Lord Newby (LD)
My Lords, this Bill updates some important elements of insurance law. The existing legislation is outdated and does not reflect the commercial expectations of businesses purchasing insurance. That leads to disputes between insurers and policyholders, causing delay, expense and uncertainty. This undermines the reputation of one of the UK’s leading industries.
The Bill is based on the recommendations of the Law Commission and the Scottish Law Commission. The policy underlying the provisions has been the subject of extensive consultation, the results of which have been reflected in the Bill where possible. I am pleased to say that there is a broad consensus of support for the changes to the law from a wide cross-section of the insurance market. The Bill has therefore been deemed suitable to be considered by your Lordships under the procedure for Law Commission Bills.
The Bill covers two different topics relating to insurance: the law of insurance contracts, which forms the core of the Bill; and some provisions allowing the Third Parties (Rights against Insurers) Act 2010 to be brought into force. In relation to insurance contract law, the Bill addresses three main areas: first, disclosure in business insurance contracts; secondly, insurance warranties; and, finally, the insurer’s remedies for fraudulent claims.
Currently, the law is set out in the Marine Insurance Act 1906, which embodies principles developed in the 18th and 19th centuries. It is now out of step with modern commercial practices. Those principles were originally designed to protect a fledgling insurance industry against exploitation by the policyholder. The law therefore gives insurers wide-ranging opportunities to refuse liability for claims due to a policyholder’s breach of obligation, even where it seems completely out of proportion to any wrongdoing by the policyholder.
The law as it currently stands increases the likelihood that insurance may fail to respond as expected, or at all. This can significantly hinder UK businesses. Policyholders cannot always predict whether insurers will pay out or rely on technical legal arguments to deny claims. If they cannot assess quality, policyholders will buy on price alone, which could reduce the quality of insurance products available in the market. Insurance is a crucial UK export. It is important that the law does not undermine the confidence which international buyers place in the UK insurance market.
The Bill is short and principles-based. Where the language of the 1906 Act has acquired a particular meaning, the Bill adopts the same language to avoid unnecessary change or uncertainty. Many of the provisions are based on existing judicial precedent and will operate within the existing legal structure.
I shall now say a few words about each area of reform. First, regarding the duty on the policyholder to disclose information to the insurer, prospective policyholders must provide the insurer with information about the risk before the insurance contract is signed. This allows the insurer to price the risk accurately. However, the existing legal requirements can be difficult to understand and can be even more difficult to adequately comply with. A failure by the policyholder to provide all material information allows the insurer to refuse all claims under the contract.
The Bill updates and replaces the existing “duty of disclosure” with a “duty of fair presentation”. Policyholders still have a duty to disclose information and there is a duty on them to search for information, but there is also an obligation on insurers to ask the policyholder if they require further clarification. If a business fails to make a fair presentation of the risk, there is a new system of proportionate remedies for the insurer, based on what the insurer would have done if the failure had not occurred.
The Bill also deals with insurance warranties. An insurance warranty is typically a promise by the policyholder to do something which mitigates the risk. Under the current law, any breach of warranty completely discharges the insurer from liability from the point of breach, even if the breach is remedied before any loss is suffered. Modern insurance contracts are full of warranties, yet policyholders and brokers are often unaware of the harsh consequences of breaching them. The Bill provides that an insurer will be liable for insured losses arising after the breach has been remedied. This brings the law into line with best practice.
The Bill also abolishes “basis of the contract” clauses. These clauses convert every statement made by a policyholder on a proposal form into a warranty. Judges have been criticising these clauses for many years.
The Bill also introduces clear statutory remedies for the insurer where the policyholder has made a fraudulent claim. Insurers are particularly vulnerable to fraud by policyholders, and the law needs to provide clear and robust sanctions. A policyholder should not be able to think that fraudulently exaggerating a claim is worth a shot. The Bill puts into statute the remedy already upheld by the courts: that is, if a claim is tainted by fraud, the policyholder forfeits the whole of that claim. The Bill also clarifies an area of uncertainty: the insurer may choose to refuse any claim arising after the fraudulent act. However, previous valid claims should be paid in full.
The provisions of the Bill are a default regime for business insurance contracts. Parties may agree alternative arrangements if they do so transparently.
The Bill also contains provisions to amend the Third Parties (Rights against Insurers) Act 2010. The Government are committed to bringing the 2010 Act into force as soon as practicable. The amendments in the Bill will achieve this.
The Bill before us updates some important elements of insurance law and has widespread support. I beg to move.
Lord Newby
My Lords, I thank all noble Lords who have spoken in this debate. I think that they all stressed the importance of greater clarity in the areas covered by the Bill, and indeed they felt that the Bill achieves that clarity. Certainly, as a non-expert, I was able to get quite a long way into the Bill before I felt that I was losing my way, and that is a good way of testing how clear it is going to be. I thought that it was very clearly drafted in an area where there is plainly a lack of clarity at the moment.
I loved the description of the Bill given by the noble Lord, Lord Carrington, as being stuffed with useful things. Possibly that should be incorporated into the mission statement of the Law Commission—to stuff all their Bills with useful things. It is a delightful concept.
The noble Lord, Lord Sheikh, reminded us of the history of the sector and its current success, which is considerable, particularly in the UK. He pointed out that one of the consequences of the Bill, once passed, will be to reduce insurance litigation. That is clearly a most welcome prospect, given the very high levels of litigation that currently take place because of the ambiguities and problems that the Bill seeks to deal with. I was also grateful to the noble Lord for explaining from a practitioner’s point of view how specific provisions in the Bill will help to reduce current difficulties and make the sector and the UK market more competitive.
The noble Lord, Lord Sheikh, and the noble and learned Lord, Lord Davidson of Glen Clova, discussed a provision that is not in the Bill which relates to late payment. Originally, there was a draft clause in the Bill, but it did not receive consensual support across the market as a whole and the Government decided to remove it at this point. However, that was not because the Government and the Law Commission think that we should drop it as an area. Attempts continue to be made to reach a degree of agreement on this because it is a difficult area. If we can get a resolution of it quite quickly with drafting that would satisfy the noble Lord, Lord Sheikh, while meeting the basic requirements of a late payment provision, we think it would be worth doing. Efforts are ongoing. We hope that we might yet be able to bring that to a consensual point, which will enable us to legislate on it.
The noble and learned Lord, Lord Davidson, also asked about monitoring the efficacy of Clause 16 and pointed to the danger of widespread contracting out. At the moment, we do not see any pent-up demand for widespread contracting out, but the Government have committed to conduct a post-implementation review of the Bill after five years. We need a bit of time to see whether people in the market think that there is an advantage to contracting out. At the moment, we do not feel that there is a great danger in that area, but we will be watching it and will have a formal review after five years.
I hope that I have dealt with the specific questions raised by noble Lords. I am extremely grateful for the support they have shown so far, and I look forward to joining at least some of them in the Committee on the Bill.