The New Insurance Act

Major change is afoot in the insurance industry. On 1 August 2016, the Third Parties (Rights against Insurers) Act 2010 comes into force. Then 12 days later, the Insurance Act 2015 comes into effect. The Insurance Act has been described by the Government as "the biggest reform to insurance contract law in more than a century". The 61st Issue of Insight looks at what these changes may mean for the construction industry.

On 12 August 2016 the Insurance Act 2015 (the "Insurance Act") will come into force bringing with it a new default regime for business insurance in the UK. It represents the most significant statutory change to UK commercial insurance law in over 100 years, and it will have a substantial impact on insurance practice and procedures, as it will apply to every insurance policy and reinsurance policy that is written in England and Wales, Scotland and Northern Ireland, as well as any renewals and endorsements.

Just a few days prior to this date, on 1 August 2016, the Third Parties (Rights against Insurers) Act 2010 comes into force. The essential idea behind this Act is to try and make it easier for a third party to pursue a claim directly against liability insurers where the insured is or becomes insolvent.

The Insurance Act is designed to complement the other relatively recent but significant change to the insurance industry, the Consumer Insurance (Disclosure and Representations) Act 2012 (the "Consumer Insurance Act"), which implemented a number of reforms for consumer insurance contracts. The Insurance Act sets out new industry standards for commercial insurance contracts, which are the product of an extensive industry review and consultation.

However, while the new terms are designed to represent the industry benchmark, the Insurance Act does allow parties to contract out of and adjust the default terms within specified guidance. Parties who use commercial insurance contracts would therefore be well advised to consider carefully how the default rules might affect their operations, and which insurance-related rules should be amended. Indeed one reason for the long lead-in time, the Insurance Act having received Royal Assent in February 2015, was in order to give the industry plenty of time to prepare, and for insurance policies to be made compliant.

To clarify the effects of the Insurance Act, this issue of Insight considers the areas covered by the new Act and some of the practice points that arise.

WHY THE NEED FOR CHANGE?

Insurance law in the United Kingdom was previously based on a mix of a lengthy history (Lloyds of London began life as a coffee shop in London in the seventeenth century) and the old statutory framework of the Marine Insurance Act 1906. It was felt that many aspects of the old legislation were outdated and no longer reflective of commercial reality and practice. The new replacement, the Insurance Act, has been introduced to modernise and simplify the law, to balance more fairly the interests of insurers and the insured, and to provide a new framework for an effective and competitive insurance market that is more sensitive to the needs of business.

The Insurance Act is designed to encourage cooperation between the insured and insurer during the pre-contract negotiation stage.

INSURANCE ACT: KEY POINTS

What does the Insurance Act cover?

Once the Act comes into force on 12 August 2016, it will apply to all new commercial (but not consumer1) insurance contracts, as well as any variations of existing insurance contracts entered into on or after that date. The rule about variations is subject to one exception: parts 3 and 4 of the Insurance Act which deal with warranties and fraudulent claims will not be applicable to variations of insurance contracts entered into before 12 August 2016.

Duty to make a "fair presentation" of the risk

The duty to make a fair presentation of the risk is probably the most substantial change to be effected by the Insurance Act. All insurance policies depend on the disclosure of material information by the party seeking insurance which enables insurers to assess and therefore price the risk correctly. Currently under the common law, a party seeking insurance has a pre-contractual duty of utmost good faith to disclose all relevant facts to the insurer free of any misrepresentation. The Act codifies and builds upon this duty as a "duty of fair presentation". Prospective insured parties must now disclose to the insurer all relevant "risks"2 and every material representation must be made in good faith. The new duty3 requires the insured to either:

disclose every material...