Last week, the new English Insurance Law entered into force. The law does not intend to be a full codification of insurance laws and alongside it other laws on insurance law will continue to apply, such as the Marine Insurance Law from 1906 and the Third Parties Rights Against Insurers Act 2010.
In this newsletter we address two changes in the new law, which mark a major departure from what was the situation under English insurance law until now: the duty of utmost good faith – Uberrima Fides – and the automatic cessation of the insurer's right to claim in the event of fraud or deceit. In place of the duty to disclose in utmost good faith – which also applied to brokers – an obligation similar to that of the obligation to act in good faith will apply to both the insurer and the insured. According to the new law, the potential insured is obliged to disclose of its own volition everything that is known to him, or which should be known to him, which will affect the insurer in its decision whether to accept the risk, as well as all information to which it is important to draw the attention of the insurer with respect to the insurance coverage. The insurer is not obliged to disclose matters already known to the insurer, and the insurers are required to mention from the outset those matters which in their opinion they need for the purposes of accepting the insurance.
An additional substantial change resulting from the new law concerns the right of the insurer to reject a claim for lack of disclosure or fraud. In the event of malicious breach of the insurer can reject the claim without return of the premium paid; in the event of a breach which is not malicious the insurer can reject the claim but it should return the premium. Having said that, in cases of breach or failure to disclose which do not amount to intentional fraud, and where the insurer would not agree to take on the insurance save on other terms, the insurer must compensate the insured on the same terms on which it would have been prepared to take on the insurance had it known the truth. This change is material and brings the English law closer to the conditions which appear in the insurance contracts law in Israel. A major change is in the provision according to which even if there is a lie in the information which was provided by the insured at the time the insurance was made or at the time of handling the claim, if it has no factual connection to the damage the subject of the claim, such lie will not operate so as to set aside the insured's right to claim.
In parallel to the entry into force of the new law, a decision in the matter of VERSLOOT DREDGING BV v HDI GERLING INDUSTRIE VERSICHERUNG AG was handed down, which decision will certainly cause shockwaves throughout the English insurance market. This is a decision of the Supreme Court (fka the House of Lords), and the leading judgement was written by His Honour Lord Sumption. The facts were simple and the question at the base of the decision was – what constitutes a fraudulent claim. The judge mentioned that this is subject which is under dispute in the common law, and which is also not resolved in the new law from 2015. There are three alternatives. The first is that the entire claim is fabricated (an invention which is not true). In this case of course the insurer is entirely exempt from paying out on the claim. The second is where there is an honest claim but the amount of the claim is maliciously inflated. Also in this instance the insurer will be exempt from having to honor the insurance even with respect to the amount of the claim which has not been inflated. The third alternative is where the claim is justified but certain aspects thereof are embellished in order to explain or conceal facts which are not convenient for the insured, although even without such facts the claim would be covered. In the judgement these lies are called collateral lies being those which are not relevant to the insured's right of indemnity and the insurer must pay the claim whether these aspects are lies or not. After a lengthy and thorough examination, Lord Sumption reaches the conclusion – which is consistent with the provisions of the new law – that the insurer is obliged to indemnify even though there is not dispute that the presentation of the facts of the claim is not true, and thereby overturned the decision of the Appeal Court. The plaintiffs succeeded in their claim for Euro 3,241,310.60.
References: The Insurance Act, 2015; and VERSLOOT DREDGING BV v HDI GERLING INDUSTRIE VERSICHERUNG AG, Supreme Court, July 20, 2016