Introduction
Historically, English law as it stood on 27 November 1826, was imported into Singapore through the Second Charter of Justice 1826. Until 1993, continuing reception of English law on specific areas was achieved through s 5(1) of the Civil Law Act, Chapter 43 (the “Civil Law Act”). Section 5(1) of the Civil Law Act was repealed by the Application of English Law Act, Chapter 7A (the “Application of English Law Act”), which took effect from 12 November 1993. One important aspect of the Application of English Law Act was to preserve the applicability of a number of English statutes germane to insurance. This included the Marine Insurance Act 1906 which was adopted as our Marine Insurance Act, Chapter 387 (the “Marine Insurance Act”).
In England, the law of insurance contracts was largely codified into the Marine Insurance Act 1906 following the cases that were decided in the 18th and 19th century from a nascent insurance industry. Many of the provisions were meant to protect insurers against exploitation by insureds in a very different age and time by allowing insurers to decline claims. Despite its title, most of the principles in the Marine Insurance Act 1906 apply to all forms of insurance on the basis that it embodied the common law but by codifying the law of insurance, it restrained how the common law could develop to meet the needs and rapid changes in the insurance industry in the 20th century and now.
The first wave of reform of UK insurance law was targeted at consumer insurance policies with the passing of the Consumer Insurance (Disclosure and Representations) Act 2012 which focused on the consumer’s duty to disclose information to the insurer. Reform for non-consumer insurance contracts comes in the form of the UK Insurance Act 2015 (the “UK Act”), which came into force on 12 August 2016. Combined, they represent the biggest reform to insurance law in the UK for more than a century. The UK Act introduces several significant changes that will have important implications on insurers and insureds alike whose insurance contracts are governed by English law.
Duty of Fair Presentation of Risk
An insurance contract is often cited as the classic example of a contract of utmost good faith. Indeed, s 17 of the Marine Insurance Act explicitly states that a contract of marine insurance is a contract based upon the utmost good faith. Among many other obligations that may arise, the element of utmost good faith imposes on insureds a positive duty to disclose all material facts to the insurer during the pre-contractual stage so that risks relevant to the insurance undertaking can be properly assessed.
Section 18(1) of the Marine Insurance Act provides that “the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him”. Section 18(2) proceeds to define “material circumstance” as “every circumstance which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk”. An insured’s failure to make the required disclosure entitles the insurer to the “all or nothing” remedy of avoidance, leaving him entirely without coverage. As the Courts and academics have rightfully recognised, such a position tips the balance heavily (and some say, unfairly) in favor of the insurers vis-a-vis unsophisticated insureds who might be unaware of the scope and consequences of their pre-contractual duties.
The rationale for such a draconian stance is attributable to a time long past and the outdated premise where only the insured has access to the relevant information for purposes of assessment of the risks to be insured while the insurer has none. It is also attributable to the protective stance adopted by the English Courts more than two centuries ago over its then fledgling insurance industry which was open to exploitation as insurers were wholly dependent on the insureds to provide proper disclosure of facts necessary to underwrite the risks.
The landmark House of Lords decision in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501 (“Pan Atlantic”) introduced a noteworthy shift in favour of the insured. Recognising that the law was too harsh and on the basis that it was unclear as to when a statement was material, the House of Lords introduced a test of materiality (the “Pan Atlantic test”):
1. A material circumstance is one that would have an effect on the mind of a prudent insurer in assessing the risk and it is not necessary that it would have a decisive effect on the insurer’s acceptance of the risk or on the amount of premium charged;
2. Before an insurer may avoid a contract for misrepresentation of a material circumstance it has to show that it was induced by the misrepresentation to enter into the policy on relevant terms.
The requirement for inducement is said to introduce a much-needed causal connection between the insured’s failure to disclose a material fact and the insurer’s granting of the relevant policy. Where the inducement element is missing, the insurer is precluded from having recourse to the “all or nothing” remedy of avoidance. With the enactment of the UK Act, the shift in favour of the insured is taken several steps further.
First, the UK Act updates and recasts the insured’s duty of disclosure under the banner of “the duty of fair presentation”. As a result, the duty to disclose every material circumstance stands simply as a primary duty under s 3(4)(a) of the UK Act. An insured’s failure to comply with this can be saved through recourse to an alternative position in s 3(4)(b) of the UK Act (the “alternative position”).
The alternative position states that where an insured fails to disclose every material circumstance as required, it is open to him to state that he had disclosed enough to put a prudent insurer on notice for purposes of making further enquiries. This changes the playing field, effectively imposing the insurer with the pro-active role of asking the insured questions about information already presented but warranting further investigation. In the absence of such further enquiries, the insured is exempted from disclosing a circumstance pursuant to s 3(5) if:
1. It diminishes the risk,
2. The insurer knows it,
3. The insurer ought to know it,
4. The insurer is presumed to know it, or
5. It is something as to which the insurer waives information.
(the “disclosure exemptions”)
Notwithstanding the above, the UK Act precludes the insured from discharging his duty under the alternative position through data dumping which is a situation where a proposer gives an insurer a large amount of undigested information for the insurer to sort through and decide what is actually relevant. Section 3(3) of the UK Act makes it clear that the disclosure must be carried out in a manner that is “reasonably clear and accessible to a prudent insured”. Further, every material representation must be “substantially correct”.
The second noteworthy feature of the UK Act is the knowledge provisions it contains, introducing some element of certainty as regards to what an insured and insurer knows, ought to know or is presumed to know for purposes of the duty of fair presentation. Section 4 deals with knowledge of the insured, with different provisions attributing knowledge to various categories of persons depending on whether the insured is an individual or not. Section 5, in turn, defines what the insurer knows, ought to know and is presumed to know for purposes of the disclosure exemptions.
The third and most significant change introduced by the UK Act lies in the remedies available when an insured breaches the duty of fair presentation. Under the previous law, the single remedy of avoidance is the default consequence of an insured’s non-disclosure. In this respect, the UK Act makes a paradigm shift.
Under the UK Act, an insurer has to first fulfil the threshold requirements set down in s 8(1) to pursue remedies against errant insureds. It is noteworthy that these threshold requirements encapsulate the Pan Atlantic test in statutory form. In particular, s 8(1) of the UK Act requires:
1. a breach of the duty of fair presentation; and
2. proof by the insurer that but for the breach he would not have entered into the contract of insurance at all or would have done so only on different terms.
(the “threshold requirements”)
A breach that complies with the threshold requirements is deemed a “qualifying breach” under the UK Act. Where established, the UK Act sets out an array of remedies at Schedule 1 to the UK Act, the availability of which hinges on the culpability of the insured. Where the insured’s breach is deliberate or reckless, the insurer still has recourse to the remedy of avoidance. Otherwise, the insurer’s remedy is based on what the insurer would have done if the insured had not committed the qualifying breach. For instance:
1. Where the insurer would have contracted on different terms, the insurer is entitled under paragraph 5 of Schedule 1 to treat the contract as having been entered on those terms to the extent that they do not relate to the premium.
2. Where the insurer would have charged a higher premium but for the breach, paragraph 6(1) of Schedule 1 allows the insurer to reduce the claim proportionately, with paragraph 6(2) of Schedule 1 providing a formula for purposes of calculating such a reduction.
The UK Act’s graduated approach towards remedies, pegging it to an insured’s culpability towards a qualifying breach, should be welcomed as a much-needed change to a previously imbalanced area in English insurance law where only the one remedy of avoidance of the insurance contract was available.
Breach of Warranties
Another key change lies in how the UK Act treats a breach of warranty.
Under s 33(1) of the Marine Insurance Act, warranties are promises by which an insured undertakes that some particular thing is or is not to be done or that some condition is to be fulfilled. Examples of warranties include:
1. an undertaking that the insured would only engage a certain number of workers to perform a risky activity;
2. an undertaking that the insured would install and maintain a fire alarm on the insured premises and keep it operational at all times.
The role of warranties is fundamentally that of risk control. It serves to ensure that insureds positively undertake/avoid courses of action thereby keeping policy risks in check.
As the law stands under s 33(3) of the Marine Insurance Act, an insured’s breach of warranty discharges an insurer from liability under the insurance contract as from the date of breach (Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd) (“The Good Luck”) [1988] 1 Lloyd’s Rep 514). This is largely automatic and not at all dependent on any decision by the insurer to treat the contract as at end (the “rule of automatic discharge”).
More importantly, s 33(3) of the Marine Insurance Act precludes any inquiry into the materiality or immateriality of the risk, as are questions whether there has or has not been a substantial compliance with the warranty. Put simply, where a warranty has been broken, even though the loss may not have been in the remotest degree connected with the breach, the insurer is nonetheless discharged on that account from all liability for the loss.
Section 10(1) of the UK Act abolishes the rule of automatic discharge. Instead, s 10(2) of the UK Act states that an insurer’s liability is merely suspended from the time of the breach of a warranty until it is remedied in the manner prescribed at s 10(5) of the UK Act. During this suspension, the insurer will have no liability for anything which occurs in that time period. For warranties that has a deadline for the insured to perform or comply with and this deadline is missed, ss 10(5)(a) and 10(6) of the UK Act allows breaches of these time-sensitive warranties to be remedied after the deadline, if the insured ultimately complies with them.
The UK Act’s recognition of remediable breaches of warranty is particularly refreshing insofar as it demonstrates a clear move towards rebalancing the insurer-insured relationship by establishing a causal link between a breach of a warranty and the insurer’s remedy.
Risk Mitigating Terms
Beyond the realm of warranties, the UK Act also governs the inclusion of contractual terms other than “a term defining the risk as a whole” which, if complied with, would tend to reduce the risk of “loss of a particular kind”, “loss at a particular location” and “loss at a particular time” (“risk mitigating terms”).
Section 11 of the UK Act serves to capture not only warranties but any other types of contractual provisions such as conditions precedent or exclusion clauses provided these terms relate to a particular kind of loss or loss at a particular location or loss at a particular time. Section 11(2) and (3) of the UK Act prevent an insurer from avoiding liability in the event a risk mitigating term is breached, where the insured can show that non-compliance could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred.
Fraudulent Claims
Section 17 of the Marine Insurance Act provides that in the event the duty of utmost good faith is not observed by one party, the insurance contract may be avoided by the other party ie, avoiding the contract ab initio thereby returning parties to the position as if the contract of was never made. This duty applies both before and after the insurance contract is made. The post-contract duty of utmost good faith has generated much debate and the English courts have, over the years, tried to make sense of this duty and even limit its scope (see Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd and Others (the Star Sea) [2003] 1 AC 469). Clearly, putting forward a fraudulent claim to an insurer is a breach of the duty of utmost good faith, and if so, the remedy of avoidance under s 17 of the Marine Insurance Act is clear. However, the Courts in England have struggled to apply the clear words for this harsh remedy and reconcile that with logic and principle. This struggle has led to the prevalent remedy in case law of forfeiture of the immediate claim, with the fraud not affecting any valid claims previously made under the policy.
With the introduction of s 12 of the UK Act, it is now clear that the consequence of a fraudulent claim is forfeiture. In particular:
1. The insurer is not liable to pay the fraudulent claim;
2. The insurer may recover from the insured any sums paid by the insurer to the insured in respect of the fraudulent claim; and
3. In addition, the insurer may by notice to the insured treat the contract as having been terminated with effect from the time of the fraudulent act.
Section 12 does not define what a fraudulent claim is or what fraud entails. In this regard, fraud has to be established first pursuant to common law principles before the relevant remedies will apply.
Contracting Out
Whether or not insurers can contract out of the UK Act depends largely on the type of insurance contract concerned.
In the context of consumer insurance contracts, s 15 of the UK Act prevents insurers from contracting out to the detriment of the consumer. Section 15(1), in particular, states that any term in a consumer insurance contract that would put a consumer in a worse position than that provided for in the UK Act would have no effect.
In contrast, under s 16 of the UK Act, save for the provisions on basis of contract clauses and similar provisions in s 9 of the UK Act which cannot be contracted out of, insurers dealing with non-consumer insurance contracts are entitled to contract out of the UK Act to put insureds in a worse position to the extent they comply with the transparency requirements set out at s 17 of the UK Act (the “transparency requirements”). The transparency requirements obliges:-
1. the insurer to take sufficient steps to draw “the disadvantageous term” to the insured’s attention before the contract is entered into; and
2. “the disadvantageous term” to be clear and unambiguous as to its effect.
In determining whether these requirements are met, the UK Act takes into consideration various factors, including the characteristics of the insured of the kind in question and the circumstances of the transaction.
Taken as a whole, these provisions clearly demonstrate a concerted and consistent effort by the UK Parliament to ensure that the insured (particularly in the context of consumer insurance contracts) is not deprived of the protections recommended by the Law Commission leading up to the UK Act.
Implications for Singapore
All insurance and reinsurance contracts entered into on or after 12 August 2016 governed by English law must comply with the UK Act, subject to the option to contract out for non-consumer insurance contracts within the limitations described. English law has led the way in the development of the insurance industry and law since the 18th century and the centuries of reliance and trust on a respected system will see the UK Act drawing interest from outside of England.
The UK Act’s impact to Singapore, being Asia’s leading speciality insurance and reinsurance hub, is immediately relevant for any insurance policies or reinsurance agreements made subject to English law on or after 12 August 2016. For areas such as marine cargo or hull insurance, the choice of law is typically English law given the international nature of maritime trade and commerce. For other polices covering risks of an international or global nature, it is again not uncommon for English law to be chosen as the governing law of the contract.
While local insurers remain relatively insulated from the impact of the UK Act if English law is not the governing law of the insurance contract, knowledge of the same is important as there is nothing to stop a local insurer (subject to any specific local law providing otherwise) from opting to adopt some of the provisions of the UK Act in favour of its insured to gain a competitive edge in the current soft insurance market. No doubt, there will be insurance brokers who will raise such a proposal with underwriters.
The changes introduced by the UK Act demonstrate the continuation of a trend of departing from the old insurance laws that arose from a very different era under outdated circumstances as seen by similar legislation in Australia. The UK Act and its provisions are a reminder that in the modern era of electronic data and records, an underwriter is no longer as helpless as his counterpart centuries ago when it comes to assessing relevant information to underwrite a risk. With data analytics and other tools available to a modern-day underwriter, the protective regime in favour of insurers in the Marine Insurance Act seems outdated and unfair. With more changes to English insurance law on its way in May 2017 to oblige insurers to pay claims within a reasonable time frame or pay damages for the loss caused by any delayed payment in addition to their indemnity obligations, the scale is tilting in favour of policyholders and insureds in a more balanced approach.
In this regard, given Singapore’s current position as Asia's leading speciality insurance and reinsurance hub and its ambition to be a global insurance marketplace by 2020, legislative changes to move away from the archaic provisions of the Marine Insurance Act ought to be considered so as to align Singapore’s insurance law with international standards.
► Simon Goh
Executive Committee Partner
Head, Insurance & Reinsurance Practice
Rajah & Tann Singapore LLP
E-mail: [email protected]
The author wishes to thank Mr Adam Liew for his assistance in the preparation of this article. Any errors, however, are entirely the author's own.