The Insurance Act The Gibraltar Insurance Institute 28

The Insurance Act The Gibraltar Insurance Institute 28 September 2015 Michael Howard FCII

Content – part 1 • Background to the Act • Understand the changes to the statutory framework • The end of utmost good faith? • Practical considerations at policy renewal

Content – part 2 • The new range of remedies • Key changes to warranties • Rights to contract out • Identify potential problem areas • Further insurance reforms

Background • Most insurance contract law dates back to Marine Insurance Act 1906 – the Insurance (Marine) Act 1960 • Case law has modernised but reform has been in the air in recent years • Recent consultations have been ongoing since 2011 • Consumer Insurance (Disclosure and Representations) Act 2012 – came into force April 2013

Why reform? The Law Commission’s stated aims; – ensure better exchange of information between insurer and insured – reduce the number of disputes, saving legal costs and avoiding “disruption for both insurer and insured” – reduce the number of claims rejected – increase confidence in the insurance sector domestically and internationally Impact Assessment, Law Commissions, June 2012

The Insurance Act 2015 • Duty of Fair Presentation • Removal of the Duty of Utmost Good Faith • Warranties • Contracting out • Fraud

Duty of utmost good faith • Carter v Boehm (1766) • “Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact, and his believing the contrary” (Lord Mansfield) • The new act removes insurers’ rights to rely on a breach of the duty of utmost good faith to avoid a policy.

Duty of Fair Presentation (1) • Current position: – Insured must disclose “every material circumstance” which it ought to know “in the ordinary course of business” – A material circumstance is one which “would influence the judgement of a prudent insurer in fixing the premium, or determining whether he will take the risk” Section 18 (2) Marine Insurance Act

Case Law – refined the Act • CITI v Oceanus Mutual Underwriting (Bermuda) (1984) – Held a circumstance was material if it had an impact on the formation of an underwriter’s opinion and his decision making process. • Pan Atlantic v Pine Top (1994) – Material if it “had an effect on the mind of the prudent underwriter” – it did not need to have a decisive influence.

Duty of Fair Presentation (2) • A fair presentation discloses every material circumstance which is known or ought to be known by senior management, or those responsible for arranging the insurance, following a reasonable search • A circumstance is material if it would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms • Presentation must be made in a way that is reasonably clear and accessible • A fair presentation can also include a presentation which puts the insurer on notice that it needs to make further enquiries

Renewal presentations – the insured • Assess who plays a “significant” role in the business • Starts with the board but extends further • Consider the different types of insurance held • May include external sources, e. g. advisers, outsourced service providers

Renewal presentations – the insured • Insured should consider amending internal procedures • Internal records to demonstrate who is responsible for the provision of which information • Set up reporting lines – relevant information goes to the relevant people • Internal process to produce the information required on renewal (and to demonstrate that reasonable searches have been made)

Renewal presentation – the insured • No assumptions about what insurers know • No data dumping – information to be filtered • Work with the broker to ensure disclosure made in a clear and accessible fashion

Renewal presentation – the broker and insured • Broker as agent – broker’s knowledge = insured’s knowledge • What does the broker know/a reasonable search show about the business? • Consider how information ought to be provided by the insured, by whom and what constitutes a reasonable search

Renewal presentation – broker and insured • Risk manage yourself • For first renewal under the Act allow extra time • Make sure risks and duties are set out in writing to the insured • System to deal with information held on an insured • Review policy documentation and “white label” products – are they fit for purpose?

Renewal presentation – the broker and insurer • The secret is communication… • Structure the renewal process • What do insurers want to see as part of the presentation process? • Market variation? • Review TOBAs and SLAs – where do the risks and liabilities lie?

Renewal presentation - insurers • What information is known or ought to have been known about the risk • Establish internal procedures about information gathering • Review record keeping

Possible Issues • Term “reasonable search” is not defined • Clients should be aware of different remedies – in particular over proportionate claim reduction – could have huge impact • Insurers may be inclined to take more coverage points

BIBA/Mac. Tavish Summary Insured’s knowledge Insurer’s knowledge What MUST be actively disclosed Knowledge of senior management NOT required to be disclosed A fair presentation of risk requires clear and accessible disclosure, without material misrepresentation, of: Information held by the insurer and accessible to the underwriter relevant to the risk Every material circumstance which the insured knows/ought to know; Knowledge of the insurance team, including brokers Information which would be revealed by a reasonable search Or, failing that, Sufficient information to put a prudent insurer on notice that it needs to make further enquiries to reveal those material circumstances What an insurer writing this risk would reasonably be expected to know Common knowledge

Break - Reminder • Considered the changes • Looked at the new duty of disclosure “fair presentation” of the risk • Practical methods at renewal

Part 2 • Remedies • Warranties • Further reform

Unfair Presentation - Remedies • Designed to place insured at risk of losing premium if fraudulent presentation • Where simply negligent – proportionate remedies will apply – If different premium, claim reduced proportionately – If different terms, claim considered against those terms • If insurer can demonstrate it would not have underwritten, then policy avoided and premium returned

Breach of duty – consequences Deliberate or reckless breach of fair presentation? Yes No If the information had been properly presented, would the insurer have still underwritten the policy? Avoid contract and retain premium Yes Would the policy have been written on different terms? If yes, then those terms are applied Would a higher premium have been charged? If so, the claims payment may be reduced No Avoid contract and return premium

Remedies - impact • Proportionate remedies – likely to see less avoidance – possible retrospective underwriting? • The absolute right of avoidance has been watered down (although not extinguished) • Unclear whether subsequent claims also affected

Possible Issues (1) • Fair presentation needs to be clear and accessible • Too much information could result in argument presentation was unfair • Need to consider information being provided – difficult for SME work

Case study 1 • ABC Limited buys PPL insurance with Large Insurance Co(“LIC”). ABC says its turnover is £ 20 m. A premium of £ 20, 000 is charged. • Third party claim is made. Liability established at £ 500, 000. During investigations it is found that ABC’s turnover was in fact £ 40 m. • What happens next?

Case study 1 • Under the new Act, insurers will have to consider what would have happened had ABC given a fair presentation of the risk, including the correct turnover. • It is likely that had the duty been complied with, insurers would have increased the premium to £ 40, 000 (assuming a flat rate). Proportionate remedies under the act would allow LIC to discount the payment made on the claim by 50% i. e. to £ 250, 000.

Issues with the Case Study • ABC has another claim in the same policy year assessed at £ 100, 000. What happens next? • What if the policy contained a condition of average?

Basis of Contract Clauses • Previously allowed – converted information provided by insureds into warranties • Now abolished (same as for consumer contracts)

Warranties • Currently – breach of warranty = insurer can avoid all claims from date of breach, even if breach irrelevant or immaterial to the loss • Under Act warranties = suspensive conditions • Liability suspended until breach remedied • BUT some breaches cannot be remedied • Will insurers and the courts seek to apply remedies strictly?

Fraudulent Claims • No definition of fraud in the Act • No claim in relation to claim arising out of fraudulent act • But claims arising from a pre-fraud event would be payable • Effectively codification

Contracting out – the basics • Will only apply for business insureds • The disadvantageous term must be clear and unambiguous • Must be drawn to the insured’s attention (sliding scale depending on sophistication of insured) before the contract is entered into • Applies to all disadvantageous terms however small • Cannot buy back basis of contract clauses

Contracting out – the pitfalls • Brokers need to be careful in checking policy terms and conditions • If broker has actual knowledge of the term then could be liable if insured not advised • Insurers need to adequately flag up the policy terms and conditions where they seek to contract out (although it need not be explicitly stated)

Gibraltar v/s UK • Gibraltar; safe haven in the event of unforseen consequences of the Act’s implementation? • Certainty but likely commercial consequences

Further Insurance Reforms • Enterprise Act – Speed of claims payments • Third Party Rights Against Insurers – Amendments to the Act • Solvency II

Presentation Available on Michael Howard