Clients will be able to sue over late payments under first change to commercial insurance law since 1906

Insurers will be unable to automatically reject a commercial claim because a business missed out some information when applying for a quote, under new rules unveiled this week.

Draft clauses from the Insurance Contracts Bill, released on Tuesday, are the first overhaul of commercial insurance law since the Marine Insurance Act 1906.

Law Commissioner David Hertzell told Insurance Times a new scheme of remedies for when clients fail to give a proper disclosure is the biggest change insurers will see.

At present, if an insurer discovers information missing from the proposal form that would have changed the premium they quoted, they can reject the claim outright.

The proposed changes mean an insurer must pay the claim, but can apply a reduction proportional to the extra premium they would have charged, if they had known about the missing information when the risk was accepted and priced by the underwriters.

The law also places a “duty of fair presentation” on the client, which means claims can be fully rejected if missing information from the proposal form was “deliberate of reckless” or would have caused the insurer to turn down the risk when it was proposed.

Most of the insurers we speak to say they’re pretty much doing that already. Or if there has been a non-disclosure and they want to keep the customer they charge an additional premium,” Hertzell said.

“It would be wrong to say it would lead to a huge increase in payouts.”

The draft rules define the duty of fair presentation as “every material circumstance the proposer knows or ought to know”.

Risk managers association Airmic chief executive John Hurrell welcomed the proposed changes.

“Anecdotally our members are telling us that the current disclosure requirements that relate to ‘every material circumstance of the risk worldwide’ cannot be complied with and therefore, theoretically, the insurer could accuse the insured of not achieving full disclosure.

“And because the penalty on that is the death penalty, ie avoidance, that gives the insurer a disproportionately strong negotiating position.”

Damages for late payment

The bill also introduces a way for clients to sue insurers for damages for unreasonably late claims payment.

DAC Beachcroft partner Nick Young said: “It’s not there to strike fear into insurers and prevent them from conducting thorough and professional investigations. It’s to deal with extreme behaviours.

“If the insurer shows there are reasonable grounds for disputing the claim, there will not be a breach of that term.”

Becoming law

Hertzell said it was quite important for the bill to be passed before next year’s general elections.

“There’s an overall consensus and level of interest. If we leave it until there’s a new government and legislative programme it would be very hard to resuscitate. It’s a case of striking while the iron is hot and people are interested.”

The Law Commission will release draft proposals on contracting out of the law, basis of contract clauses and warranties in the coming weeks as part of the consultation.

Young said: “This law is trying to tread a fine line between modernising insurance law, giving the purchaser comfort that we’re not set by prehistoric draconian laws, and wanting to give the insurance industry comfort that it’s not changing beyond recognition.

“It is evolution, not revolution.”