Modifying your Insurance Policy language to keep it Fit for Purpose

Go Back 13.4.18 INSIGHTS

Much of the discussion of the Insurance Act 2015 (“the Act”) might have been designed to induce complacency in policyholders, especially when it comes to navigating the infamously treacherous waters of pre-contractual disclosure.  No longer, some have argued, will policyholders be held hostage to “technical” breaches of those hard to fathom rules.

But look at it the other way. 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.

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 insureds was to insert into policies 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 could depend upon the insured’s commercial clout and willingness to pay premium.

These 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.

With the new rules bolstered by this old safeguard, what could possibly go wrong?

It is important not to forget that the existing caselaw demonstrates that anti-avoidance provisions are subjected to very close technical readings by judges. The scope of the protection the provisions were 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.

It is sensible to expect that anti-avoidance provisions will continue to be subject to close analysis by judges. Potentially worryingly for insureds, the more sophisticated any legacy anti-avoidance provision is, and so the more closely it is tailored to the pre-Act 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?

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.