Many personal injury practitioners may have overlooked and/or forgotten about the Insurance Act 2015 (“the 2015 Act”). However, since there is so often an insurer standing behind the defendant to a personal injury claim, the changes made by that Act are of relevance to personal injury practitioners.
This article summarises the law which preceded the 2015 Act and seeks to highlight how the modification of that regime by the 2015 Act increases the need for personal injury practitioners to have a working knowledge of the principles that apply, and be willing to engage with the factual issues that are raised when an insurer seeks to assert the right to avoid a policy of insurance.
The old regime
Although the title of the Marine Insurance Act 1906 would suggest that it applied exclusively to marine insurance it has long been recognised that, as regards the insured’s disclosure obligations the general law of insurance is consistent with the law of marine insurance. Since the 1906 Act codified the law in relation to marine insurance it is convenient simply to apply the wording of the Act even though, strictly speaking, it does not apply.
Section 17 of the 1906 Act set out the overarching obligation of parties entering into a contract of insurance to act in good faith. Sections 18 to 20 of the 1906 Act provided content for the duty of good faith during the pre-contractual period in the form of a duty of disclosure.
Crucially, section 17 prescribed only one remedy where the obligation of good faith was breached – avoidance ab initio. The logic underpinning the remedy was famously explained by Lord Mansfield in Carter v Boehm. In short, a non-disclosure vitiates the consent to contract.
The case of Pan Atlantic Insurance Co Ltd v Pine Top introduced the requirement of an insurer to prove inducement in order to avoid a policy of insurance, by analogy to the general common law in relation to misrepresentation.
In summary, therefore, in order to avoid a policy of insurance under the old regime an insurer is required to prove:
- Non-disclosure and/or misrepresentation of fact;
- Materiality: that the non-disclosure and/or misrepresentation was material; and
- Inducement: that they were induced by the non-disclosure and/or misrepresentation in the sense that they would not have written the Policy on the same terms had all the material facts been disclosed.
Materiality is an objective criterion. It is concerned with the relevance of the non-disclosure objectively, to the body of prudent underwriters at large. Whereas, inducement is a subjective criterion. It is concerned with the particular underwriter who wrote the policy. It is, effectively, a causation requirement. Would the particular underwriter have written the policy on the same terms even if there had been adequate disclosure?
In the period since the Pan Atlantic decision the approach to the requirement of inducement was explored by subsequent caselaw. While it was initially suggested that inducement could be presumed, subsequent caselaw has revealed an increasing appetite on the part of the courts to carefully scrutinise an underwriter’s assertion that they would not have written the risk on the same terms but for the failure in relation to the disclosure obligation. For example, in the first instance decision in the North Star Shipping v Sphere Drake Insurance case, Sir Anthony Colman commented:
“In evaluating the underwriters’ evidence it is important to keep firmly in mind that all their evidence is necessarily hypothetical and that hypothetical evidence by its very nature lends itself to exaggeration and embellishment in the interests of the party on whose behalf it is given. It is very easy for an underwriter to convince himself that he would have declined a risk or imposed special terms if given certain information. For this reason, such evidence has to be rigorously tested by reference to logical self consistency, and to such independent evidence as may be available.”
The case of Niramax Group Ltd v Zurich Insurance Plc (a case under the old regime) demonstrates that the courts are willing to grapple in detail with hypothetical factual issues of what would have happened if there had been appropriate disclosure in order to scrutinise whether the inducement requirement was made out.
The new regime
The 2015 Act commenced on 12 August 2016. The old regime is still therefore relevant to policies which incepted before this date.
The 2015 Act retained a duty of disclosure but, drawing upon previous caselaw, recast the obligation as a duty of fair presentation. The 2015 Act requires the insured to conduct a reasonable search. After doing so they must disclose every material circumstance known to them, or enough to put the prudent insurer on notice, “in a manner which would be reasonably clear and accessible to a prudent insurer”.
This approach was taken with the intention of discouraging ‘data dumping’ by proposers and passive underwriting during the placement of the risk, with subsequent underwriting at the claims stage, by insurers.
Whilst the recasting of the duty of disclosure as a duty of fair presentation was not intended to lead to drastic change, the remedy for a breach of the duty under the 2015 Act is radically different. Instead of only one remedy applying to all failures to disclose, Section 8 introduced a new scheme of remedies which is set out in schedule 1 to the Act. The scheme of remedies mirrors that which was introduced for consumer insurance by the Consumer Insurance (Disclosure and Representations) Act 2012 except that innocent misrepresentations are ‘qualifying misrepresentations’ under the 2015 Act.
Under the new regime, it is necessary for the court to determine what the insurer would have done had the duty of fair presentation been complied with in order to determine the remedy for the breach. This necessitates the Court to engage in a detailed analysis of how an insurer would have responded if there had there been a fair presentation of the risk.
The implications for personal injury practitioners
It is not uncommon for investigations following the presentation of a personal injury claim by the defendant’s insurers to reveal that there were issues with the placement of the risk and to seek to deny coverage as a result.
In such circumstances, it is important for the personal injury claimant’s legal representatives to seek to try and evaluate the merits of the coverage issues in order to determine whether any judgment their client obtains can be satisfied or not.
The scheme of remedies introduced by the 2015 Act introduces the possibility that even where there has been a failure in the disclosure obligation the insurer may still have an interest. For example, where the insurer would have charged an increased premium they will be obliged to provide a proportionate indemnity to the defendant. There will, therefore, be a need to engage in negotiations, at a joint settlement meeting or otherwise, against the background of the insurer asserting that it is only liable to indemnify the defendant to the personal injury claim for a proportion of their ultimate liability.
This is likely to enhance the scrutiny that will be placed upon the evidence adduced by insurers as to what they would have done had there been adequate disclosure.
Experience dictates that insurers often face practical difficulties in adducing clear evidence of how their underwriters would have reacted if they had been provided with adequate disclosure. This can be for various reasons: turnover of underwriting staff in the intervening period; issues with data retention; a reluctance for underwriting guidelines (which may be seen to be commercially sensitive) to be shared; or simply reluctance of underwriting departments to engage with claims departments.
Representatives representing insurers must explore the factual issues with their insurer clients carefully to try and overcome such practical difficulties and secure the available evidence and advise in relation to the issues.
Representatives on both sides should be aware of the potential application of Wisniewski v Central Manchester Health Authority  PIQR 324 arguments. For example, where underwriters are no longer available to provide witness evidence, the insurer’s representatives would be well advised to evidence the reason why they cannot be called to provide evidence.
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 (1766) 3 Burr 1905
  1 AC 501
  2 Lloyd’s Rep 76
  EWHC 535
 Except Part 4A (Late Payment provisions) commenced on 4 May 2017 and the Third Parties (Rights Against Insurers) Act 2010 commenced on 1 August 2016.