Law: UK Reforms Raise Questions For Bermuda

November 22, 2015

[Written by Martyn Naylor]

The UK’s financial sector is often in the media nowadays, and rarely for the right reasons. There sometimes seems to be a rule amongst journalists that the word ‘banking’ must be followed by ‘scandal’. Yet there is one extremely important part of that sector which has [for the last few years at least] kept itself away from the front pages.

The UK insurance industry is the third largest in the world [behind Japan and the US] and the largest in Europe. According to a 2013 report by the Association of British Insurers, the UK insurance market manages investments amounting to 25% of the UK’s total net worth and contributes over £10 billion in taxes to the UK Government.

The insurance industry is no less important to Bermuda; a short walk up Bermudiana Road takes an eagle-eyed observer past the offices of several major global insurance companies.

It may seem alarming, then, that the law underpinning insurance contracts in the UK was recently described by the English and Scottish Law Commissions as “outdated and out of step with the commercial realities of 21st century commercial practices”. There have in fact been calls for reform going back to 1957, but English law has developed very little since then.

The blame for this probably lies with Sir Mackenzie Chalmers, the English lawyer responsible for drafting the Marine Insurance Act 1906. Although it refers to marine insurance, the 1906 Act effectively created a code for insurance contract law generally; and it has certainly been approached that way by courts ever since. The genius of the Act’s drafting has become its curse, as its language is so clear that the courts have immense difficulty adapting it to developments in the insurance industry.

The result of this is that, until 2012 [in the UK at least], all insurance contracts – from Mrs Miggins’ pet insurance for Ginger the cat, to Mr Baker’s motor insurance for his workman’s van, to British Airways’ commercial fleet insurance – were governed by the same legal principles, which were laid down in 1906.

It goes without saying that the sort of principles developed mostly in the nineteenth century, and mainly in the context of marine insurance [the Act was passed six years before the insurance policy for the RMS Titanic would be called upon], have the potential to work great injustice, particularly to individuals and small businesses.

One key example of this sort of injustice relates to a policyholder’s ‘duty of disclosure’. The 1906 Act requires the policyholder to disclose to the insurer anything which would be ‘material’ to a reasonably prudent insurer in deciding whether to accept the risk. The insurer does not have to ask questions about such matters. But if the policyholder fails to volunteer information which would have had an effect on the insurer, the whole policy may be declared void from the outset.

If, for example, someone taking out travel insurance fails to volunteer the fact that they have a heart condition, their insurer may later decline an otherwise-valid claim for an entirely unrelated injury.

Another example of injustice relates to so-called ‘warranties’ in the insurance policy itself. These clauses resemble promises by the policyholder, which, if broken, discharge the insurer from liability. So, for example, a home insurance policy may contain a ‘warranty’ that a burglar alarm is fitted and working at all times. If the alarm stops working and the house burns down, the insurer will not have to pay the claim – even though the loss in question [the fire] was not related to the breach of warranty [and probably even if the alarm was repaired before the fire!].

Many insurers, of course, will not insist on their strict legal rights if to do so would cause such extreme unfairness. But not all insurers will take this course, and it may seem wrong for the line between justice and injustice to turn on whether a particular insurer will do the decent thing, rather than on the law itself.

As a result, the English and Scottish Law Commissions commenced a widescale review of UK insurance contract law in 2006. This has produced two important pieces of legislation so far: the Consumer Insurance [Disclosure and Representations] Act 2012 and the Insurance Act 2015.

As the names of these two Acts of Parliament suggest, UK insurance contract law now treats consumers differently from businesses. The duty of disclosure, for example, has been abolished for consumer insurance; an insurer must now ask questions if it wants to obtain specific facts and the policyholder must answer honestly.

In relation to business insurance, when the 2015 Act comes into force next year the duty of disclosure will still exist but in a modified form; a business policyholder must now give ‘a fair presentation of the risk’.

As for warranties, breaches may be remedied and, even where they are not, it is more likely that a breach which is unconnected to the loss in question will not discharge the insurer from all liability.

Further reforms are on the horizon in the UK. The Enterprise Bill, introduced into the House of Lords in September 2015, will [if enacted] require insurers to pay compensation in the event that late payment of a valid claim causes their policyholder to suffer loss [under the present law in England, an insurer is not liable to pay any damages for such late payment; the law is different in Scotland].

The questions which these significant UK reforms raise for the Bermuda insurance market is whether Bermuda should follow the UK and enact a Bermudian equivalent, or variation, of the new UK legislation, whether on a mandatory or on an opt-in/opt-out basis.

If UK insurance contract law gains a reputation for being more favourable, more certain, or more predictable than Bermuda law or New York law, it is possible that policyholders will look to the UK market for certain forms of cover rather than Bermuda.

Should Bermuda as a jurisdiction retain the common law, as reflected in the 1906 Act, or should it look to update its own insurance contract law in line with the English reforms? Given the importance of the insurance industry to the island, it is certainly something worth considering.

Martyn Naylor is an English barrister at 4 Pump Court chambers in London. He was previously a Research Assistant at the English Law Commission, and is currently on secondment with Sedgwick Chudleigh Ltd in Bermuda. He is giving a presentation on the English law reform project at XL Catlin at noon on Tuesday, 24 November 2015. Those interested in attending should contact amy.beecham@sedgwicklaw.com

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