the breach and the claim. The insured is not offered the possibility to remediate the breach and a statement may be converted into a warranty using words that only a few of the insureds understand with the ‘basis of the contract clauses’. The courts were aware of this unfair situation and tried to find ways to alleviate the effect of the promissory warranties for the insured. They explain uncertainties in the phrasing of a warranty in favour of the insured. The courts also try to explain terms, described as warranties, as suspensive or descriptive warranties rather than promissory warranties. However this latter is only the case when the terms are less important to the insured risk.28 It

24 F.D. Rose, “Marine insurance: law and practice (sec.ed.)”,CRC press, 31 july 2013,196-197. 25 F.D. Rose, “Marine insurance: law and practice (sec.ed.)”,CRC press, 31 july 2013,196-197. 26 See Annex I 27 B. Soyer, “Warranties in Marine Insurance”, Cavendish Publishing, 7 September 2001, 161-162. 28 P. M. Eggers, “The past and future of English insurance law: good faith and warranties”, UCLJLJ 2012, 239.

was a small step in the right direction that has been taken in consideration in the making of the IA 2015.

7.2 Future changes under IA 2015

Above we explained the concept of warranties under the MIA 1906. In the new act of 2015, three significant changes are introduced: 1) A breach of warranty only suspends the warranty till remedied. 2) The contractual transformation of duty of disclosure into warranties is not upheld. 3) Refusal of claim is only possible if the breach of warranty is related to the loss.

The need for these change was high. There arise no legal problems with regards to the warranties as they are well explained in the Act of 1906. But, they still form a common cause of disputes. The risk managers association carried out a survey that indicated that warranties, especially the ‘basis of the contract’ clauses, formed a big concern for corporate insurance buyers. It was putting the UK market in a bad position as the current law on warranties seemed unbalanced and tending to favor the insurer. The other common law countries have moved away from this harsh compliance and discharge rules. The civil law countries are unfamiliar with the discharge of liability rule. Already in 1980 the Law Commissions stated that alteration of the law was necessary.29

7.2.1 A breach of warranty only suspends the warranty till remedied

In current law the liability of the insurer will be automatically and permanently discharged when there is a breach of warranty. This has changed in Art 10(4)30. This section states that the insured may remedy a breach of warranty. Losses occurring before the breach of warranty and after the remediation of the breach will not affect the liability of the insurer. The section also speaks of the ‘attributable to something happening’, the legislators had the intention to include the situation in which loss exists during the period of suspension, but is not actually suffered until after that the breach is remedied.31 It also makes use of the words ‘can be remedied’, and therefore acknowledges that some of the breaches cannot be remedied.32 Thus a breach is remedied when the insured ‘ceases to be in breach’. This is found under section10(5)(b). However, some warranties are time specific. This is governed by section

29Law Commission and Scottish Law Commission, the Business Insured’s Duty of Disclosure and the Law of Warranties ( Law Commission Consultation Paper No 204; Scottish Law Commission Discussion Paper No 155, 2012), 136-137. 30 See Annex II 31 Explanatory notes IA 2015, para 89 32 Explanatory notes IA 2015, para 88

10(5)(a) and 10(6). For these warranties, a breach is remedied if the warranty is ultimately complied with, albeit late. We can think of a situation in which the deadline of a warranty was not reached, the insured could never cease to be in breach cause the time for compliance has passed.33 In section 10 the warranties will be treated as suspensory conditions. This means that, when an insured is in breach of a warranty, the insurer is no longer liable and will be suspended from his obligations to cover losses during the breach. But, once the insured has remedied the breach, the suspension of liability ends and the insurer needs to cover again for the losses the same as before the suspension. It is important to notice that we no longer speak of a discharge of liability, but of a suspension of liability as a result of the transformation of the warranties into suspensory conditions. 34 As last, it is important to note, that this section 10 applies to all warranties, expressed and implied, thus also the implied marine warranties.35 The new Act does not make any distinction between implied and expressed warranties as seen above.

We can conclude that the breach will no longer discharge but only suspend the insurer from its liability. Overall a very clear and positive change for the insured.

7.2.2 Refusal of claim when loss is due to the breach of warranty

In the Act of 1906, the strict compliance rule tells us that from the moment there is a breach of warranty the discharge of liability comes to life. There will be no cover of losses, even if there is no causal connection between the breach of warranty and the loss. There does not have to be a materiality. This changes with the Act of 2015 are found in section 10(1)(2)36.

The provision requires a causal link between the breach of warranty and the losses that occur during the breach and before the possible remedy. E.g. a ship that needs to sail in convoy for war risks, during times of war is in breach. The ship then comes into a big storm and is lost. The breach of the warranty and the loss are not linked to each other. According to the new Act, there will be no suspension of liability for the insurer although there was a non- compliance with the warranty.37 Section 11(1)38 refers to contractual terms, when applied with, “would tend to reduce the risk of …. (a) loss of a particular kind, (b) loss at a particular location, (c) loss at a particular time” It enables an objective assessment of the ‘purpose’ of the provision. It is intended to prevent an insurer to rely on a breach of a term if this breach is not connected with the actual

33 Explanatory notes IA 2015, para 90 34 S. Cooper, “ Insurance contracts: Disclosure”, Westlaw.UK (latest update 17 November 2015), 5. 35 Explanatory notes IA 2015 36 See Annex II 37X, “The insurance Act 2015 – new legislation”, Willis technical inside 2015, and http://www.willis.co.uk/documents/Industries/Willis%20Technical%20Insight%20%20Insurance%20Act%202015.pdf 38 See Annex II

loss occurred. This section 11(1) also applies, next to warranties, to other contractual provisions such as exclusion clauses.39 The onus of proof to show that there was no causation between the breach and the losses lays with the insured. It is important to note that there is no need for a direct causal link between the breach and the actual loss. But, this does not apply to terms which ‘define the risk as a whole’. For example; when a term restricts the use of property to a commercial use as opposed to private use. This term is unaffected by this requirement. The residential use would continue to be excluded from cover. It is not relevant if this use has a connection with the actual loss occurring.40 Again we can state this change in law is for the benefit of the insured and can be called more fair and equal.

7.2.3 No contractual transformation of the duty of disclosure into warranty

According to section 941, insurers will not be allowed to transform the duty of disclosure into a warranty. If the insurers want to have specific warranties, these need to be explicitly stipulated in the contract.42

As described above, the current law is using the practice of ‘the basis of the contract’ clauses, where every information they disclose will be converted in the contract as a warranty. When an insured made a small mistake in his disclosing, this could be seen as a breach of warranty. This situation was very harsh and unfair for the insured. With this new section of the IA 2015, these clauses have become null and void. The section related to the presentations is only applicable on non-consumer insurance contracts. The basis of contracts clauses in the consumer insurance contracts, were abolished in the CIDRA.43 It is important to note that the insurers will not lose their protection, they will still be protected in44: 1) The duty of fair presentation, in case of material misrepresentation by the insured before the concluding of the contract. 2) The warranties of past or present fact, explicitly mentioned in the insurance contract. Again, the change in law is beneficial for the position of the insured, it is a switch of mentality in the law.

39 Explanatory notes IA 2015, para 92 40X, ‘ The insurance Act 2015 – new legislation”, Willis technical inside 2015, and http://www.willis.co.uk/documents/Industries/Willis%20Technical%20Insight%20%20Insurance%20Act%202015.pdf 41 See Annex II 42 S. Cooper, “ Insurance contracts: Disclosure”, Westlaw.UK (latest update 17 November 2015), 5. 43 Explanatory notes IA 2015, para 84. 44 The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 158

7.2.4 How to prepare on these changes?

7.2.4.1 Insureds45 In contrast to the preparations on the new duty of fair presentations and the new proportionate remedies, there is not much guidance to be found to prepare on the changes of warranties.

The insureds should:

1) Try to limit the warranties that cannot be remedied.

2) Keep records of the warranties and put in place an efficient recording system of all data.

3) Keep records of the date of the breach and of the date the breach has been remedied and gather all information in an effective recording system.

4) Watch out for insurers changing warranties into conditions precedent in their policies as these conditions precedent cannot be remedied.

5) Watch out for insurers that extensively use exclusions.

6) Watch out for insurers including conditions precedent towards liability regarding certain matters to be true and accurate.

7.2.4.2 Insurers There is nothing to be found for the insurers regarding this part of the law. There are no guidelines available for the public. However, in my opinion the insurers should check all their policies that contain ‘basis of contract’ clauses and remove these. They should also keep track of the possible remediation of breaches by the insureds.

7.3 Conclusion

We can conclude that the changes in the marine insurance law regarding warranties, reflect a mind switch from protecting the insurer to protecting the insured. The legislators are approaching the insureds more as consumers and the insurers as professionals. The needed change, that was already picked up in the courts and by the doctrine decades ago, has finally been translated into law. Insurers will probably benefit from this change, as the UK was one of the only countries using the discharge of liability when there is a breach. Insureds will be

45 X, ”Insurance Act 2015: Warranties and other terms”, marsh.com 14 April 2016 (PowerPoint) https://www.marsh.com/content/dam/marsh/Documents/PDF/UK- en/Insurance%20Act%202015%20Warranties%20and%20Terms%20Webinar-04-2016.pdf

more eager to use the English insurers under English law, rather than addressing insurance companies in other countries. The insurers are protected by the duty of fair presentation and the express warranties. In my opinion insurers will have no problems changing their practice and they will probably not try to circumvent the law. But, the commercial world in an unpredictable one as we noticed with the crisis starting in 2008, We will have to wait and see what happens in 2016. The new law on warranties is not without flaws, the new Act only touches sections 33 and 34 of the MIA and the rest was untouched such as section 35 on express warranties. These rules are still standing. This engenders speculation on how these rules can be reconciled with the new system. An example is the law on express warranties, “may be in any form of words from which the intention to warrant is to be inferred.”46 One could wonder how it will fit next to the abolishment of the basis of contract clauses. Regarding the possible discharge of the insurer of the burden of proof of actual inducement, the legislator took not into account that section 10(1) also applies on the implied warranties. How will this affect the remedial action in voyage policies and the “blind eye” rule in time policies?47 There is also the possibility for non-consumer contracts to contract out, but we will discuss this later in this dissertation. Another concern could rise in respect of the claim handlers. The breach of warranty, only suspends the liability, once the breach is remedied, the insurers will be liable for damages that occurred after the breach. In this light it will be necessary for the claim handlers to establish more accurately, the timing of the loss. Difficulties can be expected as insurers will not be liable for losses during the breach, even when the loss does not occur until after the breach has been remedied. Vice versa, the insurers will be liable for losses that happened before the breach, but occurred during the period of suspension. There is no exact guidance to define the causal link. This will probably become the centre of claim negotiations, especially when there are multiple causes of loss.48 Furthermore, when there is a breach of warranty, there will arise difficulties in the analysis of coverage. This relates to section 11 that deals with terms that are not relevant to the actual risk. As seen this section does not apply on terms which ‘define the risk as a whole’. It will therefore be necessary for the insurers to consider if the term which has been breached, falls under the scope of section 11. They also need to answer the question if the breach could have increased the risk of the loss that has occurred. Only when there is an answer on the above two things, the cover can be rejected. To overcome these difficulties, the contract needs to be drafted carefully and clearly define the meaning of terms that ‘define the risk as a whole’49.

46 Section 35 (1) MIA 1906 47A.M. Costabel, “The UK Insurance Act of 2015: A restatement of Marine Insurance Law”, St. Thomas Law Review, Vol. 27, Issue 2, Summer 2015, 156-157.. 48S. Cooper, “The Insurance Act: the final countdown”, INCE&Co law firm Februari 2016 and http://www.incelaw.com/en/knowledge-bank/publications/the-insurance-act-2015-publication-february-2016 49S. Cooper, “The Insurance Act: the final countdown”, INCE&Co law firm Februari 2016 and http://www.incelaw.com/en/knowledge-bank/publications/the-insurance-act-2015-publication-february-2016

We can state that there is still a long way to go to reach a perfect law on warranties in marine insurance.

Chapter 8 Fraudulent claims

The insurance is being overwhelmed with insurance fraud. In 2009, the Association of British insurers, found that the detected fraud was worth over more than 730 000 million pounds during 2008. But this is only a small figure compared to the estimated value of 1.9 billion pounds a year of insurance fraud that was not detected. In the current law the fight against these enormous amounts of fraud is handled by civil law. The latter legal system needs to provide an effective remedy. There is however a discrepancy between the settlement of fraudulent claims in the English courts and the law in the MIA 1906.177 This will be discussed further in this dissertation. We will also examine whether the new Act of 2015 has taken this gap in the existing law into consideration. It is important to note that we will not explain how fraud is defined in the insurance law. Next to the basic definition of fraud, and the difficulties related, we will only deal with the remedies of fraud as this represents the major alteration in the new legislation.

177 X, “reforming insurance law: fraudulent claims”, out-law.com, updated august 2015 and http://www.out- law.com/en/topics/insurance/insurance-law-and-liability/reforming-insurance-law-fraudulent-claims-/

8.1 Explaining the concept

Before attending to the legal provisions in the Act of 1906 on fraudulent claims, we will examine the definition of insurance fraud.

The concept was defined in the case Derry v Peek of 1889. In this case the court concluded the following: “that fraud was proven when it could be shown as a false representation had been made by the assured knowingly or without believing in its truth or recklessly without caring whether the statement is true or false.” We talk about fraud if an insured deliberately gives a false representation or if he/she with full intent conceals information regarding the risk. The intentional part of the misrepresentation is the most important part of the above description. When there is no intention, there is no fraud.178

8.2 Current legislation

8.2.1 The remedies of fraud

In the current law there is a discrepancy between the common law remedy and the remedy foreseen in section 17 MIA1906179. We will shortly explain both remedies.

8.2.1.1 Common law remedy of forfeiture If a claim is fraudulent in its whole or for a part, the claim may be rejected by the insurer. The contract will remain in force, but the claim does not have to be settled. This rule was generally used in the early development of fraudulent claims, unless the parties had stipulated another rule in the contract. The parties have the right to put clauses in the contract which decide to use other consequences such as e.g. the avoidance of the contract .180

8.2.1.2 Section 17 MIA 1906: Utmost good faith Section 17 determines that during both the pre-contractual and contractual phase, all parties need to upheld the utmost good faith. When this is breached by one of the parties, the other

178 P. Tribe and J. Steer, “Aspects of fraud in marine insurance”, elbornes.com, lecture, 20 may 2008, 1 and http://www.elbornes.com/downloads/lecturepdfs/Aspects%20of%20Fraud%20in%20Marine%20Insurance.pdf 179 See Annex I 180 O. Gurses, “Marine Insurance law”, London, Routlegde, 2015, 250-251.

party can avoid the contract ab initio.181 The pre-contractual phase is covered by the duty to disclose with its relevant consequences. The post-contractual phase is described in section 17, thus the insured must act honestly when making a claim under the contract.

Section 17 only offers the consequence of avoidance. The parties are being put in a position as had there never been a contract. The insurer can require the reimbursement of all claims paid, including the claims that were legal and were made before the fraud occurred. This is a very severe and harsh consequence.182

When an insured makes a fraudulent claim, the insurer is not liable for the claim. What is the basis of this non-liability? This is not clear due to the fact that the juridical basis presents some difficulties. In the case Orakpo v Barclays insurance services co ltd it was ruled that in any absence of an expressed non-liability term, such term would be implied and form a part of the contract. But in other cases, the judges ruled that the obligations in section 17 continue during the contract and are still relevant when it comes to fraudulent claims. The courts argued that this was necessary so the insureds could not intentionally exaggerate claims for losses. In the case Britton v the Royal Insurance Company concerning the part of the remedy of fraudulent claims, it was said that the insurance contract is one of good faith which must be maintained by both parties. This was later supported in other cases such as Black Bing Shipping Corp v Massie, that clearly stated that a fraudulent claim is a breach of the duty of good faith. But, this was again overruled by the case of the star sea.183. Here the courts had doubts about the fact that the insurer could avoid the contract ab initio in case of fraud. They were more in favour of the idea that the loss should be avoided from the moment the fraud was attempted. As a result of this, the insurer was not entitled to avoid the policy in a retrospective manner and paid claims were not to be reimbursed. If this ruling is being interpreted in this way, it would not be in compliance with section 17 of the Act of 1906. Lord Mance argued that the court should keep the common law rules related to the fraudulent case, out of the scope of section 17, so there would not be an avoidance of contract. This was confirmed in several cases.184 In the case K/S merc –Scandia XXXXII v Lloyd’s underwriters Lord Longmore preferred a different view as he taught it was possible to apply the duty of good faith in a fraudulent case, but that this was not clear given the fact that the judges instead of using the word avoidance as foreseen in section 17, rather used the words ‘all claim’ on the contract. He also argued that it is up to the parties to conclude the consequences of a fraudulent claim in the clauses of the contract. It is clear that the principle of good faith is

181 X, “reforming insurance law: fraudulent claims”, out-law.com, updated august 2015 and http://www.out- law.com/en/topics/insurance/insurance-law-and-liability/reforming-insurance-law-fraudulent-claims-/ 182The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 211. 183 O. Gurses, “Marine Insurance law”, London, Routlegde, 2015, 249. 184 P. Tribe and J. Steer, “Aspects of fraud in marine insurance”, elbornes.com, lecture, 20 may 2008,5 and http://www.elbornes.com/downloads/lecturepdfs/Aspects%20of%20Fraud%20in%20Marine%20Insurance.pdf

exceeding the pre-contractual phase. But, there is no clear view in English law about the proper consequences. There are many uncertainties with regards to the consequence of avoidance as stated in section 17 MIA 1906. The remedy used is not always the same. Recent practice shows that judges look for the most appropriate remedy based on the circumstances of the case.185

It is important to note, that if fraud occurs in the disclosing phase, the consequence of non- disclosure comes to life i.e. the avoidance of the contract. In such case return of premium becomes impossible186.

8.2.1.3 Discrepancy As described above, judges do not always follow the same path, the consequences depend on the circumstances of the case. Sometimes they use section 17 and at other times the principles of common law, unless there is a expressed clause in the insurance contract that clearly defines the consequence of fraudulent claims.

The Law Commissions pointed out that the blurred position of the current law leaves two issues unresolved: 1) “The effect of a fraudulent claim on a previous genuine claim under the same policy made in respect of loss suffered before the fraud” 2) “The effect of a fraudulent claim on a genuine claim in respect of loss suffered after the fraud but before the insurer has taken action to terminate the contract.” 187

The law does not offer an adequate solution for the above issues. For the first issue the common law approach is generally used whereby previous paid claims do not have to be reimbursed. This is in contradiction with section 17 of the current law. There is no prevailing opinion about the second issue. In some cases the contract continues until its termination whereby legitimate claims must be settled. In other cases the contract is automatically terminated, whereby genuine claims arising after the fraud do not have to be paid. There is no definite ruling about which approach should prevail.188

8.2.2 Conclusion

It seems that judges are not always consistent in their answer on the consequence that needs to be used. In some cases they declare that the avoidance is too harsh and they therefore apply

185 O. Gurses, “Marine Insurance law”, London, Routlegde, 2015, 250. 186 Section 84 (3)(a) MIA 1906 187 The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 216. 188 The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 215.

the common law consequence of rejection whilst in other cases they apply the consequence of avoidance as foreseen in the MIA. It all depends on the circumstances of the case. In my opinion, the intention of the judges is good and demonstrates their concern to perform their most important task: being an impartial decision-maker in the pursuit of justice. The avoidance of the contract is the most severe consequence and therefore is not always the right decision. However judging leads to uncertainties as there is a lack of clear parameters in the current law. When parties bring their case to court, the outcome is very uncertain. That is the reason why changes are required for the future. These changes are soon to be deployed in courts when the IA 2015 comes into effect later this summer.

8.3 Changes under IA 2015

The Law Commissions did not aspire a complete change from the current law on insurance fraud. They had no intention to define fraud. Their focus is based on the remedies. They searched clear and appropriate remedies in addition to the sole remedy of avoidance.189. The determination of the fraud remains based on the common law principles.190

The Law Commissions introduced five key changes in section 12 and 13191 concerning fraudulent claims:192 1) The insurer is not liable to settle fraudulent claims. 2) The insurer may recover any sums paid in respect of the fraudulent claim. 3) The insurer may give notice to the insured to terminate the contract and may retain the premium. Termination will be effective from the time of the fraudulent act. 4) The insurer remains liable for events giving rise to the insurer’s liability before the time of the fraudulent act. 5) Remedies for group insurances.

It is clear that chapter four of the IA 2015 represents a big evolution with regards to the Act of 1906. In the old Act, fraudulent claims were not expressly mentioned, the consequence was being derived from the good faith provision and the general common law rules. Now we have clear and appropriate consequences. These new provisions set an end to the uncertainties related to the consequences of fraudulent claims.

189The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014),207-208 190 Explanatory notes IA 2015, para 99 191 See Annex II 192 The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014),171-172.

Before we have a closer look at alterations, we need to note two specific things193: 1) There is a distinction between the terms ‘fraudulent act’ and ‘fraudulent claim’. The fraudulent act is the behavior that makes a claim fraudulent, this can happen after the initial submission of the claim. 2) The term ‘relevant event’. This term refers to any event that would trigger the liability of the insurer. This will usually be a loss for which the insured is covered under the contract. However, some insurance contracts are written on the basis of ‘claims made’. In those cases, the ‘relevant event’ can be the notification of a claim against a professional, even when there is no loss. The distinction between fraudulent act and fraudulent claim and the term ‘relevant event’ are important for the termination of the contract. We point this out more in 8.3.3.

8.3.1 Liability of insurer at time of the fraud

This is a clear confirmation of the consequence in common law i.e. the rejection of the claim. Herewith previous rulings of judges are being codified.

8.3.2 Recovery of payment for fraudulent claims

Again, this was already confirmed by the courts in the current law. This is the consequence of the rejection based upon the common law principles.

8.3.3 Termination of the contract

As set out above, there was no clear view whether the genuine claims paid after the fraud and before the termination of the contract, were allowable. Section 12(1)(c) and (2) give a clear view on these issues. We can derive that there is no automatic termination of the contract. The insurer needs to give notice to the insured that the contract will be treated as terminated as from the time of the fraudulent act. Herewith payment of claims after this time need to be reimbursed. If no notice is given, claims will not have to be returned by the insured. These new provisions set an end to the uncertainty related to those claims.

8.3.4 Liability of insurer before the fraud

The prevailing opinion amongst judges, as described in 8.1.2.3, was that genuine claims settled before the fraudulent claim, did not have to be refunded, i.e. in contradiction with

193 Explanatory notes IA 2015 para 102 and 104

section 17 of IA 2015. This opinion of the courts is being codified in the MIA of 2015 and excludes all potential uncertainties related to this matter.

8.3.5 Remedies for fraud in group insurance

A group insurance is an insurance whereby one person takes out an insurance for multiple beneficiaries. One of the most well-known group insurances are insurances taken by an employer for their employees. 194

When a beneficiary of a group insurance makes a fraudulent claim, the fraudulent act is - according to section 13 - subjected to section 12. The insurer can exercise the rights under section 12 against that beneficiary only and not against the entire group. The Law Commissions were of the opinion that special protection was needed, as the beneficiary is not the contracting party of the insurer. Without this protection the normal rules of forfeiture in common law would apply, offering no possibility for remedy to the insurer. This would be unfair in respect to the insurer. Therefore the Commissions argued that if one or more beneficiaries submit a fraudulent claim they should be subjected to the same penalties as the contract partner of the insurer, however without any prejudices for the other innocent beneficiaries.195

8.3.6 How to prepare on these changes?

There are no guidelines to be found on how to prepare on the changes regarding fraudulent claims. In my opinion the insureds will have no huge changes to overcome. Insurers on the contrary will need to put in place a system of automatic notification in case of fraudulent claims. Otherwise they would not able to terminate a contract after an fraudulent act by the insured. They will have to inform their employees of the new notification duty and introduce clear work instructions for giving notification.

194 D. Wuyts, R. Barbaix en B. Weyts, “De groepsverzekering als aanvullend pensioen”, Antwerpen, Intersentia, 31. 195The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 223.

8.4 Conclusion196

We can conclude that this is significant improvement in the law of fraudulent marine insurance claims. However, there are still some gaps. There is no definition of fraud or fraudulent claim in the Act, which - in my opinion - are important issues. How can one submit a fraudulent claim, when one does not know what fraud means? And how does one decide if the claim is fraudulent or not without a clear definition? Because of the specific aspects of marine insurance, the common law definition of fraud in my opinion does not satisfy, a specific definition would give more clarity. There is also nothing determined about third party fraud. How do we address a situation whereby a third party commits fraud against the insurer or the insured? The Law Commissions stated that this has been developed separately from fraud by the insured party itself. There was opposition of some judges of the commercial court towards the changes, especially those related to the remedy of forfeiture. They find these too harsh compared to other insurances. The Law Commissions reacted that it was their intention to remove the remedy of avoidance. They were not able to move away from the well-forfeiture rule and, although it is arguably anomalous, because they don’t have the power to make such a substantial change. Another problem lays in the fact that the recoverability costs for investigation by the insurer to detect the fraud of his insured has not been addressed. There is a need to define this in law, but the Law Commissions taught there was no need for this reform, as the insurers should insert an express term in their insurance contracts to deal with these costs. I support their view in this as the insurers are professionals and the insured consumers that need more protection. The law does also not address the co-insurance, whereby one of the two insureds, (we can think of spouses), commits a deliberate fraudulent act. But, as there arise no problems in practice there was no need to address this matter in the Act. I think this results from the fact that the law in the UK is based on common case law. If there are no problems around an issue, there is no need to address it. We may not forget that there is also the possibility to contract out these provisions. We will discuss this later in chapter 9.

As last I would like to note that the above five key elements codified mainly the current opinions of the courts, but also give more clarity with regards to the aspect of reimbursement of genuine claims after and before the termination of the contract for reason of a fraudulent act. The Law is not really innovative, it mainly arranged codification of current case law.

196The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 223-228.

A lot has changed to cope with current uncertainties, but in my opinion there is still a long way to go, the law about fraud in marine insurance is still not clear enough.

Chapter 9 Contracting out and transparency

During the consultations in the preparation of the Act of 2015, there was a very strong lobbying from the marine insurance companies for freedom of negotiations, for freedom of contract. However, the Law Commissions were afraid that this freedom would not be entirely in favour for the insured, especially since the insurance company has a very big bargaining position against the smaller companies in need of insurance. For this purpose the Commissions tried to find a balance between those two observations and reached this balance with the transparency provisions in section 17 IA 2015197 and the contracting out possibility in section 15 and 16 IA 2015198.199

9.1 Contracting out

As we have seen, the Act of 1906, is not mandatory. It is possible for the parties to avoid the provisions by contract. In the new Act of 2015, the Act will be the default regime for all commercial insurance contracts. It is thus possible to deviate from the new Act and contract out. However, a difference in provisions and protection from this contracting out opportunity for non-consumer contracts and consumer contracts foreseen in the Act. The Law Commissions are of the opinion that the provisions, relating to the consumers, should be mandatory. The consumers can’t be put in a worse position than under the IA 2015. This follows the approach of the CIDRA. On the other hand, they believe that in non- consumer insurance contracts, this protection is not required. The IA 2015 offers a perfect balance between the interests of the insurer and the non-consumer insured. The Law Commissions find that the non-consumer insureds have enough experience, knowledge and bargaining power to negotiate. It should be possible for them to opt out of the provisions

197 See Annex II 198 See Annex II 199 A.M. Costabel, “The UK Insurance Act of 2015: A restatement of Marine Insurance Law”, St. Thomas Law Review, Vol. 27, Issue 2, Summer 2015, 155-156.

under the IA 2015, but not without fulfilment of some procedural conditions.200 This will be discussed more in detail below. Now we will have a closer look at the regime for contracting out for both types of contract.

9.1.1 Contracting out regime for consumer contracts

As mentioned above, the Law Commissions desired to make the provisions of the IA 2015 mandatory for consumer contracts. This recommendation was followed in section 15.

There is no possibility to contract out of the regime of warranties and fraudulent claims when it is putting the consumer in a worse position than under the MIA 2015. It is also impossible to apply the contracting out of provision to settlement agreements. The Law Commissions argued that they did not want to prevent valid settlements about claims, even if the settlement was less favorable than the provisions in the new Act. This follows the approach in the CIDRA.201 It is not possible for the insured to avoid the settlement by stating that is was less favorable than the Act of 2015 and its provisions.202

Important here to note is that the CIDRA, is already protecting consumers with regards to the disclosure and representations. As we have seen, the duty of fair presentation in the IA 2015, is only applicable for non-consumer contracts, consumer contracts fall under the scope of the mandatory regime of the CIDRA. There was thus no need to have other provisions included, except for the warranties and fraudulent claims, in the exception of contracting out related to consumer contracts. The consumers are generally protected under the CIDRA.

Another important thing to note is that the contracting out provision concerning consumer contracts, also applies to the consumer beneficiaries of a group insurance in section 13 in the light of the fraudulent claims. When a consumer takes out a contract of insurance for other consumers who are the beneficiaries of the insurance contracts, it is impossible to put the beneficiaries in a worse position as foreseen in the new Act.203 This is provided in section 18204.

200The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 303. 201The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 305. 202 Explanatory notes IA 2015, para 119 203 The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 305. 204 See Annex II

9.1.2 Contracting out regime for non-consumer contracts

In section 16, we can make the same observations as in section 15. It is possible to contract out of non-consumer contracts, except when the provisions of the contract are putting the insured in a worse position than defined by the Act of 2015. In non-consumer contracts the exclusions of contracting out are related to the duty of fair presentation, warranties and fraudulent claims. However, it is still possible to contract out of the latter three provisions, even when it is putting the insured in a worse condition. This is stipulated in section 17 which we will handle later in 9.2. Here section 2 (duty of fair presentation) is also a part of the exclusions, in contrast to the consumer contracts, where this issue is handled by the CIDRA. In non-consumer insurance contracts, it is also impossible to contract out of settlement agreements for the same reasons as in the consumer contracts. There is only one situation in which it is never possible to contract out of, this is settled in Section 16(2) and relates to the ‘basis of contracts clauses’ and similar provisions in section 9.205

Another important thing to note is that the contracting out provision of the non-consumer contracts, also applies to the non-consumer beneficiaries of a group insurance in section 13 related to fraudulent claims. This is provided in section 18206. Thus, when a non-consumer takes out a contract of insurance for other non-consumers who are the beneficiaries of the insurance contract, it is not possible to put the beneficiaries in a worse position as foreseen in the new Act, unless they fulfil the requirements foreseen in section 17.207 The insured as referred to in section 17, means the person who takes out the insurance contract on behalf of the group.208

9.2 Transparency

We have seen that it is possible to contract out of the provisions in the new Act, unless the contract terms are putting the insured in a worse position than in the new Act. These contract terms are also referred to as the disadvantageous terms.209

205 Explanatory notes IA 2015, para 120 206 See Annex II 207 The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 305. 208 Explanatory notes IA 2015, para 133 209 Section 17 (1) IA 2015

As mentioned above, in non-consumer contracts, it is possible to contract out of the regime, even if the position of the consumer is worse than the position foreseen in the Act of 2015. This will only be possible when the insurer fulfils the requirements of transparency.

Providing the possibility to contract out of part 2, 3 and 4, after fulfilment of the transparency conditions, the Law Commissions tried to find a balance between the small non-consumer insureds who have less knowledge and the very sophisticated insurance market where the principle of contracting out is widespread. The value of the UK insurance market depends on a flexible legal regime and the need of freedom to agree on contracts. However, it was thought that the transparency conditions would introduce uncertainty into the insurance contracts and insurers were not eager to rely on other contract terms. This, because they have no clue what will happen when the terms will be tested in court. There were a number of concerns:1) the need of certainty from the insurers 2) the freedom of contract 3) the interests of the insureds that have limited bargaining power, especially the smaller businesses. The proposed transparency requirements were intended to achieve the following aims by the Law Commissions: “(1) To encourage insurers to consider whether opting out of the default regime is necessary or appropriate in the circumstances. (2) To enable policyholders to make an informed decision (with or without the aid of a broker) about whether to agree to the alternative position, to negotiate for the default position or to seek an alternative insurance provider. (3) To ensure that the contracting out provisions are not so onerous as to interfere with the smooth running of the insurance market, particularly at the more bespoke and sophisticated end of the market. (4) To give the courts room to differentiate between different scenarios, from well-advised, commercially aware insurance buyers to smaller insureds buying “off the shelf” and, increasingly, online.”210

From section 17, we can derive that there are two requirements that need to be fulfilled. The insurer must draw the disadvantageous term to the attention of the insured or its agent and the term must be clear as to its effect.

9.2.1 Attention requirement

According to the first requirement the insurer must, before the contract is being concluded, bring to the attention of the insured the terms that are putting the insured in a worse position than the IA 2015 (disadvantageous terms). When this requirement is not fulfilled, the disadvantageous terms will have no effect. It should be noticed however that the insured must

210The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 307-308.

not have actual knowledge of the disadvantageous term. The insurer must just take sufficient steps to put these terms under the attention of the insured.211 This requirement should be fulfilled during the preparation of the contract by an agent.212 This happens under the general law of agency in which section 22(4) plays an important role. This provision states that, if something has been done to the insurer or the insured, it is the same as being done by or in relation to that person’s agent.213 The Law Commissions wanted this requirement to be interpreted in a flexible manner, the term sufficient is different for each insured. This was settled in section 17(4) which states that the specific characteristics of the insured and the transaction, should be taken into account.214 It is therefore possible that very little must be done to fulfil this requirement. Here we can e.g. think of a notice in writing, outside the insurance contract. This seems a rather subjective approach.215 The potential lower boarder of what must be done to satisfy the requirement, does not mean that this requirement can be overlooked, The Law Commissions insisted quite hard that this transparency requirement should be concluded, else the above aims would not be reached.216

Important to note hereby is section 17(5). If the insured or his agent was informed of the disadvantageous term, he cannot rely on failure of the attention requirement. The disadvantageous terms will be of effect.

9.2.2 Clear and unambiguous requirement

The second requirement is to ensure that the disadvantageous term is clear and unambiguous as to its effect. The disadvantageous term should therefore describe the provision in the Act of 2015 which it does not apply to.217 This requirement goes further than putting in the contract that part 3 of the IA 2015 will not apply. The insurer needs to describe the consequences of

211 H. Wright, “Insurance Act 2015: Quick reference guide to key provisions and their practical effects for underwriters”, lmalloyds.com, published July 2015, 14 and http://www.lmalloyds.com/Act2015 212 H. Wright, “Insurance Act 2015: Quick reference guide to key provisions and their practical effects for underwriters”, lmalloyds.com, published July 2015, 14 and http://www.lmalloyds.com/Act2015 213 Explanatory notes IA 2015, para 126 214 Explanatory notes IA 2015, para 129 215 The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014) 309-311. 216 The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014) 309-311. 217 H. Wright, “Insurance Act 2015: Quick reference guide to key provisions and their practical effects for underwriters”, lmalloyds.com, published July 2015, 14 and http://www.lmalloyds.com/

the disadvantageous terms, the consequence that the warranties provisions will not apply.218 As for the attention requirement, the subjective approach of section 17(4) applies here too.

9.3 How to prepare on these changes?

We can make the same observation for the contracting out regime as for the fraudulent claims. There are no guidelines available for the insureds and the insurers in how to adapt their businesses to the changes in the new Act. We can state that the insured should be on its guard for possible terms in the contract that contract out provisions of the IA, especially when these are not subjected to the transparency requirements. The insurer will have to do more preparations then the insured. The insurer will have to consider whether he will contract out of the provisions or not. If he does, then there will be the need to make standard terms and notifications to comply with the Act.

9.4 Conclusion

The above transparency requirements, impose additional administrative work to the insurers. This has been done deliberately by the Law Commissions. They had the intention for the insurers to consider whether the benefits of contracting out are worth the administrative work and costs. The Law Commissions were afraid that the insurers would routinely contract out of the default regime and try to create a more complex situation. This does not mean that they find the contracting out regime as something to be avoided. They find it rather convenient for larger or unusual risks. This is why the imposed transparency requirements are flexible among sophisticated parties, since for those almost no additional administrative work will be required.219

In my opinion, however despite of transparency requirements, the possibility of contracting out in non-consumer contracts, does not protect well enough the smaller businesses that need to be insured and the businesses that have no or little bargaining power. I think that in practice contracting out will become rather the rule than the exception. Developing standard contracts

218 The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014) 312. 219 The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014) 309.

terms will lead to no additional administrative work to comply with the transparency requirements. It will not result in a lot more administration and higher costs. The IA 2015, will probably not change a lot for the non-consumer insurance contracts. It will only be beneficial for the consumers.

Another important thing to note is that the Law Commissions foresaw in their rapport that the contracting out terms for non-consumers should have 2 exceptions, namely the basis of the contract clauses, which was added in Section 16(1) IA 2015 and the deliberate or reckless breaches of the duty to pay sums due within a reasonable time.220 There was no need for the exceptions in the consumer contracts as the consumers are protected by this by the CIDRA and the IA 2015 in its contracting out regime. But, this is not the case for the non-consumer contracts. The last exception, we do not find in the IA 2015 as the late payment provisions were not a part of the Insurance Bill of 2014. I have some concerns about this, which I will share in chapter 11 that deals with Clause 14 of the Insurance Bill of 2014.

220The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014) 316.

Chapter 10 Direct action right against third party liability insurer

10.1 The third parties rights against insurers Act of 2010

In July 2001, the Law Commission ended its review of the unfair, time consuming and costly provisions in the Act of 1930 and published a report called ‘Third Parties – Rights Against Insurers’. In 2002, the accompanied Draft Bill was accepted by the government to give the report effect. Seven years later, the Draft Bill was finally introduced in parliament in November 2009. This Bill was then given royal assent on March 25th 2010. In the year 2002, there was an amendment of the Insolvency Act of 1986 by the Enterprise Act. The latter allowed companies to enter the administration without a court order. During the time of making of the Bill, it was never noticed that companies entering in the administration without a court order remained out of the scope of the Bill for the Act of 2010.221 As an effect hereof, some cases were, even after the acceptance of the government of the Act in 2009, still falling under the Act of 1930. This means that the huge costs and time for establishing the liability is still in use or that some claimants will even be unable to recover their losses on grounds of the Act of 1930, although they should have been able to do so under the Act of 2010. To overcome this gap in the law, a proposal was published by the Law Commissions in March 2012. The Ministry of Justice also concluded that some rules of court were necessary to implement the Act of 2010 and that it required small amendments.222

The Act of 2010, is still not into force. Section 21(2) of the Act states that “This Act comes into force on such day as the Secretary of State may by order made by statutory instrument appoint”. This still has not be done. On 25 February 2016 there was a note from the Ministry of Justice by Lord Faulks about the commencement. This was the following: “I have today laid the draft Third Parties (Rights against Insurers) Regulations (“the draft Regulations”) before both Houses of Parliament.

221 A. Padfield, “Whatever happened to the Third Parties (Rights Against Insurers) Act 2010?”, P.I.L.J. , November 2012,24 (1). 222 A. Padfield, “Whatever happened to the Third Parties (Rights Against Insurers) Act 2010?”, P.I.L.J. , November 2012,24 (1) (2).

The draft Regulations have to be approved by a resolution of each House of Parliament before they can be made. Subject to that approval being given, I intend to make the Regulations without delay. I will announce the commencement date of the Third Parties (Rights against Insurers) Act 2010 (“the 2010 Act”) as amended by both the Insurance Act 2015 and the Regulations in due course but the date will not be earlier than three months after the regulations have been made.”223 We can derive from this that the commencement date has still not been set.

10.2 The third parties (rights against insurers) Act 2010 and the MIA of 2015

The MIA of 2015 does not replace the Act of 2010, it only makes some amendments to the Act. This, to overcome new forms of insolvency that had been introduced by later legislation and thus had not been included in the draft of the Act of 2010. The Act of 2010 was out of date before it even came into force. These amendments were required to correct the above defect.224

10.2.1 Section 19 of the IA 2015

In part 6, section 19, of the IA 2015225 it is provided that the Secretary of State has the power to change the meaning of ‘relevant person’ by regulation.226

Section 19 IA 2015227 defines conditions of the amendment. The Secretary of State has the right to add or remove circumstances in which a person is a ‘relevant person’. This, however under the condition that the added circumstances involve “actual or anticipated dissolution of a body corporate or an unincorporated body, actual or anticipated insolvency or other financial difficulties for an individual, a body corporate or an unincorporated body, or are similar to circumstances for the time being described in sections 4 to 7”228 in the opinion of the Secretary of States. The provisions by the Secretary of State cannot concern everything,

223 Third Parties (Rights against Insurers) Act 2010 – regulations and commencement: Written statement - HLWS542 by Lord Faulks on 25 February 2016 224 C. Douglas, “UK: Can the Third Parties (Rights against Insurers) Act 2010 come into force yet?”, HoganLovells global insurance blog 24 February 2015 and http://www.hlinsurancelaw.com/2015/02/uk-can-the-third-parties-rights-against-insurers- act-2010-come-into-force-yet/ 225 See Annex II 226 X, “Third parties rights against insurers 2010”, ”, out-law.com last updated August 2015 and http://www.out-law.com/page- 10645. 227 See Annex II 228 Section 19 (2) IA 2015

the limits were defined in section 19(3) IA 2015, which states that: “Regulations under this section (section 19 of IA 2015) may make provision about— the persons to whom, and the extent to which, rights are transferred under section 1 in the circumstances added or removed by the regulations (the “affected circumstances”), the re-transfer of rights transferred under section 1 where the affected circumstances change, and the effect of a transfer of rights under section 1 on the liability of the insured in the affected circumstances”. In this text, section 1 refers to section 1 of the Act of 2010. The act of 2010 alters, in certain instances, the effect of aspects of transfer of rights under section 1 by making provisions about the above cited circumstances. Section 19(3) makes it impossible to address these issues in connection with the removal or addition of circumstances.229 The regulations of the Secretary of State that include or exclude circumstances involving types of dissolution of a body, only apply to the following provisions on the Act of 2010: “a) section 9(3) (cases in which transferred rights are not subject to a condition requiring the insured to provide information or assistance to the insurer), and (b) paragraph 3 of Schedule 1 (notices requiring disclosure).”230 These two cited provisions modify the duty to provide information, including were a body corporate has been dissolved. This provision makes it possible to overcome changes to the ‘relevant person’ due to being dissolved. When this situation occurs, it can be needed to change the two provisions cited, now this is possible.231

When the regulations of the Secretary of State add a circumstance, one must make sure that section 1 of the Act of 2010 which foresees in the transfer of rights to a third party, will apply to the added circumstance. This is only the case if in the added circumstance one or both of the following points occurs in relation to a person before the date on which the regulations come into force: “(a) the circumstances arose in relation to the person; (b) a liability against which the person was insured under an insurance contract was incurred.” The regulations must also provide that in the above case the person cannot be treated as a ‘relevant person’ until that day or until a later day as specified in the regulations.232 This was written down with the intent that nothing that happened before the regulations come into force will be undone.233 The other way around, when the regulations of the Secretary of State remove a circumstance, they must see to that the transfer of rights in section 1 does not apply in cases which involve the removed circumstance if one or both of the events, as seen above, occur in relation to a person before the day on which the regulations come into force.234 This prevents that transfers that already have occurred under section 1, will not be undone by the regulations.235 The regulations of the Secretary of State can include “consequential, incidental, supplementary, transitional, transitory or saving provision”. The regulations can also “make

229 Explanatory notes IA 2015, para 138 230 Section 19 (4) IA 2015 231 Explanatory notes IA 2015 139 232 Section 19 (5)(6) IA 2015 233 Explanatory notes IA 2015, para 136 234 Section 19 (7) IA 2015 235 Explanatory notes IA 2015, para 137

different provisions for different purposes” and they can also “make provision by reference to an enactment as amended, extended or applied from time to time”. Next to this the regulations may also “amend an enactment, whenever passed or made, including this Act.”. As last the regulations must be made out of a statutory instrument and can only be made after a draft of the regulations has been approved by each House of Parliament (The English and the Scottish).236

10.2.2 Section 20 of the IA 2015237

Section 20 IA 2015238 brings another change to the Act of 2010. It inserts several amendments found in Schedule II of the IA.

1) In Schedule II, §2239, we find a new insolvency procedure: the debt relief orders of Northern Ireland 2) Schedule II, §3240 adds new administration. This was to capture all forms of administration under the insolvency Act 1986. Companies can now also be inserted in the administration by the holder of a floating charge and by the directors of a company. 3) Schedule II, §4241 deals with cases where an insured became a ‘relevant person’ before commencement but incurs liability to a third party after the commencement. 4) Schedule II, §6242 adds an interpretation provision. This provision ensures that references to legislative enactments in the Act of 2010 continue to apply. It is of no importance if the referred legislation has been amended.

10.2.3 Conclusion

Legislators have encountered numerous difficulties to prepare the new Act of 2010 for its coming into force. The Act was not up to date and there was a significant need for amendments, to enable for the Act to come into force. This was done by providing the necessary amendments in the insurance Act of 2015. However, this has not completely solved all problems. Therefore the Act of 2010, has still not come into force, and it most probably will not come into force before the new Insurance Act of 2015 (August, 12th 2016). At this day, the parties and the courts still have to apply the unfair, time consuming and costly provisions of the Act of 1930. We still have no idea when the Act will come into force.

236 Section 19 (8-11) IA 2015 237 Law Commission, Third parties (Rights against insurers) Act 2010: Background to the provisions in the Insurance Bill, 4-6 and http://www.lawcom.gov.uk/wp-content/uploads/2015/06/Third_Parties_and_Insurance_Bill_2014.pdf 238 See Annex II 239 See Annex II 240 See Annex II 241 See Annex II 242 See Annex II

Hopefully this will happen before the end of this year as it would make everything much easier for the third parties suffering losses.

Chapter 11 Removed propositions of the Law Commissions

11.1 Clause 14 of the Draft Bill 2014

In the report of 2014, the Law Commissions stated that the insurers should pay valid claims under a reasonable period of time. When they do not fulfil this obligation, they should pay a compensation to the insured for the losses they suffered as a result from late payment. These provisions concerning the late payment, where omitted from the Bill of 2014, before it went to Parliament. The clauses drafted by the Law Commissions were seen as too controversial to be added into the IA 2015. The clauses drafted are now brought before the Parliament in the sections 20 and 21 of the Enterprise Bill of 2015.243 The Bill has received royal assent on May, 4th 2016 and became the Enterprise Act 2016.

Here below we will explain the propositions of the Law Commissions, the reasons for criticism and the further reform.

11.1.1 Report of the Law Commissions July 2014

11.1.1.1 Current law244

The Law Commissions addressed the lack of provisions in the law of England and Wales that provide a remedy against late payment of valid claims by the insurer. This has the consequence that the insured will not be compensated for losses suffered as a result of the overdue payments. They proposed for this reason a statutory implied term in every insurance contract enforcing the insurer to pay claims within a reasonable delay. If the insurer breaches these terms, compensation should be obliged.

243Website the Law Commission http://www.lawcom.gov.uk/project/insurance-contract-law/ consulted 9 May 2016 244 The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 253-261

The current law of England does not provide law on late payment for insurance claims by the insurer. The courts ruled that the primary duty for the insurer is not to pay insurance claims, but to prevent the loss from happening. In this light, the courts do not see the insurance payments as debts, but as damages for breach of contract. This latter has the result that English law does not recognise claims for damages resulting from late payments of valid claims. This differs from the position of the Scottish law where the main duty of the insurer is to pay for damages and this payment is considered as a debt under the insurance contract. Here it is accepted that there is an implied term in each insurance contract enforcing the insurer to pay for the damages in a reasonable time with diligence. If in breach, the potential liability for loss related to the breach arises. English law has been criticized as this lack of terms is not found in other common law countries and since it is unfair, unprincipled and uncommercial. Unfair because it interferes with the balance between the contract parties. Timely payment can be crucial for some businesses, especially in the current difficult financial situation. If insurers do not pay in due time, this undermines the confidence in the insurance industry. The law is unprincipled and uncommercial, the primary duty of the insurer which, according to the courts, is preventing the loss, does not reflect the commercial reality and the expectations of the insured. The insureds consider that the contract gives them the right to receive in due time compensation for their losses. As this is not the case under the current law, they are in desperate need of a legal reform.

11.1.1.2 Reform245

The idea for reform was initiated with the case Arbory Group v West Craven Insurance Services. In this particular case the judges did not essentially address the question of the primary duty of preventing the loss. They basically ruled instead in favour of a compensation for late payment of insurance claim.246 The Law Commissions made a proposal for such compensation in section 14 of the Draft Bill of 2014.247 For this provision in the draft of the Bill we can conclude that there should be an implied term in every insurance contract. This specific term in the Draft Bill states that the insurer must pay out the valid claims within a reasonable time. It also states that this reasonable time must be judged in the light of the circumstances of the case and include the time to investigate and assess the claim. The draft provision gives examples of what the court can take into account such as e.g. the type of insurance. It is important to note that the insurer also has a defence

245 The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 290-298 246 The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 264-265 247 See Annex III

when there are reasonable grounds to dispute the claim. During the dispute, there will be no breach of the implied term if the insurer pays not within a reasonable time. In case the insurer has reasons to dispute the claim or conduct investigations, it is still possible that he would be in breach with the provision if, for example, he investigates the matters too slowly. At last it is important to note that the remedies are similar to the standard for a breach of contract and needs to be seen apart from “the right to enforce payment of the sums due and a the right of interest on those sums”. It was also foreseen that this provision would be part of the contracting out regime in section 16(1) and 17(2) of the Draft Bill. It was suggested by the Law Commissions that it should not be possible for the consumers to contract out of the regime related to the late payments. This differs from the regime for non-consumers in which it is still possible to contract out of the fulfilment of the transparency requirements. But, if the insurer is reckless or deliberate, it is impossible to contract out even in non-consumer contracts.248

11.1.1.3 Opposition249 There was a lot of opposition by the IUA (International Underwriting Association) and LMA (Lloyd’s Market Association). Concerns raise about the fact that compensation for late payment would expose the insurers to unlimited extra costs, which would lead to increased premiums and difficulties with capital requirements. The consults of HM Treasury made objections against the clause concerning late payment. Also two stakeholders representing the London market stated that compensation for late payment would lead to high costs and more law suits. However, they do not denounce late payment, they aspire a more limited right to damages if an insurer refuses a valid claim even when he knows that it is valid or reckless. One insurer argued that this issue was already protected under existing legal framework and that the proposal by the Law Commissions would only lead to more threats of law suits to hasten claim settlements. He also stated that more litigation would probably result from this and would lead to increased costs for customers. This criticism resulted in the fact that the late payment clause was not added to the Bill of 2014. But, the Law Commissions did not gave up, as this problem needs to be addressed and they worked with stakeholders to achieve a consensus. They had further investigations and looked for solutions. They are of the opinion that the statutory right to damages for late payment is important. Their work pulled off and two sections were added to the Enterprise Bill of 2015, that recently got a royal assent.

248 See Annex IV 249 Law Commission and Scottish Law Commission , Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment Executive Summary (Law Com No 353 / Scot Law Com No 238, 2014), 26

11.1.2 The Enterprise Act of 2016

The EA 2016 (Enterprise Act) contains a reform of the IA 2015. It introduces damages for late payments. We can find this in sections 28 and 29250 EA. The purpose of these new provisions is the same as the purpose in the report of the Law Commissions of July 2014. The factsheet related to late payment of damages as part of the Enterprise Bill stipulates: “the government is committed to combating unreasonably late payment of sums due to businesses in particular. The law should incentivise insurers to pay as promptly as is reasonable, and give policyholders a legal right to enforce this.”251

The new provisions are similar to the Draft Bill of Insurance 2014. We refer to 11.1.2 for explanation. It contains a framework for late payment of damages and contract out options. The first part is to be inserted in the IA 2015 under section 13A. Here no changes are introduced, it only states that the provisions will apply to contracts that are concluded after section 13A has come into force. The same rule applies for variations to such contracts. The provisions related to the contracting out options are inserted in the IA 2015 under section 16A. There are no significant changes in this area, the section only adds a definition of deliberate and reckless late payment. Important to note with regards to an acceptable time limit for actions against damages for late payment of insurance claims; there will be an amendment to the Limitation Act of 1980. Here a time limit of one year, starting from the date the insurer must pay all the sums, has been added in section 30 EA252.253 We can conclude that the Law Commissions pushed the provision for late payment through Parliament and made them recognize that late payment of damages does matter. This Act got recently a royal ascent and will probably come into force “at the end of the period of one year beginning with the day on which the Act was passed”, (one year after the royal ascent, would be May 4th 2017).254

11.1.3 Conclusion

The amendment to the Act of 2015 was necessary as businesses are being harmed by unreasonable late payments of claims which could even lead to bankruptcy. There is however still some reluctance and issues according to stakeholders, more specifically in the reinsurance business. The most important issue is related to the fact that, if the insurer who was liable for damages for late payment, can recover these damages from the reinsurer. It is possible that these damages will be covered in an reinsurance agreement. However, it seems unlikely that courts will be prepared to imply a term to the effect that damages of this nature become

250 See Annex IV 251BIS/15/499 Policy paper of the Department from Businesses, Innovation and Skills, Late payment of insurance claims: Factsheet 17 September 2015 252 See Annex IV 253 Section 38, 29 and 30 EA 254 Section 44(3) EA 2016

recoverable. However, the courts will probably not be prepared to imply such terms of late payment damages as the courts were not able in the past to attempt to imply terms such as costs of investigation. This matter will become even more complex for the reinsurer when the delay was due to the insurer in the underlying claim. It is expected that the courts will imply a term whereby reinsurers will be liable to compensate the reinsured for damages paid. It is recommended to deal with these issues in an expressed matter in the reinsurance contract.255 We can conclude that insurers will need to manage claims proactively and make sure that outsourced claim teams are trained and aware of the potential damages. However, the insurers will still be able to dispute claims in good faith and the insured will need to prove that the damages he suffered are the result of the delay.

11.2 Clause 6(3)(b) of the Draft Bill 2014

This clause concerns the knowledge of an individual acting as an agent of the insurer. It states that the confidential information of the insurer’s agent related to other clients than the insurer, should not be attributed to the insurer. This clause was deleted by the Law Commissions and the government because it was unnecessary and confusing according to two stakeholders that represented the insurance lawyers. They found no examples of situations for use of this provision. Two stakeholders that represented the Lloyds market also had some concerns, they argued the clause was unnecessary, because it was already dealt with in practice. This is only applicable to the confidential information for the insurer’s agent, not for the agent of the insured. This issue is settled in section 4(5) of IA 2015. Only the confidential information of the insured’s agent cannot be attributed to the insureds knowledge. 256

11.3 Clause 11 of the Draft Bill 2014

Clause 11257 of the Draft Bill relates to terms relevant to particular descriptions of loss. It was introduced to reduce the risk of a particular type of loss, or the risk of loss at a particular time or at a particular place. When this term is breached, it can only be excluded for losses of that type or occurring at that particular time or place. It was stated that on this part the situation in

255 S. Cooper, “The Insurance Act: the final countdown”, INCE&Co law firm Februari 2016 and http://www.incelaw.com/en/knowledge-bank/publications/the-insurance-act-2015-publication-february-2016 256Insurance Bill: Governments’s response to targeted consultation and http://www.lmalloyds.com/CMDownload.aspx?ContentKey=cbea371a-e5a2-49cf-b639- 0a24fb05c76d&ContentItemKey=62dcc586-671e-4e53-9b9a-330a36f8a823 257 See Annex III

the current law of 1906 was not satisfying. However, no consensus could be reached with regards to this reform. There was a lot of opposition against the formulation in the Draft Bill. Stakeholders representing the London market argued that clause 11 was not workable and was not satisfying. Others stakeholders such as insurers, academic research groups, insurance associations and insurance lawyers had concerns about the clarity of the drafted clause and therefore would lead to numerous law suits.258 In the 2014 report of the Law Commissions, these concerns were also mentioned. The lack of certainty about the interpretations and applicability in court could result subjects of litigation.259 However some of the consultees such as the broker’s association, were in favor of clause 11. They argued it would be difficult to explain to their clients the sole benefit for the insurer without any commercial reason. Since no consensus was reached on this subject , the government decided to remove the clause. The government stated “removing these clauses is necessary in order to be sure that the final Bill is suitable for the special procedure for uncontroversial Law Commission Bills”260

The clause was thus removed before the Bill went to Parliament. But during the proceedings before Parliament, the clause was redrafted by the Law Commissions and re-introduced by the House of Lords.261 The future law related to this clause is placed in section 11 IA 2015. For further explanation we refer to 7.2.2.

258Insurance Bill: Governments’s response to targeted consultation and http://www.lmalloyds.com/CMDownload.aspx?ContentKey=cbea371a-e5a2-49cf-b639- 0a24fb05c76d&ContentItemKey=62dcc586-671e-4e53-9b9a-330a36f8a823 259The Scottish Law Commission and English and Wales Law Commission, joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353 / Scot Law Com No 238, 2014), 201. 260 Insurance Bill: Governments’s response to targeted consultation and http://www.lmalloyds.com/CMDownload.aspx?ContentKey=cbea371a-e5a2-49cf-b639- 0a24fb05c76d&ContentItemKey=62dcc586-671e-4e53-9b9a-330a36f8a823 261 X, “Insurance Bill: an update from the LMA”, Lloyd's Market Association Bulletin 10 February 2015 and http://www.lmalloyds.com/Web/News_room/LMA_bulletins/LMA_Bulletin_2013/LMA15-010-KvdK.aspx

Conclusion

When the new Insurance Act 2015 will come into effect later this year, it will bring along the much needed changes for the insurance market. This will definitely result in a more fair and balanced law for all stakeholders involved. However, as explained in the interim conclusions, this law is not without flaws. But then again, is there such a thing as a perfect law? It is almost impossible to create a law that is adapted to all future market changes and the changes in the balance between all parties. What really caught my intention, writing this dissertation, is the continuously codifying aspect of case law. In the common law system, legislators do not really need to be innovative, they must try to translate previous court rulings into a new Act, in contrast to legislators in our civil law system that need to be innovative creating new legislative enactments. One could wonder if Acts are really necessary in the common law system since there are always enough precedents in case law to inspire judges for new court rulings. Acts are however a necessity since they engender more certainties which are very important to insurance law, especially in the very complicated international maritime market. The new Insurance Act however brings along some uncertainties that will probably lead to more disputes, litigations and costs. Interpretations will therefore be required for new court rulings. Legislators were well aware thereof, but considered that the introduction of the new Act was of more importance and higher value than the litigations that most probably could result from it. In order to satisfy the new law it will be important that organizations have adequate and effective internal corporate governance and communication tools. Employees of small businesses, large corporations and organizations need to become conversant with the changes in the new Act. For this purpose, the LMA (Lloyd’s Market Association), the IUA (International Underwriting Association) and a panel of law firms are working on new guidance notes and a training program for managing agents in preparation of the new Act that will come into force in August 2016. The Act will have an impact on the contracts that have been written under English law, but in future the new law will most probably also influence foreign law contracts that are placed in the London Market, the mecca of the marine insurance business. These contracts will be adapted to the market practice. As a result of the work being done by lobbyists for the national and international marine insurance companies freedom of negotiations will remain of high importance. The new law still gives priority to expressed conditions negotiated between contract parties on the condition that these are written down in the clauses of the policy. This is of the outmost importance since the value of the UK insurance market depends on a flexible

legal regime and the need of freedom to agree on contracts. Only this way London can remain the economical center of the international marine business world.

Overall, the new Act offers an improved balance between the interests of both the insureds and the insurers. The insureds are given better protection while, some new provisions are clearly in favour of the insurer. This is also an important aspect to upheld the current position of London in the international insurance market. In my opinion, insurance companies will most certainly adapt their policies to the new law, as there are also improvements for the insurers and adapted policies will reduce the risk of litigation and the high costs involved. But, I cannot say this with certitude. It is more likely to happen for consumers contracts since both parties will benefit in case policies are adapted to the new Act. Non-consumer contracts might not be adapted to the new Act as the possibility to contract out remains in place. Which presents a benefit for coverage of huge and unknown risks, but not for coverage of normal risks. How will the insurance companies react? Will they adapt their policies? Will they contract out? The near future will tell...

Annexes

Annex I

Marine Insurance Act 1906 (21/12/1906)

17 Insurance is uberrimæ fidei. A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party.

18 Disclosure by assured. (1) Subject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract. 3) In the absence of inquiry the following circumstances need not be disclosed, namely:— (a) Any circumstance which diminishes the risk; (b) Any circumstance which is known or presumed to be known to the insurer. The insurer is presumed to know matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his business, as such, ought to know; (c) Any circumstance as to which information is waived by the insurer; (d) Any circumstance which it is superfluous to disclose by reason of any express or implied warranty.

19 Disclosure by agent effecting insurance. (1)Subject to the provisions of the preceding section as to circumstances which need not be disclosed, where an insurance is effected for the assured by an agent, the agent must disclose to the insurer— (a)Every material circumstance which is known to himself, and an agent to insure is deemed to know every circumstance which in the ordinary course of business ought to be known by, or to have been communicated to, him; and (b)Every material circumstance which the assured is bound to disclose, unless it come to his knowledge too late to communicate it to the agent.

20 Representations pending negotiation of contract. (1)Every material representation made by the assured or his agent to the insurer during the negotiations for the contract, and before the contract is concluded, must be true. If it be untrue the insurer may avoid the contract. (2)A representation is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk. (3)A representation may be either a representation as to a matter of fact, or as to a matter of expectation or belief.

(4)A representation as to a matter of fact is true, if it be substantially correct, that is to say, if the difference between what is represented and what is actually correct would not be considered material by a prudent insurer. (5)A representation as to a matter of expectation or belief is true if it be made in good faith. (6)A representation may be withdrawn or corrected before the contract is concluded. (7)Whether a particular representation be material or not is, in each case, a question of fact.

33 Nature of warranty. (1)A warranty, in the following sections relating to warranties, means a promissory warranty, that is to say, a warranty by which the assured undertakes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts. (2)A warranty may be express or implied. (3)A warranty, as above defined, is a condition which must be exactly complied with, whether it be material to the risk or not. If it be not so complied with, then, subject to any express provision in the policy, the insurer is discharged from liability as from the date of the breach of warranty, but without prejudice to any liability incurred by him before that date.

34 When breach of warranty excused. (1)Non-compliance with a warranty is excused when, by reason of a change of circumstances, the warranty ceases to be applicable to the circumstances of the contract, or when compliance with the warranty is rendered unlawful by any subsequent law. (2)Where a warranty is broken, the assured cannot avail himself of the defence that the breach has been remedied, and the warranty complied with, before loss. (3)A breach of warranty may be waived by the insurers

Annex II

Insurance Act 2015 (12/02/2015)

1 Insurance contracts: main definitions In this Act (apart from Part 6)— “consumer insurance contract” has the same meaning as in the Consumer Insurance (Disclosure and Representations) Act 2012; “non-consumer insurance contract” means a contract of insurance that is not a consumer insurance contract; “insured” means the party to a contract of insurance who is the insured under the contract, or would be if the contract were entered into; “insurer” means the party to a contract of insurance who is the insurer under the contract, or would be if the contract were entered into; “the duty of fair presentation” means the duty imposed by section 3(1).

4 Knowledge of insured (1)This section provides for what an insured knows or ought to know for the purposes of section 3(4)(a). (2)An insured who is an individual knows only— (a)what is known to the individual, and (b)what is known to one or more of the individuals who are responsible for the insured’s insurance. (3)An insured who is not an individual knows only what is known to one or more of the individuals who are— (a)part of the insured’s senior management, or (b)responsible for the insured’s insurance. (4)An insured is not by virtue of subsection (2)(b) or (3)(b) taken to know confidential information known to an individual if— (a)the individual is, or is an employee of, the insured’s agent; and (b)the information was acquired by the insured’s agent (or by an employee of that agent) through a business relationship with a person who is not connected with the contract of insurance. (5)For the purposes of subsection (4) the persons connected with a contract of insurance are— (a)the insured and any other persons for whom cover is provided by the contract, and (b)if the contract re-insures risks covered by another contract, the persons who are (by virtue of this subsection) connected with that other contract. (6)Whether an individual or not, an insured ought to know what should reasonably have been revealed by a reasonable search of information available to the insured (whether the search is conducted by making enquiries or by any other means). (7)In subsection (6) “information” includes information held within the insured’s organisation or by any other person (such as the insured’s agent or a person for whom cover is provided by the contract of insurance). (8)For the purposes of this section— (a)“employee”, in relation to the insured’s agent, includes any individual working for the agent, whatever the capacity in which the individual acts,

(b)an individual is responsible for the insured’s insurance if the individual participates on behalf of the insured in the process of procuring the insured’s insurance (whether the individual does so as the insured’s employee or agent, as an employee of the insured’s agent or in any other capacity), and (c)“senior management” means those individuals who play significant roles in the making of decisions about how the insured’s activities are to be managed or organised.

5 Knowledge of insurer (1)For the purposes of section 3(5)(b), an insurer knows something only if it is known to one or more of the individuals who participate on behalf of the insurer in the decision whether to take the risk, and if so on what terms (whether the individual does so as the insurer’s employee or agent, as an employee of the insurer’s agent or in any other capacity). (2)For the purposes of section 3(5)(c), an insurer ought to know something only if— (a)an employee or agent of the insurer knows it, and ought reasonably to have passed on the relevant information to an individual mentioned in subsection (1), or (b)the relevant information is held by the insurer and is readily available to an individual mentioned in subsection (1). (3)For the purposes of section 3(5)(d), an insurer is presumed to know— (a)things which are common knowledge, and (b)things which an insurer offering insurance of the class in question to insureds in the field of activity in question would reasonably be expected to know in the ordinary course of business.

6 Knowledge: general (1)For the purposes of sections 3 to 5, references to an individual’s knowledge include not only actual knowledge, but also matters which the individual suspected, and of which the individual would have had knowledge but for deliberately refraining from confirming them or enquiring about them. (2)Nothing in this Part affects the operation of any rule of law according to which knowledge of a fraud perpetrated by an individual (“F”) either on the insured or on the insurer is not to be attributed to the insured or to the insurer (respectively), where— (a)if the fraud is on the insured, F is any of the individuals mentioned in section 4(2)(b) or (3), or (b)if the fraud is on the insurer, F is any of the individuals mentioned in section 5(1).

8 Remedies for breach (1)The insurer has a remedy against the insured for a breach of the duty of fair presentation only if the insurer shows that, but for the breach, the insurer— (a)would not have entered into the contract of insurance at all, or (b)would have done so only on different terms. (2)The remedies are set out in Schedule 1. (3)A breach for which the insurer has a remedy against the insured is referred to in this Act as a “qualifying breach”. (4)A qualifying breach is either— (a)deliberate or reckless, or (b)neither deliberate nor reckless. (5)A qualifying breach is deliberate or reckless if the insured — (a)knew that it was in breach of the duty of fair presentation, or (b)did not care whether or not it was in breach of that duty. (6)It is for the insurer to show that a qualifying breach was deliberate or reckless.

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9 Warranties and representations (1)This section applies to representations made by the insured in connection with— (a)a proposed non-consumer insurance contract, or (b)a proposed variation to a non-consumer insurance contract. (2)Such a representation is not capable of being converted into a warranty by means of any provision of the non-consumer insurance contract (or of the terms of the variation), or of any other contract (and whether by declaring the representation to form the basis of the contract or otherwise).

10 Breach of warranty (1)Any rule of law that breach of a warranty (express or implied) in a contract of insurance results in the discharge of the insurer’s liability under the contract is abolished. (2)An insurer has no liability under a contract of insurance in respect of any loss occurring, or attributable to something happening, after a warranty (express or implied) in the contract has been breached but before the breach has been remedied. (3)But subsection (2) does not apply if— (a)because of a change of circumstances, the warranty ceases to be applicable to the circumstances of the contract, (b)compliance with the warranty is rendered unlawful by any subsequent law, or (c)the insurer waives the breach of warranty. (4)Subsection (2) does not affect the liability of the insurer in respect of losses occurring, or attributable to something happening— (a)before the breach of warranty, or (b)if the breach can be remedied, after it has been remedied. (5)For the purposes of this section, a breach of warranty is to be taken as remedied— (a)in a case falling within subsection (6), if the risk to which the warranty relates later becomes essentially the same as that originally contemplated by the parties, (b)in any other case, if the insured ceases to be in breach of the warranty. (6)A case falls within this subsection if— (a)the warranty in question requires that by an ascertainable time something is to be done (or not done), or a condition is to be fulfilled, or something is (or is not) to be the case, and (b)that requirement is not complied with. (7)In the Marine Insurance Act 1906— (a)in section 33 (nature of warranty), in subsection (3), the second sentence is omitted, (b)section 34 (when breach of warranty excused) is omitted.

11 Terms not relevant to the actual loss (1)This section applies to a term (express or implied) of a contract of insurance, other than a term defining the risk as a whole, if compliance with it would tend to reduce the risk of one or more of the following— (a)loss of a particular kind, (b)loss at a particular location, (c)loss at a particular time. (2)If a loss occurs, and the term has not been complied with, the insurer may not rely on the non-compliance to exclude, limit or discharge its liability under the contract for the loss if the insured satisfies subsection (3). (3)The insured satisfies this subsection if it shows that the non-compliance with the term could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred.

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(4)This section may apply in addition to section 10.

12 Remedies for fraudulent claims (1)If the insured makes a fraudulent claim under a contract of insurance— (a)the insurer is not liable to pay the claim, (b)the insurer may recover from the insured any sums paid by the insurer to the insured in respect of the claim, and (c)in addition, the insurer may by notice to the insured treat the contract as having been terminated with effect from the time of the fraudulent act. (2)If the insurer does treat the contract as having been terminated— (a)it may refuse all liability to the insured under the contract in respect of a relevant event occurring after the time of the fraudulent act, and (b)it need not return any of the premiums paid under the contract. (3)Treating a contract as having been terminated under this section does not affect the rights and obligations of the parties to the contract with respect to a relevant event occurring before the time of the fraudulent act. (4)In subsections (2)(a) and (3), “relevant event” refers to whatever gives rise to the insurer’s liability under the contract (and includes, for example, the occurrence of a loss, the making of a claim, or the notification of a potential claim, depending on how the contract is written). 13Remedies for fraudulent claims: group insurance (1)This section applies where— (a)a contract of insurance is entered into with an insurer by a person (“A”), (b)the contract provides cover for one or more other persons who are not parties to the contract (“the Cs”), whether or not it also provides cover of any kind for A or another insured party, and (c)a fraudulent claim is made under the contract by or on behalf of one of the Cs (“CF”). (2)Section 12 applies in relation to the claim as if the cover provided for CF were provided under an individual insurance contract between the insurer and CF as the insured; and, accordingly— (a)the insurer’s rights under section 12 are exercisable only in relation to the cover provided for CF, and (b)the exercise of any of those rights does not affect the cover provided under the contract for anyone else. (3)In its application by virtue of subsection (2), section 12 is subject to the following particular modifications— (a)the first reference to “the insured” in subsection (1)(b) of that section, in respect of any particular sum paid by the insurer, is to whichever of A and CF the insurer paid the sum to; but if a sum was paid to A and passed on by A to CF, the reference is to CF, (b)the second reference to “the insured” in subsection (1)(b) is to A or CF, (c)the reference to “the insured” in subsection (1)(c) is to both CF and A, (d)the reference in subsection (2)(b) to the premiums paid under the contract is to premiums paid in respect of the cover for CF.

15 Contracting out: consumer insurance contracts (1)A term of a consumer insurance contract, or of any other contract, which would put the consumer in a worse position as respects any of the matters provided for in Part 3 or 4 of this Act than the consumer would be in by virtue of the provisions of those Parts (so far as relating to consumer insurance contracts) is to that extent of no effect. (2)In subsection (1) references to a contract include a variation.

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(3)This section does not apply in relation to a contract for the settlement of a claim arising under a consumer insurance contract.

16 Contracting out: non-consumer insurance contracts (1)A term of a non-consumer insurance contract, or of any other contract, which would put the insured in a worse position as respects representations to which section 9 applies than the insured would be in by virtue of that section is to that extent of no effect. (2)A term of a non-consumer insurance contract, or of any other contract, which would put the insured in a worse position as respects any of the other matters provided for in Part 2, 3 or 4 of this Act than the insured would be in by virtue of the provisions of those Parts (so far as relating to non-consumer insurance contracts) is to that extent of no effect, unless the requirements of section 17 have been satisfied in relation to the term. (3)In this section references to a contract include a variation. (4)This section does not apply in relation to a contract for the settlement of a claim arising under a non-consumer insurance contract.

17 The transparency requirements (1)In this section, “the disadvantageous term” means such a term as is mentioned in section 16(2). (2)The insurer must take sufficient steps to draw the disadvantageous term to the insured’s attention before the contract is entered into or the variation agreed. (3)The disadvantageous term must be clear and unambiguous as to its effect. (4)In determining whether the requirements of subsections (2) and (3) have been met, the characteristics of insured persons of the kind in question, and the circumstances of the transaction, are to be taken into account. (5)The insured may not rely on any failure on the part of the insurer to meet the requirements of subsection (2) if the insured (or its agent) had actual knowledge of the disadvantageous term when the contract was entered into or the variation agreed.

18 Contracting out: group insurance contracts (1)This section applies to a contract of insurance referred to in section 13(1)(a); and in this section— “A” and “the Cs” have the same meaning as in section 13, “consumer C” means an individual who is one of the Cs, where the cover provided by the contract for that individual would have been a consumer insurance contract if entered into by that person rather than by A, and “non-consumer C” means any of the Cs who is not a consumer C. (2)A term of the contract of insurance, or any other contract, which puts a consumer C in a worse position as respects any matter dealt with in section 13 than that individual would be in by virtue of that section is to that extent of no effect. (3)A term of the contract of insurance, or any other contract, which puts a non-consumer C in a worse position as respects any matter dealt with in section 13 than that person would be in by virtue of that section is to that extent of no effect, unless the requirements of section 17 have been met in relation to the term. (4)Section 17 applies in relation to such a term as it applies to a term mentioned in section 16(2), with references to the insured being read as references to A rather than the non- consumer C. (5)In this section references to a contract include a variation. (6)This section does not apply in relation to a contract for the settlement of a claim arising under a contract of insurance to which this section applies.

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19 Power to change meaning of “relevant person” for purposes of 2010 Act For section 19 of the Third Parties (Rights against Insurers) Act 2010 (power to amend sections 4 to 6 of the Act) substitute— “19 Power to change the meaning of “relevant person” (1)The Secretary of State may by regulations make provision adding or removing circumstances in which a person is a “relevant person” for the purposes of this Act, subject to subsection (2). (2)Regulations under this section may add circumstances only if, in the Secretary of State’s opinion, the additional circumstances— (a)involve actual or anticipated dissolution of a body corporate or an unincorporated body, (b)involve actual or anticipated insolvency or other financial difficulties for an individual, a body corporate or an unincorporated body, or (c)are similar to circumstances for the time being described in sections 4 to 7. (3)Regulations under this section may make provision about— (a)the persons to whom, and the extent to which, rights are transferred under section 1 in the circumstances added or removed by the regulations (the “affected circumstances”), (b)the re-transfer of rights transferred under section 1 where the affected circumstances change, and (c)the effect of a transfer of rights under section 1 on the liability of the insured in the affected circumstances. (4)Regulations under this section which add or remove circumstances involving actual or anticipated dissolution of a body corporate or unincorporated body may change the cases in which the following provisions apply so that they include or exclude cases involving that type of dissolution or any other type of dissolution of a body— (a)section 9(3) (cases in which transferred rights are not subject to a condition requiring the insured to provide information or assistance to the insurer), and (b)paragraph 3 of Schedule 1 (notices requiring disclosure). (5)Regulations under this section which add circumstances may provide that section 1 of this Act applies in cases involving those circumstances in which either or both of the following occurred in relation to a person before the day on which the regulations come into force— (a)the circumstances arose in relation to the person; (b)a liability against which the person was insured under an insurance contract was incurred. (6)Regulations under this section which— (a)add circumstances, and (b)provide that section 1 of this Act applies in a case involving those circumstances in which both of the events mentioned in subsection (5)(a) and (b) occurred in relation to a person before the day on which the regulations come into force, must provide that, in such a case, the person is to be treated for the purposes of this Act as not having become a relevant person until that day or a later day specified in the regulations. (7)Regulations under this section which remove circumstances may provide that section 1 of this Act does not apply in cases involving those circumstances in which one of the events mentioned in subsection (5)(a) and (b) (but not both) occurred in relation to a person before the day on which the regulations come into force. (8)Regulations under this section may— (a)include consequential, incidental, supplementary, transitional, transitory or saving provision, (b)make different provision for different purposes, and (c)make provision by reference to an enactment as amended, extended or applied from time to time,

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(and subsections (3) to (7) are without prejudice to the generality of this subsection). (9)Regulations under this section may amend an enactment, whenever passed or made, including this Act. (10)Regulations under this section are to be made by statutory instrument. (11)Regulations under this section may not be made unless a draft of the statutory instrument containing the regulations has been laid before, and approved by a resolution of, each House of Parliament.”

20 Other amendments Schedule 2 amends the Third Parties (Rights against Insurers) Act 2010 in relation to the insured persons to whom the Act applies.

SCHEDULE I

Deliberate or reckless breaches 2 If a qualifying breach was deliberate or reckless, the insurer— (a)may avoid the contract and refuse all claims, and (b)need not return any of the premiums paid.

Other breaches 4 If, in the absence of the qualifying breach, the insurer would not have entered into the contract on any terms, the insurer may avoid the contract and refuse all claims, but must in that event return the premiums paid. 5 If the insurer would have entered into the contract, but on different terms (other than terms relating to the premium), the contract is to be treated as if it had been entered into on those different terms if the insurer so requires. 6 (1)In addition, if the insurer would have entered into the contract (whether the terms relating to matters other than the premium would have been the same or different), but would have charged a higher premium, the insurer may reduce proportionately the amount to be paid on a claim.

SCHEDULE II individuals subject to debt relief orders in Northern Ireland 2(1)Section 4 (relevant persons: individuals) is amended as follows. (2)In subsection (3), after paragraph (b) (deed of arrangements registered under the Insolvency (Northern Ireland) Order 1989) insert— “(ba)subject to subsection (4), a debt relief order made under Part 7A of that Order,”. (3)In subsection (4) (individuals who are relevant persons for the purposes of section 1(1)(b) only), after “(1)(d)” insert “or (3)(ba)”.

Corporate bodies etc in administration 3(1)Section 6 (corporate bodies etc) is amended as follows. (2)In subsection (2) (events under the Insolvency Act 1986), for paragraph (b) substitute— “(b)the body is in administration under Schedule B1 to that Act,”. (3)In subsection (4) (events under the Insolvency (Northern Ireland) Order 1989), for paragraph (b) substitute— “(b)the body is in administration under Schedule B1 to that Order,”

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Transitional cases 4 In section 1(5)(b) (definition of “relevant person”), at the end insert “(and see also paragraph 1A of Schedule 3)”. 5(1)Schedule 3 (transitory, transitional and saving provision) is amended as follows. (2)At the beginning insert— “Application of this Act”. (3)After paragraph 1 insert—

Interpretation 6After section 19 insert— “19AInterpretation (1)The references to enactments in sections 4 to 7, 9(7) and 14(4) and paragraph 3(2)(b), (4) and (5) of Schedule 1 are to be treated as including references to those enactments as amended, extended or applied by another enactment, whenever passed or made, unless the contrary intention appears. (2)In this Act, “enactment” means an enactment contained in, or in an instrument made under, any of the following— (a)an Act; (b)an Act or Measure of the National Assembly for Wales; (c)an Act of the Scottish Parliament; (d)Northern Ireland legislation.”

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Annex III

Insurance Draft Bill 2014 (17/07/2014)

14 Implied term about payment (1) It is an implied term of every contract of insurance that if the insured makes a claim under the contract, the insurer must pay any sums due in respect of the claim within a reasonable time. (2) A reasonable time includes a reasonable time to investigate and assess the claim. (3) What is reasonable will depend on all the relevant circumstances, but the following are examples of things which may need to be taken into account (a) the type of insurance, (b) the size and complexity of the claim, (c) compliance with any relevant statutory regulatory rules or guidance, (d) factors outside the insurers control. (4) If the insurer shows that there were reasonable grounds for disputing the claim (whether as to the amount of any sum payable, or as to whether anything at all is payable)ê (a) the insurer does not breach the term implied by subsection (1) merely by failing to pay the claim (or the affected part of it) while the dispute is continuing, but (b) the conduct of the insurer in handling the claim may be a relevant factor in deciding whether that term was breached and, if so, when. (5) Remedies (for example, damages) available for breach of the term implied by subsection (1) are in addition to and distinct from (a) any right to enforce payment of the sums due, and (b) any right to interest on those sums (whether under the contract, under another enactment, at the courts discretion or otherwise).

11 Terms relevant to particular descriptions of loss (1) This section applies to any term (express or implied) of a contract of insurance compliance with which would tend to reduce the risk of one or more of the following. (a) loss of a particular kind, (b) loss at a particular location, (c) loss at a particular time. (2) Breach of such a term may not be relied upon by the insurer to exclude, limit or discharge its liability for, respectively. (a) loss of a different kind, (b) loss at a different location, (c) loss at a different time. (3) This section may apply in addition to section 10.

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Annex IV

Enterprise Act 2016 (4/05/2016)

28 Insurance contracts: implied term about payment of claims (1)After section 13 of the Insurance Act 2015 (remedies for fraudulent claims: group insurance) insert— “PART 4A LATE PAYMENT OF CLAIMS

13A Implied term about payment of claims (1)It is an implied term of every contract of insurance that if the insured makes a claim under the contract, the insurer must pay any sums due in respect of the claim within a reasonable time. (2)A reasonable time includes a reasonable time to investigate and assess the claim. (3)What is reasonable will depend on all the relevant circumstances, but the following are examples of things which may need to be taken into account— (a)the type of insurance, (b)the size and complexity of the claim, (c)compliance with any relevant statutory or regulatory rules or guidance, (d)factors outside the insurer’s control. (4)If the insurer shows that there were reasonable grounds for disputing the claim (whether as to the amount of any sum payable, or as to whether anything at all is payable)— (a)the insurer does not breach the term implied by subsection (1) merely by failing to pay the claim (or the affected part of it) while the dispute is continuing, but (b)the conduct of the insurer in handling the claim may be a relevant factor in deciding whether that term was breached and, if so, when. (5)Remedies (for example, damages) available for breach of the term implied by subsection (1) are in addition to and distinct from— (a)any right to enforce payment of the sums due, and (b)any right to interest on those sums (whether under the contract, under another enactment, at the court’s discretion or otherwise).” (2)In section 22 of that Act (application etc of Parts 2 to 5), after subsection (3) insert— “(3A)Part 4A applies only in relation to contracts of insurance entered into after that Part has come into force, and variations to such contracts.”

29 Contracting out of the implied term about payment of claims (1)After section 16 of the Insurance Act 2015 (contracting out: non-consumer contracts) insert— “16A Contracting out of the implied term about payment of claims: consumer and non- consumer insurance contracts (1)A term of a consumer insurance contract, or of any other contract, which would put the consumer in a worse position as respects any of the matters provided for in section 13A than the consumer would be in by virtue of the provisions of that section (so far as relating to consumer insurance contracts) is to that extent of no effect. (2)A term of a non-consumer insurance contract, or of any other contract, which would put the insured in a worse position as respects deliberate or reckless breaches of the term implied

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by section 13A than the insured would be in by virtue of that section is to that extent of no effect. (3)For the purposes of subsection (2) a breach is deliberate or reckless if the insurer— (a)knew that it was in breach, or (b)did not care whether or not it was in breach. (4)A term of a non-consumer insurance contract, or of any other contract, which would put the insured in a worse position as respects any of the other matters provided for in section 13A than the insured would be in by virtue of the provisions of that section (so far as relating to non-consumer insurance contracts) is to that extent of no effect, unless the requirements of section 17 have been satisfied in relation to the term. (5)In this section references to a contract include a variation. (6)This section does not apply in relation to a contract for the settlement of a claim arising under an insurance contract.” (2)In section 17(1) of that Act (the transparency requirements), after “16(2)” insert “or 16A(4)”.

30 Additional time limit for actions for damages for late payment of insurance claims After section 5 of the Limitation Act 1980 insert— “5AAdditional time limit for actions for damages for late payment of insurance claims (1)An action in respect of breach of the term implied into a contract of insurance by section 13A of the Insurance Act 2015 (late payment of claims) may not be brought after the expiration of one year from the date on which the insurer has paid all the sums referred to in subsection (1) of that section. (2)Any payment which extinguishes an insurer’s liability to pay a sum referred to in section 13A of the Insurance Act 2015 is to be treated for the purposes of this section as payment of that sum.”

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