27th February 2015

Good News For Insurance Policy Holders

The news has just broken that a new Act has been passed to be known as the Insurance Act 2015.  Though little has been said about it in the press, it actually makes some quite important changes in the law and should be greatly appreciated by consumers holding insurance policies.

Jekyll and Hyde

For many years consumers have complained of a somewhat “Jekyll and Hyde” aspect to insurance companies.  It seems to be all smiles and glossy brochures when taking out a policy of insurance against road traffic accidents, or insuring your home and property, or insuring yourself against the risk of having an accident on holiday.  But the smiles fade, and a hard, suspicious tone creeps in as soon as a claim is made.  People have had their claims refused after a burglary because they did not have a particular kind of lock fitted as specified by their contract of insurance, even where such a lock would have made no difference to the burglar.  Life insurance pay-outs have been refused on the grounds of some trivial error in the medical history reported by the policyholder.  It is these problems that the Insurance Act 2015 attempts to remedy.

The basic difficulty with insurance contracts was that by an old common law rule they were designated as contracts “of the utmost good faith”.  Innocent or trivial mistakes in the application form could be founded upon to allow an insurance company to refuse to pay out.  Closely allied to this was the rule that consumers taking out policies of insurance could be required by the insurance company to “warrant” certain facts as correct.  Insurance companies could then litter their application forms with questions on all sorts of matters, and include a term under which the consumer warranted all answers as true.  If a claim was then made, the insurance company had maximised its chances of finding some mistake somewhere, which could then be relied on as an excuse to refuse compensation.

What will change?

In the first place, any rule of law that a breach of warranty automatically results in cancellation of the insurance company’s liability is abolished, and clauses attempting to turn any statement for a policyholder into a warranty are outlawed.  Also, an insurance company will no longer be able to refuse compensation on the basis of a breach of a contract term which is completely irrelevant to the loss suffered.  Thus, in the window lock example given above, the insurance company would not be able to refuse compensation since it would have made no difference to the burglary whether the lock had been fitted or not.

Stamping out “Avoidance”

Also, the Act addresses another form of avoidance practised by insurance companies.  For example, let us say that it is a warranted term of my house and contents policy that I should have a functioning burglar alarm.  I therefore fit a burglar alarm and maintain it correctly.  My house is then burgled, and nobody pays any attention to the alarm.  Subsequently my alarm breaks and I do not bother to fix it because it is plainly useless.  I make a claim, and the insurance company refuses it because I am now in breach of the term.

Alternatively, it is a warranted term of my home and contents policy that I should fit a burglar alarm and maintain it in working order.  I fit the burglar alarm, but allow it to fall into disrepair, and for a few years it does not work.  I then fix it, whereupon my house is burgled.  Again the insurance company refuses to pay out on the grounds that I did not maintain the burglar alarm constantly from the time I took out the policy.

In neither situation has the burglar alarm been broken at the time of the actual burglary, and yet under the old law insurance companies have been able to avoid liability successfully.  The 2015 Act expressly deals with the situation by providing that insurance companies are still liable if the insured loss happens before the term is broken, or if it occurs after the breach of the term has been remedied.  In both the examples above, the insurance company would now have to compensate me.  However, in the first of the examples, the insurance company would have the right to insist that I fix my burglar alarm before they pay out.

Of course, if I allow my burglar alarm to fall into disrepair, and a burglary happens, it will not help me to fix the burglar alarm after the event.  In that event the insurance company can still refuse to compensate me, which seems fair enough.

Positive road ahead

The above is something of a simplification of the Act, which provides for slightly different duties depending on whether the policyholder is a business or a private individual.  Also, at the time of dictation the Act is not in force, and we understand that it will not come into effect until August 2016.  However, when it does come into force it is hoped that it will make life considerably easier for the holders of insurance contracts.

Richard Godden
Partner – Dispute Resolution/Personal Injury



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