Insurance Act – some unintended consequences?

Parliament has never passed a Law of Unintended Consequences and yet, perversely, they are a feature of much that ends up on the statute books. The latest example may be the effect of the new Insurance Act 2015 on that stalwart of the insurance industry, the Premium Payment Warranty (PPW), says Andy Stevenson of Elborne Mitchell..

Originally designed as a simple-but-effective means of ensuring that insureds pay their premium on time, current PPWs may become a much blunted tool when the new Act comes into force on 12 August 2016, if they work at all.

The problem lies in the change to the law regarding warranties generally under the new Act. Under the current law, the position is clear: if the insured breaches a warranty, the insurer is immediately discharged from liability to indemnify any loss. This is regardless of whether the breach has anything to do with the cause of the loss. Which is why PPWs are so effective – if the premium is not paid within the prescribed period then the insurer is discharged from liability, regardless of what happens afterwards.

There are various clauses used routinely in the insurance market, but LSW585 is a good example, showing the main ingredients. It says “It is warranted that all Premiums due to the Underwriters under this Policy are paid within [xx] days from Inception. Non-receipt by Underwriters of such premiums by Midnight on the Premium Due date shall render this Insurance Policy void with effect from Inception.”

Brief and to the point, it delivers a clear message to commercial and consumer insureds alike: pay your premium on time or lose your cover.

The new Act was designed to deal with the perceived draconian effect that many other sorts of standard warranties (e.g. as to operating fire alarms, guarding of premises) have on businesses and to level the playing field in favour of insureds. However, because the Act makes no distinction between different types of warranties, it may have inadvertently removed, or at least reduced, the power that PPWs have traditionally had.

The problem is this:  under the new Act warranties become ‘suspensory conditions’. This means that the insurer will not be liable for losses whilst the insured is in breach of a warranty, but cover is automatically reinstated if the breach is remedied before any loss occurs. In the case of a PPW, the position under the Act would seem to be that an insured may pay its premium later than the date required by the PPW and – provided it does so before any loss occurs – there is nothing the insurer can do about it. So in that sense the PPW’s power is diminished.

So any assumption that current PPWs will survive the introduction of the new Act unscathed is a dangerous one, at least until a case gets to the Courts.

In promoting the new Act the Law Commission stated that it was not their intention to prevent insurers from including conditions which are so fundamental that breach by the insured should discharge the insurer from all liability.

So clarification is likely in due course.

But, until such time as the Courts determine the issue (or Parliament amends the legislation), a safer course might be for insurers to rethink their existing PPW arrangements. Parties are, for instance, permitted to contract out of the Act. The insurance industry has, to date, broadly indicated that it will adopt the Act wholesale, but a limited contracting-out for PPWs might be an attractive option. In other words, a policy might say that the parties agree to contract out of the Act for the purposes of the premium payment warranty, but that the Act shall apply to the rest of the policy terms.

However, whether this will be commercially acceptable to insureds remains to be seen. Care will also have to be taken to spell out the effect of the breach of warranty in order to minimise scope for dispute about enforceability later down the line.

Another option might be to re-word the PPW as a condition precedent to liability. Much though will depend on the drafting of the new clause (is it, for example, just a warranty in disguise and therefore potentially still subject to the Act?) and its commercial acceptability.

It is important to stress that both of these also represent a business risk for brokers. They need to have considered and understood any new clauses in order to properly advise their clients and obtain their instructions. Failure to do so might lead to negligence claims, with the usual negative effect on profits, management time and the cost of future PI cover.

All in all, this does look very much like an unintended consequence of the government’s efforts to water down the effect of warranties generally. How it will play out remains to be seen, but insurers, brokers and insureds who routinely use PPWs would be well advised to consider the issue and, if necessary, seek advice.

Andy Stevenson is a partner at Elborne Mitchell LLP