Innocent non-disclosure/anti-avoidance clauses – still fit for purpose?Go Back
The Insurance Act 2015 is supposed to make it more difficult for insurers to avoid policies. This is particularly good news for those insureds whose policies also say that insurers will not avoid the policy unless the insured has been guilty of some form of misconduct in the disclosure process. Those lucky insureds will consider themselves doubly protected. However, that double protection may not work if the drafting of the policy has not recognised the innovations of “the duty of fair presentation”.
Why it matters
Traditionally, judges have paid very close attention to the language of innocent non-disclosure/anti-avoidance clauses. This has produced some very “technical” readings of those clauses such that, sometimes, the scope of the protection they offered was found to be much narrower than expected by the insured.
The duty of fair presentation changed the existing law and introduced new concepts. If the traditional approach to construing anti-avoidance clauses continues then any such provision which has failed to adapt to the new duty may be found to be inapplicable in the new world, or to offer less than expected protection.
Some examples of how things might go wrong
Suppose a clause commences “insurers shall not avoid this policy for breach of the duty of utmost good faith”. This was probably a good idea under the old law. However, the Insurance Act 2015 abolished any rule of law permitting avoidance by reference to a failure to observe the utmost good faith. How would a judge look at this example clause now? Would they try to respect the intent of the provision: ie to prevent avoidance? Or would they disregard the clause in its entirety on the basis that it purports to address an issue that no longer arises?
No clause introduced under the old law will refer to the concept of “reasonable search” as part of the insured’s obligations, because no such obligation existed. Assume the insured failed to undertake such a search, and their anti-avoidance clause makes no reference to forgiving such a failure. Might that be a means by which a judge could sidestep the clause and interpret it as inapplicable to the situation that has arisen?
Similarly, insureds are now obliged to give disclosure in a manner which would be reasonably clear and accessible to a prudent insurer. What if an anti-avoidance clause makes no provision for a failure to do so? Could an insurer rely on such a failure and so escape the intent of the anti-avoidance language.
The second and third of the above examples reflect the problems that can arise from a shift of emphasis under the 2015 Act. Under the previous law, intentional conduct was punished the same way as innocent omission. Anti-avoidance provisions which dealt with that injustice were ideal. The new law is prescriptive as to aspects of the process of giving disclosure in a way that the old law wasn’t. How the insured went about compiling their disclosure was irrelevant under the old law, all that mattered was the accuracy or otherwise of the finished product. Consequently, it would hardly be surprising if anti-avoidance provisions constructed to address the old law made no attempt to grapple with issues that didn’t arise under it. Simply addressing the insured’s state of mind, without addressing their new specific process obligations, may lead to an anti-avoidance clause offering incomplete protection.
Another thing they don’t teach you in law school
Whether there are going to be problems will depend on the drafting of the clause in question. However, a clause that has not kept pace with changes in the law undoubtedly has the potential to fail to do its job. And it is not just because of the traditional construction approach of judges described above. A new factor is in play.
The previous law on avoidance was widely recognised as unfair and, in practice, judges often went as far as they legitimately could to prevent outcomes they perceived as unjust for being based on highly “technical” breaches of the insured’s duties. Judges know that the Insurance Act 2015 is Parliament’s attempt to rebalance the playing field in insurance disputes so that it is more favourable, or less unfavourable, to insureds. With that problem addressed, will judges be disinclined to give insured-friendly readings to anti-avoidance clauses which have not been carefully drafted? Does the level playing field mean insureds need to be more vigilant in their own interests because judicial sympathy will be in shorter supply than it once was?
This post is intended to provide guidance of a practical nature but does not contain legal advice or advice as to what action you should or should not take specific to your insurance needs or those of your business, or with regard to any particular situation.