Airmic has published a clause, drawn up by law firm Herbert Smith Freehills, to protect policyholders who innocently breach the duty of fair presentation introduced by the Insurance Act.
One of the headline features of the Act is to replace the all-or-nothing remedy of avoidance, whereby insurers may currently treat a policy as if it never existed in the event of a material non-disclosure or misrepresentation by the insured. This is being replaced with a series of ‘proportionate remedies’. Under the Act, where an underwriter can show that it would have charged a higher premium had it received a fair presentation of the risk, the insurer can proportionately reduce the claims payment made to the policyholder.
The new sample clause can be inserted into policies by mutual agreement, whereby the insured pays the additional premium that would have been charged rather than face a reduction in the claim. The option would not apply where the failure to provide the relevant information had been either deliberate or reckless.
“Whilst we strongly support the Insurance Act, many of our members have found the ‘fair presentation’ aspects challenging as they are inevitably open to interpretation. This clause drawn up by Herbert Smith Freehills LLP has the potential to significantly strengthen the policyholder's position,” said Airmic CEO John Hurrell.
The sample wording is set out below. As with all aspects of policy wordings, those considering using the clause must do so with care and should think about seeking legal advice.
- In the event that the Insured breaches the duty of fair presentation prior to inception of this insurance, or prior to any variation; and
- the breach is not deliberate or reckless; and
- the Insurer can show that it would have charged a higher premium,
Then the Insured shall be liable for such additional premium as would have been charged had the duty of fair presentation not been breached. It is agreed that in these circumstances the Insurer will have no right whatsoever to reduce proportionately any amount to be paid on a claim.
The phrases “duty of fair presentation” and “deliberate or reckless” in this clause shall have the same meanings as given to them in the Insurance Act 2015. It is not intended that this clause shall amend or vary any other provision of this policy.
Today marks the first anniversary of the commencement of the Third Party (Rights against Insurers) Act 2010. It is, as we have discussed, a successor to an Act of the same name dated 1930. It modifies and brings up to date the protections available for a claimant bringing an action against an insured but insolvent defendant. Despite the overhaul of the UK’s insurance legislation (CIDRA 2012, Insurance Act 2015 and of course TPRAIA 2010 there has been very little “insurance” case law on the new statutes but in the last few weeks a number of cases considering the new TPRAIA have been reported.
Peel Port v Dornoch was a case arising from a fire, causing damage of more than £1m at Sheerness Docks. In this instance the defendant was not in liquidation but the PL insurer, Dornoch Ltd relied on a “hot working” endorsement and alleged that their insured was in breach of the condition. The insurer had provided details of terms but not the policy. The claimant made an application for pre-action disclosure of the policy. Pointing to the information that the new Act requires to be provided and suggesting that as the substantial claim was likely to trigger an insolvency that it would save costs and the court should exercise its discretion to order disclosure. It was accepted the policy would be a disclosable document in coverage proceedings (between policyholder and insurer) and would form part of the statutory disclosure required by TPRAIA 2010 but the judge noted that policyholder was not insolvent and possibility (or even likelihood) of insolvency of policyholder did not comprise sufficiently exceptional circumstances to exercise discretion and order pre-action disclosure of the insurance policy.
BAE Pension Fund Trustees v Bowers & Kirkland was a case that arose from defects in the design of a concrete slab which was laid by D3, a company which had become insolvent. An application was made to join D3’s insurers as a co-defendant. The policy provided that disagreement about coverage would be subject to French Law and any coverage dispute should be arbitrated. The insurer argued that the breach of a condition meant that there was no insurance and that TPRAIA 2010 did not apply. In addition the jurisdiction clause meant that an English Court could not hear the case. The court noted that s2 provided a mechanism for determining precisely the sort of dispute that the insurer argued ousted the Court’s ability to determine the dispute. It was not necessary for the claimant to establish that it was entitled to a policy indemnity for it to join the insurer as a party. The legislation allowed the insurer to pursue the coverage arguments but this was the time to argue those issues and they did not form an argument to resist being joined as a defendant.
Redman v Zurich & ESJS1; a “friendly fight” between parties to establish a precedent about the TPRAIA transitional provisions and whether the 1930 or 2010 Act applies. In this instance Mr Redman died from lung cancer on 5 November 2013 some years after he had worked for a company now known as ESJS1. His former employer (now sued by his widow) was the subject of a voluntary liquidation commencing on 30 January 2014 and culminating in dissolution on 30 June 2016. All these dates precede 1 August 2016, the commencement date of the newer TPRAIA. Argument had however been raised that the insured (ESJS1) had not incurred a liability, against which it was insured under the contract of insurance, until after 1/8/16 and that, as a consequence, the 2010 Act applied. If the claimant had succeeded on the point she could have brought an action directly against the insurer – if she so chose. However this point was abandoned (the judge confirming correctly so) as the liability of the employer was incurred when the cause of action is complete: in this case when the claimant (or deceased) suffered damage. The further submission of the claimant was that the 1930 and 2010 Acts can apply in parallel. Albeit that this was, to use the Judge’s word “brave” it, also, was not successful. Mr Justice Turner confirmed that where both “triggers” (the policyholders insolvency and the occurrence of damage) pre-date the 1/8/16 commencement then only the more restrictive 1930 Act applies
In each of these case there are “no surprises” to date and indeed many of the issues and questions above have been considered in the BLM TPRAIA Flowchart. Peel Port did try to push the boundaries but as the Judge noted the availability of insurance cover is a regular feature of litigation and it is for the claimant to take the defendant as he finds him – insurance may well be commercially relevant to the litigation but coverage documents are irrelevant to the issues. Therefore Peel Ports maintains the status quo – policy documents, absent insolvency, are not discoverable in a non-coverage case. BAE Pension Fund and Redman are both determined as we would have expected.
However, it is early days as far as the new law is concerned and there will be other more complex cases that will be decided on more obscure facts and difficult interpretations of the law: perhaps to be determined before TPRAIA celebrates its second Birthday.
Written by Terry Renouf, consultant at BLM and member of the firm’s Time for Change team.