August 31, 2016 Insurance Recovery and Counseling Practice The U.K. Insurance Act of 2015: An Update By Matthew L. Jacobs On August 12, 2016, the Insurance Act of 2015 (“the 2015 Act”)[1] went into effect for new insurance contracts or variations to existing policies made within the United Kingdom (“U.K.”).[2] It covers all “non-consumer insurance contracts,” meaning any contract that is either taken out by a non-individual policyholder or that is “entered into wholly or in significant part for trade, business[,] or professional reasons.”[3] The 2015 Act comes after a corollary reform of consumer insurance contract law in 2012 and implements many of the Law Commission’s recommendations regarding the non-consumer insurance sector.[4] With the exception of a flat ban on “basis of the contract” clauses, as discussed below, the 2015 Act provides a default regime that permits parties to contract out, subject to the statute’s transparency requirements. I. Background The 2015 Act is an integral step in the United Kingdom’s efforts to update and codify insurance law in a way that both respects longstanding common law principles and reflects the needs of the modern era. It builds from and refines the Marine Insurance Act 1906 (“the 1906 Act”), which has been applied over time to provide the foundational common law principles for insurance law in the United Kingdom.[5] As part of its effort to offer a stable, yet flexible statutory baseline that courts may continue to develop in coming years, the 2015 Act both adds new provisions and amends parts of the 1906 Act as well as other related statutes.[6] II. Key Elements of the 2015 Act A. Disclosure and Representation Requirements The 2015 Act alters the corporate, or non-consumer, policyholder’s information-sharing requirements by replacing the 1906 Act’s provisions on disclosure and representations with a new “duty of fair presentation.”[7] This duty attaches before entry into the corporate policyholder’s contract, or upon variation or renewal of such a contract. The 2015 Act also stipulates a series of remedies in the event that the duty of fair presentation is breached. i. Duty of Fair Presentation The duty of fair presentation covers both what the insured must disclose and the manner in which the insured must make this disclosure: Content of Disclosure: To make a fair presentation, the insured must disclose every “material circumstance”[8] affecting the risk about which the insured “knows” or “ought to know,” or, alternatively, provide enough information to put a “prudent insurer” on notice that the insurer should ask follow-up questions. The Act also clarifies what [“ought to”] “know” means for the insured and the insurer: Insured: The meaning of “knows” depends on whether or not the insured is an individual. For a non-individual, it includes knowledge of the insured’s senior management or what the person(s) responsible for the insured’s coverage know. The meaning of “ought to know” is defined with a reasonableness standard: the insured ought to know “what should reasonably have been revealed by a reasonable search of [available] information.” Insurer: Though the insured bears the duty of fair presentation, the insurer’s knowledge is relevant in assessing whether the duty has been met. What an insurer “knows” is defined as the knowledge of the individual(s) who make decisions about whether to enter into a contract and the terms of any such agreement. “Ought to know” is more narrowly defined as something that the insurer’s employee or agent knows and “ought reasonably” to have conveyed or information to which the key decision makers have access. Additionally, an insurer is presumed to know anything that is common knowledge or that an insurer operating in that field “would reasonably be expected to know in the ordinary course of business.” Manner of Disclosure: The insured must make such a disclosure in a way that is “reasonably clear and accessible to a prudent insurer.” Such a disclosure can be made in more than one presentation to the insurer, and the 2015 Act intends to warn against “data dumps” or, at the other extreme, overly terse explanations.[9] The duty of fair presentation also requires the insured to avoid making any misrepresentations, applying a “substantially correct” standard for material, factual matters and a “good faith” standard for material representations regarding expectations or beliefs. ii. Remedy for Breach of Duty of Fair Presentation The 2015 Act amends current law, under which the sole remedy for a breach of the duty to disclose is avoidance of the contract, and sets forth a more nuanced remedial scheme for certain “qualifying breaches.” Section 8 provides for a remedy if the insurer can show that the breach was deliberate or reckless or when the insurer can show that it would have changed its behavior if the insured had made a fair presentation (for instance, the insurer would have rejected the contract or agreed only if the terms were different).[10] The Act summarizes this change in the remedy and specifies what counts as a “qualifying breach:” Under the current law, a breach of section 18 or 20 of the 1906 Act gives the insurer a single remedy of avoidance of the contract. Under the Act, the insurer has different remedies depending on the situation. One distinction is whether or not the proposer’s breach of the duty of fair presentation was deliberate or reckless... [For a corporate policyholder’s contract covered by the Act], breaches do not have to be careless or deliberate/reckless in order 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 for non-consumer insurance.[11] B. Insurance Warranties and Other Contract Terms The 2015 Act makes several notable changes regarding warranties: It bans any “basis of the contract” clauses that would, under prior law, transform a representation into a warranty once included in the contract. This provision is especially significant because it is the only part of the Act that an insurer cannot “contract out” of (in contrast to the “default” regime of the rest of the statute). It changes the remedies for breach of warranty. Previously, breach of a warranty led to full discharge of the insurer’s liability. Section 10(2) of the 2015 Act now provides that an insured’s breach of a warranty suspends the insurer’s liability from the time of the breach (not its discovery) until the time it is remedied. In addition, Section 11 sets out rules for terms that apply to more precisely specified — as opposed to general — risks.[12] If the insured breaches a specific term, then the insurer is still liable for coverage under the contract so long as the insured can prove that the breach did not increase the risk of the actual loss. C. Contracting Out The 2015 Act sets a “default” floor that allows insurers to contract out of its provisions (with the exception of the ban on any basis of the contract clauses). Section 16 allows parties to non-consumer contracts to include a term that sets a different standard than the Act, so long as the procedures in Section 17 are followed for any “disadvantageous term.” Any such term is null and void unless: The insurer provides clear notice before entering into the contract or variation; and The effect of the term is “clear and ambiguous.” This requirement sets a subjective standard that is judged against the specific characteristics of the parties and the nature of the transaction. These transparency requirements must be satisfied; otherwise, a term that would be less favorable to the insured than the Act’s language has no effect, and the Act’s “default” language controls. III. Conclusion The 2015 Act makes significant adjustments to the United Kingdom’s corporate, or non-consumer, insurance contract status quo. Especially notable are changes regarding the information that the insured must disclose to meet the duty of fair representation, and the insurer’s associated responsibility to be proactive in asking questions to determine the risk; changes regarding what warranties can or cannot be included in corporate policyholder contracts and what remedies apply in cases of breach; and under what conditions parties can depart from the statutory baseline. Only time will tell whether these alterations effectively update the pre- existing common law and statutory regime; for now, what is clear is that as of August 12, 2016, the guiding principles of U.K. insurance law will change in ways that insurers will need to consider as they enter into new, or modify old, non-consumer insurance contracts. Mr. Jacobs would like to thank Alicia Solow-Niederman, a law clerk from Harvard Law School and member of the Harvard Law Review, for her assistance in writing this article. [1] Insurance Act 2015, c. 4 (U.K.), http://www.legislation.gov.uk/ukpga/2015/4/contents/enacted. [2] The majority of the Act controls non-consumer insurance contracts throughout the United Kingdom, with the exception of the amendments to other statutes described in Section 21(4) (which applies to England, Wales, and Scotland) and Section 21(5) (which applies only to Northern Ireland). See Insurance Act 2015, c. 4, Explanatory Notes ¶ 4 (U.K.), http://www.legislation.gov.uk/ukpga/2015/4/notes/contents (hereinafter “2015 Act Explanatory Notes”). These and other amendments to other statutes are discussed later in this document. [3] Id. at ¶ 32. As the Explanatory Notes detail, the Act defines a “non-consumer insurance contract” as any contract that is not a “consumer insurance contract” as defined in the Consumer Insurance (Disclosure and Representations) Act.