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Published 29 enero 2014
The Law Commission yesterday unveiled the first draft clauses of what may become the Insurance Contracts Act 2015 at an event hosted by international law firm DAC Beachcroft.
The draft clauses cover three key areas: business disclosure, damages for late payment and remedies for fraud, all of which may be contracted out of in relation to business insurance. The Bill follows on from the consumer disclosure reforms contained in the Consumer Insurance (Disclosure and Representations) Act 2012 (the "Consumer Act").
The proposals retain the duty of disclosure for businesses, removed for consumers, placing the duty within a "duty of fair presentation". This also includes the duties not to make misrepresentations and to present the risk in a clear and accessible manner. The duty of disclosure would be satisfied if all material circumstances were disclosed or sufficient information was provided to put the insurer on notice to make further enquiries. As under the Consumer Act, remedies would be proportionate and compensatory. Insurers could still avoid a policy for deliberate and reckless breaches as under the Consumer Act, but a remedy would also be available where the breach was innocent if the underwriter would have refused to write the policy at all.
DAC Beachcroft partner, Nick Young commented: "There are important carve outs from the duty of fair presentation in relation to what the insurer ought reasonably to know in light of an agent's knowledge. This could have significant ramifications for loss adjusters and surveyors."
The drafting creates an implied term in every insurance contract that insurers must pay sums due within a reasonable time. This means that an insured who suffers loss as a result of breach of that term could, for the first time, recover contractual damages from the insurer. The insurer may, however, have a defence if it can show that it had reasonable grounds for its breach.
Nick Young noted: "Whilst this draft wording may affect those insurers who either refuse to pay under a policy, or agree that a policy responds but make no payment, it does not apply where there are "reasonable grounds" for disputing the claim. What exactly amounts to "reasonable grounds" is still to be seen, but the clause is not as onerous as certain commentators suggested that it might be. Insurers should also be alert to the fact that a damages for late payment claim could create a separate cause of action with its own limitation period, that may be difficult to determine."
Clarifying insurers’ remedies for fraud, the drafting also removes the option of avoidance for breach of good faith. Under the proposals, an insurer would have no liability to pay the fraudulent claim and would have the option to terminate its liability to pay out in respect of losses after the fraud, but would remain liable for legitimate losses before the fraud.
James Deacon, partner at DAC Beachcroft, said: "It is disappointing that earlier proposals have been dropped that would have enabled insurers to recover investigation costs. In light of recent judicial comment, there may yet be pressure for a more comprehensive review of fraud as a whole."
Having received strong support for their proposals in principle, the Law Commissions are now conducting a limited consultation on the wording in their draft provisions and welcome responses to Commercial and Common by 21 February 2014. The outstanding drafting in relation to warranties and parties’ ability to contract out of the default provisions is expected within the next few months. To view the draft clauses, please visit the Government website.
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