Looking the Gift Horse in the MouthGo Back
Be careful what you wish for…..
Much of the discussion of the Insurance Act 2015 (“the Act”) might have been designed to induce complacency in policyholders. They might legitimately conclude that this piece of legislation was a gift from the gods to remedy the perfidy of insurers. This is particularly so when it comes to navigating the infamously treacherous waters of pre-contractual disclosure. No longer, so it seems, will policyholders be held hostage to “technical” breaches of those hard to fathom rules.
In the face of such apparent good fortune then one reaction from policyholders would be perfectly understandable:
“We think we make a good job of our disclosure, so if we keep doing what we have always done then, given the purpose of the Act, we will inevitably be better off than we were before.”
This document is intended to be the first of a series in which we analyse the validity of that conclusion in respect of disclosure before turning to other new features of the commercial insurance contractual landscape in the wake of the Act.
In this first document we consider the potential consequences of the Act for a practice which might be taken to reinforce complacency: the insertion of anti-avoidance provisions into insurance policies. Such provisions have been intended to spare, and have succeeded in sparing, policyholders from the full rigour of the punishment which the prior law meted out to those who had made an innocent but material misrepresentation or non-disclosure. So, with the new rules bolstered by this old safeguard, what could possibly go wrong?
Before turning to that, it is worth making a general observation that underscores Wynterhill’s cautious approach to the benefits said to be conferred by the Act.
Ultimately, judges and arbitrators will carry the Act into effect and the former, at least, will shape its meaning in reported decisions that will create precedent. The Act appeared after decades in which judges had expressed their discomfort with the painful consequences for policyholders of seemingly inoccuous non-disclosures. Judges adjusted the relevant law so far as they felt able without crossing the boundary into change which would require legislative action. More significantly, on a day to day basis, they approached factual and expert evidence in a way which, as most insurance litigators should acknowledge, by and large guaranteed that mere “technical” breaches did not take down policies: in practice insurers were often required to have a complaint of substance in order to justify the sanction of avoidance.
Judges know that the Act is Parliament’s attempt to remedy the potential for injustice against which they had been taking such measures as they could. The welcome given to the Act will have reinforced any judge’s assumption that the playing field was finally being levelled. So what will be their attitude now? Can policyholders expect a continuation of the judicial sympathy of the last few decades? Or will judges feel more constrained to respect the solutions which the Act is said to offer? Will they, indeed, take the view that policyholders have got what they wished for, and it is no longer for the judges to look for reasons to overlook so-called “technical” breaches?
Anti-avoidance provisions before the Act
The most objectionable aspect of the previous law was the potential disparity between the harshness of the legal consequence of non-disclosure or misrepresentation, on the one hand, and, on the other, the nature of the conduct of the insured in making that misrepresentation or non-disclosure. A perfectly understandable oversight, involving no intent to mislead whatsoever, could leave an insurer with the right to treat a policy as having never existed. The financial consequences for the insured of an inadvertent failure could be catastrophic: an irony made more savage given how many policies are purchased precisely to protect insureds from the financial consequences of inadvertent conduct.
The solution available to policyholders was to insert a provision that introduced a requirement that something more than inadvertent oversight was required to justify avoidance of the policy. Of course, insurer’s agreement to that solution was required, so how comprehensive the solution was depended in many cases on the commercial clout or willingness to pay of the insured.
The solution of anti-avoidance provisions took on many forms. Some excluded the remedy of avoidance absolutely. Some modified the duty of disclosure. Most commonly they limited the availability of avoidance to circumstances where there was some blameworthy conduct by the insured: avoidance could only be justified if the insured had negligently failed to make disclosure or, more beneficially, avoidance was confined to cases of fraudulent concealment. Sometimes the effect of a non-disclosure was modified: rather than avoid the policy the insurer’s remedy could be limited to not paying any claims which had some connection with the facts that were not disclosed.
Anti-avoidance provisions: the catch (even before the Act)
Notwithstanding judicial sympathy for insureds, the caselaw demonstrated that anti-avoidance provisions were subjected to very close technical readings by judges. Therefore, the scope of the protection the provision was found to offer could, in fact, be narrower or otherwise different in meaning from what the insured might reasonably have expected when reading what, on the face of it, the clause said.
Anti-avoidance provisions: where now?
Nothing in the Act prevents the continued use of such provisions.
The issue, of course, is that the law governing disclosure has been changed by the Act. Moreover, it is prudent to expect that anti-avoidance provisions will continue to be subject to close analysis by judges and arbitrators. Consequently, and potentially worryingly for insureds, the more sophisticated their previous anti-avoidance provision was, and so the more closely it was tailored to the then existing law so as to ensure that it would have its desired effect, the more likely it is that the language previously adopted will be unfit for purpose in the light of the Act.
To take some obvious, and non exhaustive, examples:
- Existing provisions may be phrased by reference to the observance of a duty of utmost good faith. The Act abolishes any rule of law permitting avoidance by reference to a failure to observe the utmost good faith. Does this automatically render inapplicable any anti-avoidance provision that continues to reference utmost good faith?
- The Act fixes the insured with knowledge of what should reasonably have been revealed by a reasonable search of information available to the insured. This has been seen, perhaps contentiously, as the imposition of an obligation to conduct a reasonable search. This is a new development. Might a traditional anti-avoidance provision be sidestepped and rendered inapplicable for its omitting to forgive a failure to undertake a reasonable search?
- By reason of the Act the insured has a new obligation to gives its disclosure in a manner which would be reasonably clear and accessible to a prudent insurer. Failure to do so places the insured in breach of the so-called “duty of fair presentation” which is the core of the disclosure regime under the Act. Does any pre-existing anti-avoidance provision offer a let out for the insured who provides its disclosure in a disorganised fashion, or in a way which is otherwise difficult to comprehend? Given that this obligation is new, it seems unlikely that pre-existing provisions offer protection against the potential for such a breach.
- The Act provides different outcomes for any breach of the duty of fair presentation depending on whether the breach was deliberate or reckless or neither. Prior to the Act, as a matter of general law, the nature of the breach was irrelevant, all that mattered was that there had been a failure to disclose. Can an insured place faith in an existing anti-avoidance provision which makes no allowance for outcomes which depend on the nature of the breach?
The law relating to pre-contractual disclosure has undergone a fundamental overhaul by reason of the Act. New duties have been imposed. New terminology has been adopted, and old terminology has been abandoned or adjusted in meaning. New consequences for breach have been imposed. Against that background, carrying on as before, and trusting the Act itself to sort out any difficulties in favour of the insured, may not be the most prudent course.
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.