How the proposed duty of fair presentation might apply to multiple parties
The Law Commission of England and Wales has published a note which provides an interpretation of how the duty of fair presentation included in the Insurance Bill 2014 might apply where an insurance policy covers more than one party or legal entity.
The duty to make a fair presentation of the risk applies to an insured. Importantly, however, the right to claim under a policy may (depending on the drafting) extend beyond the policyholder to named insureds or ‘covered parties’. Where there is a non-disclosure that is deliberate or reckless the contract can be avoided. If the non-disclosure is not deliberate or reckless the remedy available to the insurer will be based on what the insurer would have done had it received a fair presentation.
The Law Commission reminds interested parties that, as under the existing law, where a policy covers a joint interest under which the parties share the rights and obligations of the contract, a failure to make a fair presentation of the risk by one will result in the remedies (whether avoidance or a lesser remedy) being applied to all the joint insureds.
Where the interests in the policy are considered to be severable (in other words construed as a bundle of separate contracts or different ‘slices’ of a severable agreement), the remedy for failing to make a fair presentation will be applied only to the liable party.
The Law Commission also identifies a third category of interest, where the policy is drafted between the insurer and a single insured, for example a parent company, but provides that various third parties will have the benefit of the cover (for example, every employee of each subsidiary or even of subsidiaries of subsidiaries). In these circumstances it becomes increasingly difficult to ascertain the scope of the duty to make a fair presentation of the risks being covered. There is currently no authority on how the existing requirements of the Marine Insurance Act 1906 apply in such circumstances. The Act does not state that each covered party is required to disclose, only that the prospective insured should. If the covered party seeks to later claim under the policy, however, the insurer may be able to use a defence available against them ‘which would have been available’ had the covered person been an insured under the contract. This will be limited to circumstances where the Contract (Rights of Third Parties) Act 1999 applies (although in most cases, insurance policies exclude the application of this Act).
The Law Commission is ‘confident’ that specific wording in the Insurance Bill to deal with covered persons is not required. The requirement upon the insured to make a reasonable search of information in order to make a fair presentation of the risk extends to making a search of information held in the insured’s own organisation and held by others. This would therefore require a parent company to make a reasonable search of all the information available on those who will be included under the policy as ‘covered persons’. What is reasonable will be fact specific. The requirement under the Bill is to disclose circumstances which ‘ought reasonably to have been revealed’. The Law Commission notes that this is a pragmatic test. If a covered party has unreasonably failed to make available important information, the duty to make a fair presentation will be breached by the insured.
Why does this matter? Frequently parent companies take out insurance to cover group risks. Knowing the effect of the drafting (as either joint, several or as a single insured for covered parties) will affect the scope of any diligence taken in relation to arranging cover. Although reassuring that the Law Commission takes a pragmatic view on how far a parent company should extend its reasonable search of information needed to make a fair presentation, the note is obviously not binding on the courts. Firms therefore will need to pay careful attention to how they scope risk diligence and ensure that they record their decision making in relation to what information they are seeking from group companies in relation to coverage.
Terms not relevant to actual loss
Clause 11 of the Law Commission’s draft Insurance Bill (not included in the version of the Bill currently being considered before Parliament) attempts to limit the insurer’s ability to deny liability under a contract of insurance for a breach of a contractual term that was intended to reduce losses of a particular type or in a particular circumstance or time. An example of such a term might be a requirement to have a specific type of lock in place in order to reduce the risk of burglary. Her Majesty’s Treasury has requested that the clause be re-considered as a few stakeholders found the original drafting uncertain.
The Law Commission proposes that the re-drafted clause should attach to specific risk mitigation clauses – i.e. terms which could affect risks of a specific type of loss taking place or the risk that a particular type of loss will be greater than it might be otherwise. The clause should not be applied to clauses that reduce the risk profile of the risk as a whole (for example clauses that limit the use to which a property can be put or the geographical limits of coverage). What the clause as redrafted seeks to do is to ensure that the insurer should remain liable to pay a claim when the breach of a specific risk mitigation clause is totally irrelevant to the loss that has actually happened. However, it is for the insured to prove that the breach was irrelevant to the loss and could not have increased the risk of the loss that actually occurred happening.
So, what does this mean in practice? A good example of how the clause works is to consider the requirement that a vehicle is roadworthy. In this example the insured vehicle has a broken headlight. If the insured claims after skidding on black ice in darkness the insurer will not have to pay. The breach although not the direct cause of the loss, could potentially have contributed to the accident. However, if a claim is made after a tree falls onto the car in broad daylight, a broken headlight will have no connection to the type of loss that occurred and the insurer must pay the claim.
Progress of the Bill
The Insurance Bill is currently being considered in the House of Lords. A special public bill committee has been convened in order to scrutinise the Bill. Both oral and written evidence will be heard. Once this process is completed the Bill is expected to enter the House of Commons sometime in January.
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