Biggest shake-up of UK commercial insurance law in over a century

The Insurance Act 2015 is designed to increase transparency in the industry and will require businesses to disclose all information that could influence an insurer with the fixing of a premium or deciding whether to underwrite a risk. Other key changes focus on warranties, contracting out and insurers’ remedies for fraudulent claims.

“The work for brokers will be mainly around understanding the Act before it becomes law and to make sure they have the right systems in place,” Nick Young, partner at DAC Beachcroft, told Insurance Age. “They need to invest the time now to make sure they are compliant with the new rules.” However, Stuart Bennett, a director of UK online business insurance firm Quote Dave, said: “This is the biggest change to insurance contract law for over 100 years, but the vast majority of SMEs will still be completely in the dark about the obligations they face.”

The all-important Clause 11
One of the Act’s major changes will be Clause 11, which provides rules around ‘terms not relevant to the actual loss’. It states that insurers cannot rely on non-compliance by the insured relating to a loss if the insured is able to show that non-compliance with the term could not have increased the risk of the loss that actually occurred.

The Lloyd’s Market Association (LMA) and International Underwriting Association (IUA), who have been working with law firms on compliance, illustrate this with an example in which a household policy contains a clause warranting that all outside doors should be locked by five bolt locks at night. Thieves break down the locked door, which is found to have only a three-bolt lock, and rob the house. In such circumstances, the insured can argue that the thieves were so well equipped that whatever precautions had been taken by way of locks, they would still have got in; in other words, the risk of loss would not have been affected by failure to have a five-bolt rather than a three-bolt lock.

The British Insurance Brokers' Association (BIBA) highlighted the importance of this clause, with executive director Graeme Trudgill saying: “This is good news for business customers and with Clause 11, it means that insurers will be obliged to pay claims when a breach of a policy term is totally irrelevant to the loss that has taken place, unless of course it defines the risk as a whole.”

Ian Jones, head of technical claims management at AXA Travel Insurance, told ITIJ: “Insurers will welcome what is, for a change, a piece of clearly-worded legislation. The fraud position is clear and unambiguous but Section 11, I believe, will be most relevant.” He explained: “Many contracts currently contain wording referring to direct or indirect medical conditions. Whilst there is still a duty of disclosure, insurers will not be able to rely on this if the medical condition relevant to the admission is not linked. This Act will bring benefits to both customers, in terms of clarity, and insurers who will be able to make quicker coverage decisions, speed up the claims-handling process and greatly improve the customer journey.”

Bedding-in period
International law firm K&L Gates has published a guide on the changes for policyholders and commented: “It seems inevitable that there will be a ‘bedding in’ period while the provisions of the Act are put to the test, which may lead to disputes over the scope and application of the provisions. However, it is to be hoped that in the long term, the Act will result in greater certainty and equality in the position between policyholders and their insurers.”

Meanwhile, Young pointed out that the new law simply reflects what is best practice today and is important if London is to be maintained as the hub for insurance activity. “It puts us back in line with other European countries and the rest of the world,” he said.

So far, the UK insurance industry – the third largest market in the world –  has generally welcomed the new law, which replaces certain provisions of the Marine Insurance Act 1906, which has been applied to all UK commercial law, marine or otherwise.