The cynic will answer yes. Even if only 5% of the turnover of the large and successful law firms that specialise in insurance law relates to coverage litigation that is still a lot of money spent on lawyers’ fees. There is no reason to think that will change.
A more positive approach might again be yes on the basis that this is how the UK common law system works. The law develops based on precedents from significant cases whether or not the law is codified into legislation. The great advantage of this system is that the law develops over time to reflect social and technical change. The disadvantage is uncertainty although to some extent that is ever present as it is not always easy to apply prior law to every set of facts.
It is therefore a reasonable assumption that the Insurance Act 2015 will spawn litigation as parties seek to explore the limits of the new legislation and as new technology impacts the insurance sector. The Law Commissions were aware of the risk and to an extent accepted litigation as the price for developing the law. The Insurance Act is drafted on a principles basis like its predecessor, the Marine Insurance Act 1906. Setting out the principles rather than a detailed regulation future proofs the law and allows necessary change. However the courts are left to fill in the detail.
Nonetheless the Law Commissions sought to limit unnecessary disputes. If the intention remained the same language was carried forward from the 1906 Act to ensure that the legal precedents built up over the previous centuries are preserved. This is particularly true of the new duty of “Fair Presentation” which incorporates familiar concepts and phrases and was itself taken from existing cases. However the new duty contains more guidance than the earlier law and it is likely that this will be tested in court. For example what constitutes a “reasonable search” for information? Who are “senior management”? Was information provided in a manner that was “reasonably clear and accessible”? Did the proposer provide sufficient information to put the insurer on notice that it should ask further questions? Should the broker have disclosed information or was it confidential and unconnected? Although these issues are not particularly novel it is easy to see how the answer might depend on the particular facts and that there may well be cases brought to establish the boundaries of the new law.
Whilst there is much in the duty of fair presentation that is familiar the new Act has changed the current law on warranties in line with best practice. Warranties will now suspend cover which can be reactivated following compliance and to be effective there must be a causal connection between the breach of warranty and the loss. The new Act does not define a warranty and that contentious topic will no doubt continue to involve the courts.
The conversion of traditional warranties into suspensory conditions is unlikely to lead to litigation. However the new Act provides that risk mitigation terms including warranties, i.e. those that seek to reduce the risk of loss of a particular kind or at a particular place or time, will not be effective if the insured can show that non-compliance “could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred.” Whilst this does not impose a straightforward causal connection between the breach and the loss there clearly needs to be a causal link. In most situations it will be readily apparent whether such a link exists. However there will be others where the situation is much more arguable and no doubt some of those will be litigated.
When the Law Commissions consulted the market they were clearly told that the market preference was for a single business regime. The Law Commissions recognised that in practice it was hard to produce a law that would apply equally to a micro business and to a complex global reinsurance placement. It is therefore possible to contract out of the new Act provided the other party is sufficiently informed and the new term is sufficiently clear and unambiguous. It will be enough to inform the policyholder’s broker. What constitutes sufficient notice or whether a term is clear and unambiguous is a question of fact and interpretation. It is not difficult to imagine a disappointed policyholder challenging whether their insurer had actually contracted out of the new law if it suited them to do so.
So whilst some litigation to develop the law is probably inevitable, there is a lot that can be done to minimise unnecessary disputes. The new Act provides a good opportunity to review wordings and to check whether traditional formats will comply with the new law. It may be possible to agree information protocols either for a particular insured or for a class of business. Proper training in advance of the implementation date of 12 August 2016 is essential. The new law deliberately presumes a reasonable degree of competence for all parties, insurer, broker and policyholder alike. Those who are unprepared are unlikely to receive much sympathy from the courts. It would also be sensible to review internal systems for collecting and transmitting information. The new law assumes that these are adequate. It would be wise to ensure that proper records are kept of the placement so that there is no argument about who said what to whom. Insurers should maintain underwriting records and guidelines so that they can show how they would have acted had a fair presentation been made. The new law does not expect perfection. However it does anticipate a reasonable level of professionalism.
Finally, it is worth remembering that both for consumers and businesses there is evidence that the major source of dispute when a claim is made is that the policyholder bought the wrong cover. The new Act will have no bearing on this. This problem will only be solved by careful risk management and assessment, clear policy terms and better overall communication.
Former Law Commissioner, David Hertzell is a consultant at risk and insurance law business, BLM
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