To paraphrase Jane Austen, the law seems but a quick succession of busy nothings. The latest busy nothing that we must contend with is a change in law, which although it became effective in April last year, conversations with several clients have indicated that its impact may not have been widely acknowledged or recognised.
The Consumer Insurance (Disclosure and Representations) Act of 2012, which came into force on 6 April 2013, has been a long time in the making. As many people are aware, the ordinary propositioning common law jurisdictions is that any non-disclosure by an insured party when entering into an insurance contract can allow the insurer to reject a claim on the basis that had it known the full picture, it may not have insured the risk or may have charged a higher premium. In England, the consequence of this over the years has been for consumers (as opposed to professional buyers of insurance products) that an innocent oversight can give the insurer the right to decline a policy claim.
Recent English case law, consultations by the Law Commission and The Unfair Terms in Consumer Contracts Regulations 1999 have all contributed to an environment that has inevitably led to a pro-insured climate in the consumer insurance sector. Instead of the duty on the insured and the insured’s agents to disclose and not misrepresent material facts, the burden now shifts to the insurer to ask for specific information that the insurer would reasonably want to know when deciding whether or not and on what terms to write the risks. Meanwhile, the consumer now has “a duty … to take reasonable care not to make a misrepresentation to the insurer” prior to the placement or amendment of a policy. The broad catch all of “are you aware of any other information that would be relevant to this insurance application?” may only have limited effect. For the first time, this test of reasonable care placed on a consumer severely limits the general duty of upmost good faith enshrined in the 1906 Marine Insurance Act.
Insurers and underwriters will be expected to ask clear, unambiguous questions of the insured/agents of the insured and not to seek to get round the intention of the legislation by overburdening them with too many questions. In our superyacht world, an application for insurance by an experienced superyacht insurance broker would take in different considerations as to whether the application is for cover for a RIB or a 100m behemoth. The underwriter will need to pay careful attention to an insured’s responses to the questions. There is absolutely no duty for an insured or their broker to draw an underwriter’s attention to a particularly important answer. The assumption will be made that the underwriter will have knowledge of any information included on an insured’s application or proposal form. If a question is left unanswered or is ambiguous and the underwriter does not press for an answer or for clarification, it would be deemed that the underwriter may have waived the information request so there will be no misrepresentation.
In 2013, the Association of British Insurers wrote that it did not expect there to be a major change in the way insurers treated claims following the amendment to the law. “Their practises have gradually improved over the past thirty years because of industry initiatives to bring a consistent approach and make questions asked at the point of sale clearer and unambiguous,” they said. “The Act will set an industry wide standard.” But this does not mean that underwriters will, on the basis of an insurance proposal, not be able to decline claims. If it is established that there has been a misrepresentation by the insured because of a lack of reasonable care and that, if it hadn’t been for the misrepresentations, the underwriters will not have written, renewed or varied the risk the underwriter may have a remedy.
In circumstances where the misrepresentation made to the insurer was deliberate or reckless, the underwriter may be able to void the contract and, by extension, the claims and indeed not return the premium. On the other hand, if a misrepresentation is found to be simply carelessness, a lot will be depend on the assessment of the effect of the misrepresentation. Indeed, when looking at insurance renewals, the insured will have a duty to check and notify the insurer if the information held by the insurer, as to the circumstances of the insured, have indeed changed, irrespective of consumer insurance policies.
Another departure is that any pre-contractual negotiations are no longer effective in consumer insurance policies and the Act now clarifies the position. The Act, as you would expect, only applies to English, Welsh, Scottish and Northern Irish, consumer insurance contracts entered into after 6 April 2013, but it will also apply to consumer insurance policy renewals or variations, or endorsements agreed after that date even if the policy was issued prior to that date.
For the insured to be relieved of the obligations of upmost good faith disclosure, he must be acting as a consumer. Under the Act that means an individual acting wholly or mainly for non-business purposes. This means that a commercial yacht would be excluded but a private yacht would be included. Therefore, if the policy covers mixed business and non-business use of the insured vessel, the question as to whether the insured is a consumer will depend on the main purpose of the insurance. If the main purpose is to cover business use, for example while the yacht is chartered by third parties, the Act will not apply and existing Marine Insurance principles will remain effective. In reality, even the private use of a commercial yacht would fall outside the ambit of the Act, therefore in reality only exclusively private vessels that operate as non-commercial assets only will have the benefit of the Act.
While it is true that insurers at the time of the initial insurance application may not know whether or not they are dealing with a business user or a “consumer”, insurance brokers must be alert to this issue and have a role to play in ensuring that the risk is presented in such a way that it is clear whether the underwriter has the burden of asking relevant questions or whether the duty is on the insured to disclose all material facts. We have no doubt that, from time to time, the definition of a consumer under the Act will undoubtedly be tested by the Courts and over time, we will inevitably have many definitions of what a consumer is. In the meantime, any insurer should proceed with caution when entering into a contract of insurance with an individual or corporate owner of a superyacht.
The new Act addresses what has long been considered an imbalance in pre-contractual burden imposed on insurance consumers and shifts the burden to the underwriter and the insurer.