The Proposed Bill On Insurance Law: What Does It Mean For Business Insurers?

The Law Commissions produced some draft clauses in January which they intend to include in a new Bill on insurance contract law later this year. Following further work, they have now published the remaining clauses for the Bill.

They intend that this Bill will follow the special Parliamentary procedure for uncontroversial Law Commission bills (in the hope, no doubt, that Royal Assent can be obtained before the next election in May 2015).

We set out below the key changes being introduced, as well as important details on contracting out, and how these changes might affect business insurers.

1) Warranties

It is proposed that all basis of the contract clauses will be prohibited (as is already the case for consumer contracts) and the Law Commissions have now confirmed (somewhat unexpectedly) that it will not be possible for business insurers to contract out of this particular change. This proposed change has, in any event been gaining increasing support in the market, with a recent AIRMIC campaign to persuade insurers to remove such clauses from their policies receiving approval from some leading insurers.

It is also proposed that all warranties will become "suspensive conditions", with the effect that an insurer will still be liable for losses under the policy prior to the breach of a warranty and also after the breach has been remedied. The Law Commissions have explained that this means that where, for example, an insured breaches a warranty that an alarm system will be inspected every six months, that breach will be "remedied" if the system is inspected after seven months and so coverage will be suspended for only one month in such circumstances.

Where a term (not just a warranty - this could include, for example, a condition precedent) is designed to reduce the risk of a particular type of loss, or the risk of loss at a particular time or in a particular place, a breach will only entitle the insurer to refuse claims for losses falling within that category of risk. So, for example, the breach of a warranty to install a burglar alarm would suspend coverage for loss caused by a burglar but not a flood. However, where there is a burglary, nothing is payable, regardless of whether the burglar alarm would have prevented the particular theft in question.

However, where a term is not designed to reduce a particular risk but is instead designed to delimit the scope of the insurance contract more generally, a breach will allow an insurer to reject a claim even if the loss was not caused by the breach. The example given by the Law Commissions is where a yacht-owner breaches a warranty forbidding the yacht to be used for commercial gain. The insurer in that case will be able to reject a claim arising out of (say) storm damage.

(2) Utmost good faith/non-disclosure

These proposed changes will apply only to business insurance (consumer insurance...