Is uncertainty the price of insurance law reform?

We examine three recent cases dealing with problematic areas of English insurance law and how the outcome might have differed if they had been decided under the Insurance Act 2015 (IA 2015) when it takes effect in August 2016. Those areas are remedies for non-disclosure (Involnert), basis clauses (Genesis Housing) and “fraudulent devices” to promote claims (Versloot Dredging).

Only in the first of these cases (Involnert and remedies for avoidance) would the eventual outcome have been different under IA 2015. In the other two cases, the result would probably have been the same. The route to the same outcome would have been significantly different in Genesis Housing with the abolition of basis clauses in IA 2015. In the difficult area of fraudulent devices, both the outcome and the route to it probably remain unchanged following the Court of Appeal’s decision in Versloot Dredging, although a Supreme Court decision in this troublesome area is still awaited.

Involnert Management Inc v Aprilgrange Ltd and others

The claimant insured a luxury yacht for €13 million although the yacht was worth only €8 million. Following loss of the yacht in a fire, Leggatt J held in the Commercial Court that the overvaluation was material and had induced the underwriter to give cover for an excessive amount. The policy was void.

Leggatt J described the result as a “blot on English insurance law” because the insurers would have been perfectly prepared to insure the yacht for €8 million. As he went on to observe, under IA 2015 the proportionate remedies regime would have resulted in a corresponding reduction of the limit of indemnity in the policy but would otherwise have left the policy intact.

That would also have been good news for the broker who bore part of the claimant’s loss.

Genesis Housing Association v Liberty Syndicate Management

The claimant housing association insured itself against the risk of its building contractor becoming insolvent during the construction phase of a building project. Unfortunately, its proposal form contained a material error: it named a long established and successful subsidiary of the contractor as the contractor. In fact, the contractor was another group company, a special purpose vehicle with no trading record.

The Court of Appeal held that the basis clause converted the statement in the proposal form into a warranty, the warranty was incorrect and the insurers were relieved of liability. Questions whether the misstatement was material and whether it had induced the insurer to write the policy were therefore irrelevant.

Under section 9 IA 2015, basis clauses are banned and it is impossible to contract out of this provision. If this case was decided under the new law, the insurer would have to prove that the misstatement in the proposal form was material (which it probably was – the single purpose vehicle was a significantly higher risk than the established subsidiary) and that it had induced the actual underwriter to accept the risk (which would depend on the evidence of the actual underwriter).

The underwriter’s evidence would not end there, however. If the underwriter’s evidence was that cover would not have been granted on any terms (as seems quite possible) then the insurer would be able to avoid. Alternatively, if the underwriter’s evidence was that cover would have been granted but on different terms or at a different premium, that would engage the proportionate remedies regime so that the policy would remain valid but only on those different terms or premium.

All this is significantly more burdensome for the insurer than the old regime. The insurer could try to avoid that by converting the insured’s representation as to the identity of the contractor into a free standing warranty in the policy. The Law Commissions believe this is possible. However, there may be problems with the broad wording of section 9 IA 2015. It prohibits all attempts by an insurer to convert an insured’s representation into a warranty by declaring the representation forms the basis of the contract “or otherwise”. The exact meaning of those two weasel words will have to be explored by the courts if insurers try to convert pre-contractual representations in the proposal form into warranties in the policy.

Versloot Dredging BV v HDI Gerling and others

The long standing rule that insurers were entitled to reject a fraudulent claim (and the entirety of a partly fraudulent claim) is now codified in sections 12 - 13 IA 2015. However, IA 2015 is oddly silent about the difficult question of “fraudulent devices” – fraudulent representations made to bolster an otherwise genuine claim.

In this case, the Court of Appeal largely upheld earlier authority to the effect that an insurer is entitled to reject a claim where a fraudulent device is used provided that:

• It is directly related to the claim. 
• It was intended by the insured to promote the success of the claim against the insurer. 
• It yielded a significant improvement in the insured’s prospects of success before any final determination of the parties rights (ie, in litigation or arbitration.

This seems to be the last word on this vexed subject and it is seems unlikely, for the time being at least, that the courts will depart from the principles set out above.

Conclusions

Analysis of these three cases and how they might have been resolved under IA 2015 shows that there will be significant new uncertainties in coverage disputes. It may be possible to reduce those uncertainties by an early review of underwriting protocols and policy wordings but it will not be possible to avoid them altogether. That is, as ever, the price of law reform.