The new Insurance Act 2015 (the “Act“) will come into force in the UK on 12 August 2016, representing the greatest change to English insurance law for over 100 years. The Act will apply to all business contracts of insurance and reinsurance/retrocession (as well as any variations made to existing contracts after the Act has come into force) and will materially alter the way (re)insurance business is conducted in the London market. This article focuses on the impact of the Act on foreign reinsureds purchasing reinsurance from the London market.
It is critical that these buyers of English law governed reinsurance are aware of and prepared for the changes the Act will introduce. In light of the “fronting” arrangements in place for many local risks, it will be in the interests of all parties in the risk transfer chain, including policyholders whose policies contain cut-through provisions to London reinsurers, to prepare and plan for the arrival of the Act.
Information will need to be clearly presented, indexed and signposted, otherwise it may not be considered a fair presentation of the risk.
Contracts of reinsurance and retrocession are contracts of insurance for the purposes of the Act, with the party purchasing the insurance (the insurer or reinsurer) being the “insured” and the party providing the insurance (the reinsurer or retrocessionaire) being the “insurer”.
Many of the concepts introduced by the Act will require further input from the English courts and this is certainly likely to be the case when it comes to the Act’s application to reinsurance contracts.
In the reinsurance context, the Act appears to have created a new and much more onerous duty of disclosure on reinsureds. Under the new regime, a reinsured will have to give its reinsurer a “fair presentation of the risk”, which will include disclosing every material circumstance it knows or “ought to know”.
The Act provides that an insured “ought to know what should reasonably have been revealed by a reasonable search of information available to the insured” including information “held within the insured’s organisation or by any other person.” Such information can be revealed by “making enquiries” or by “any other means”. From a reinsured’s perspective, this could extend to searches outside of the reinsured’s organisation, in addition to other teams within the reinsured’s structure dealing with other risks, clients and claims, and certainly to information on its own intranet.
Where the underlying insurance policy is governed by English law, there is a risk that a reinsured might find itself in breach of its duty to give a fair presentation to its reinsurers, and therefore without reinsurance, yet still liable to the underlying policyholder. This could arise where the policyholder discloses information that would put a prudent insurer on notice that it needs to make further enquiries to reveal material information, but the reinsured fails to make those enquiries. The reinsured would be unable to avoid the underlying policy, but its reinsurers could argue that the reinsured had breached its duty of fair presentation by failing to make enquiries with the underlying policyholder.
Where underlying policies are governed by English law, it is critical that reinsureds make all relevant enquiries where proposal forms/renewal presentations flag areas that merit requests for further information.
Where underlying policies are subject to local law, reinsureds could still face difficulty in complying with the onerous “duty of fair presentation” owed to their reinsurer, particularly if the standards of local underwriting are less stringent than those envisaged by the new Act. For example, where the underlying policy is underwritten with only minimal disclosure by the policyholder; this might be sufficient to comply with local law, meaning that the policyholder will be covered in the event of a loss, but the reinsured may face difficulty demonstrating to its reinsurer that, under English law, it has conducted a reasonable search of available information and provided a fair presentation of the risk.
Reinsurers too will have to alter the way they currently underwrite business, as the new Act provides that the reinsured may satisfy its duty of fair presentation if it discloses information that would put a prudent reinsurer on notice that it needs to make further enquiries to elicit material information. Reinsurers will have to take a much more active role in the disclosure process than is presently the case.
It would be sensible for foreign reinsureds to agree in advance with reinsurers the precise parameters of the reasonable search to avoid disputes arising down the line.
It may be that foreign reinsureds decide to contract out of some or all of the provisions of the Act, specifically the provisions dealing with knowledge and the duty of disclosure. Indeed, English reinsurers will carry out their own assessment as to whether they apply the new regime in their contracts.
A careful assessment will need to be undertaken by foreign reinsureds as to how to benefit and/or prepare for this new regime. Although in the long term the Act should lead to greater contractual certainty, in the short term it will undoubtedly lead to disputes and parties seeking clarification from the English courts.
Foreign reinsureds may wish to play it safe for now, and stick to the regime they know, certainly vis-à-vis the new disclosure obligations and provisions as to “knowledge” by contracting out of the new regime when purchasing reinsurance after 12 August 2016. In the long run, however, it may be in their interests to join the new regime and benefit from a more favorable legal framework for purchasers of English reinsurance.