Insurance Act 2015

Insurance Act 2015

2015 CHAPTER 4

Commentary on Sections

Part 7: General

Schedule 1: Insurer’s remedies for qualifying breaches

Part 1: Contracts

153. Part 1 of Schedule 1 sets out the remedies available for qualifying breaches of the duty of fair presentation in relation to non-consumer insurance contracts. This includes breaches of that duty in relation to renewals.

Deliberate or reckless breaches

154. Paragraph 2 specifies the remedies for qualifying breaches that are deliberate or reckless, as defined in section 8. The insurer is entitled to avoid the contract and retain premiums paid.

Other breaches

155. If the breach of the duty of fair presentation was not deliberate or reckless, the remedy is based on what the insurer would have done if the insured had not made the qualifying breach; that is, if the insured had made a fair presentation of the risk.

156. Under paragraph 4, where an insurer would have declined the risk altogether, the policy may be avoided, the claim refused and the premiums returned.

157. Paragraphs 5 and 6 set out the position where the insurer would have contracted on different terms. If the different terms do not relate to the premium, paragraph 5 provides that the insurer can treat the contract as having been entered into on those terms. Thus if the insurer would have included an exemption clause or imposed an excess, the claim would be treated as if the contract included that exemption clause or excess.

158. Where the insurer would have charged a higher premium, paragraph 6 allows the insurer to reduce the claim proportionately. The formula for calculating the reduction is contained in paragraph 6(2). For example, if an insurer only charged £10,000 but would have charged £15,000 had the insured made a fair presentation, the insurer is entitled to reduce the amount to be paid on a claim by a third.

159. In some cases, both paragraphs 5 and 6 will apply. If the insurer would have entered the contract on different terms and would have charged a higher premium, those alternative terms may be applied to the contract and, in addition, the claim may be reduced proportionately.

Part 2: Variations

160. Part 2 of Schedule 1 sets out the remedies available for qualifying breaches of the duty of fair presentation made when an insurance contract is being varied.

Deliberate or reckless breaches

161. Paragraph 8 specifies the remedies for qualifying breaches that are deliberate or reckless in the context of variations. Under paragraph 8(a), the insurer is entitled to treat the contract as having been terminated with effect from the time the variation was made. Under paragraph 8(b), the insurer need not return the premiums paid.

Other breaches

162. If the breach of the duty of fair presentation was not deliberate or reckless, the remedy is based on what the insurer would have done had the insured made a fair presentation of the additional or changed risk on variation.

163. The Act makes a distinction between variations involving a reduction in premium (paragraph 10) and all other variations (that is, where the premium was increased, or not changed, as a result of the variation) (paragraph 9). This is intended to reflect the fact that, where the overall premium is reduced, the overall bargain between the parties is affected. The variation therefore goes to the heart of the insurance policy.

164. In either case, if the insurer would not have agreed to the variation on any terms, the insurer may treat the contract as if the variation was never made. If the premium was increased, the insurer must return the additional premium paid for the variation (paragraph 9(2)). If the premium was reduced, the insurer may reduce proportionately the amount to be paid on claims arising out of events after the variation (paragraphs 10(2) and 11).

165. Again, in either case, if the insurer would have included additional terms relating to the variation (for example, a warranty relating to the new risk), the insurer may treat the variation as if it contained those terms (paragraphs 9(3)(a) and 10(3)(a)).

166. If the insurer would have charged a different premium for the variation, or would not have changed the premium when in fact it increased or reduced it, the amount to be paid on claims arising out of events occurring after the variation may be reduced in proportion to the premium that the insurer would have charged (paragraphs 9(3)(b) and 10(3)(b)). Paragraph 11(3) makes further provision about the formula, depending on whether the insurer increased or reduced the premium or did not change it.

Part 3: Supplementary

167. Section 84 of the 1906 Act sets out an insurer’s duties to return premiums. Section 84(3)(a) states that where the policy is avoided by the insurer from the commencement of the risk, the premium is returnable, provided that there has been no fraud or illegality on the part of the assured. Under paragraph 12, this is to be read subject to the provisions of Schedule 1, which allows the insurer to retain premiums for deliberate or reckless breaches of the duty of fair presentation.