Insurance contracts are not like other contracts and their terms can be archaic, difficult to interpret and often perceived to be unfair.
For businesses and consumers alike, the time was ripe for change. Just a few months ago, on 1 August 2016, the Insurance Act 2015 (the "Act") came into force in the UK introducing what the government has described as "the biggest reform to insurance contract law in more than a century". We would certainly agree that the changes are significant and we have been advising our clients in the construction sector on their implications.
It applies to new insurance, renewals and variations (insurance and reinsurance contracts) entered into after 12 August 2016 for non-consumers. It will therefore be relevant to a vast number of construction projects.
So what are the changes introduced by the Act?
- Previously, insured parties were obliged to disclose to the insurer all material information which it knew, or ought to have known. In circumstances where the insured party failed to comply with such an obligation, this entitled the insurer to refuse all claims and treat the policy as void. This placed a heavy burden on the insured party, in that it was expected to predict what information an insurer may deem material. In many cases this lead to a 'data dump', where an insured party disclosed huge amounts of information to its insurer, for fear of falling foul of its disclosure obligations.
- The Act introduces a new 'duty of fair presentation'. In accordance with such a duty, the insured party remains obliged to disclose every material circumstance which it knows or ought to know. However, in a change to the previous common law position, the Act introduces a safety net by confirming that the duty of fair presentation will also be met providing the insured party gives the insurer sufficient information so as to put that insurer on notice that it needs to make further enquiries about potentially material circumstances.
- In circumstances where the insured party fails to comply with its duty of fair presentation, the Act entitles the insurer to a remedy, but that remedy must be proportionate to the breach in question. For example, in order to refuse a claim in its entirety, the insurer would need to show that it would not have entered into the contract at all had it been provided with all material information. If on the other hand the insurer would have entered into the contract but on the condition of payment of a higher premium, then the insurer can reduce an insurance claim pay-out by that same amount.
- The Act introduces the need for a causal link between a breach of a warranty by the insured party and an increase in risk. This prevents the insurer from refusing a claim outright because the insured failed to comply with a term of the insurance policy, even though the non-compliance is unrelated to the loss suffered by the insured party. In the context of construction projects, one example could be an insurance policy term requiring the insured to employ CCTV monitoring of the site for safety and security purposes. Overnight, an electrical fault in a piece of machinery causes fire damage to equipment and parts of the site but it is revealed that the CCTV was not operating at the time the fire started. Under the Act, the insurer can no longer argue that breach of the warranty to employ CCTV invalidates the claim.
- It may not be so reassuring to learn that it is possible to contract out of most of the provisions of the Act if sufficient steps are taken to ensure that the contracting out is done in a transparent way. However, the prohibition on "basis of the contract" clauses – which convert pre-contractual information into warranties – cannot be contracted out of.
What does it mean for the construction industry?
Previously, an insured party was obliged to disclose all material circumstances that it knew, or ought to know in the ordinary course of business.
Under the Act, the insured party "ought to know what should reasonably have been revealed by a reasonable search of information available to the insured". The Act goes on to state that information available to the insured will include information that is ''held within the insured’s organisation or by any other person (such as the insured’s agent or a person for whom cover is provided by the contract of insurance).”
For large construction projects, a reasonable search of available information may be quite extensive, especially if there are greater than normal risks involved in the project. The greater the risks, the greater the search of information should be.
In projects in which the insured has engaged subcontractors, providing details of all material information held by third parties may prove no mean task. For example, it may require the contractor to make enquiries with each of its subcontractors in order to ascertain any limits on liability that subcontractor may have in place. It may also require the contractor to make enquiries with project related professionals, such as the architect or quantity surveyor, on the basis that they may hold relevant information.
For construction and engineering contracts, it will likely take a great deal of careful management to present the necessary level of information to the insurer, especially where multiple types of liability cover are needed or all risks insurance policies are used. In all cases the reasonable search should be started as early as possible, and the extent of the search carefully documented.
Still to come:
On 4 May 2017, s13A will be inserted into the Act by the coming into force of the Enterprise Act 2016. This will automatically imply a provision into every insurance contract the effect of which is to require sums due in respect of an insurance claim be paid by the insurer within a reasonable time. The insured will have a right to enforce the payment of the sum due and an entitlement to interest on that sum. This will also be a provision that cannot be contracted out of, and will come as good news for the cash flow of construction teams.
By Caitlin Foley and Jessica Evans.