A wind of changes in marine insurance; Nadia Zorba* writes:
A new era in marine insurance is approaching as the current legislation (Marine Insurance Act 1906) is being reformed after a century and replaced by the Insurance Act 2015. The Act received Royal Assent on 12 February 2015 and will enter into force from August of 2016. This is a key change in commercial insurance as many fundamental provisions of the MIA are being repealed. The Act sets new standards in marine insurance and, therefore, new duties and rights to the assured shipowners and their brokers. The main aim of the Act is to bring a more commercial foundation to the insurance legislation, updated with the 21st century practice and to improve the provisions with the strict remedies of avoidance of the contract (in case of breach of pre-contractual utmost good faith ) and the automatic disposal of the insurer’s liability (in breach of warranties, “Good Luck”). The main alterations are regarding the pre-contractual duty of disclosure, the warranties and the fraudulent claims.
Duty to make a fair presentation of the risk insured
In Section 21(2) of the Act the duty of pre-contractual disclosure is amended and repudiates the former provisions of the sections 18, 19 and 20 of MIA. The new duty is to make a fair presentation of the risk and it is two-folded: requires that a) the assured shall disclose every material circumstance that the insured knows or ought to know and b) failing that, disclosure which gives the insurer sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances. The first part largely resembles to the previous provision but the second part is an innovation that requires from the insurers to be more proactive and enquire further information where needed. This gives a balance to the obligations of both parties. In addition, disclosure must be “in a manner which would be reasonably clear and accessible to a prudent underwriter” (section 3(3)(b) of the Act). Therefore, the “data dumping” and the confusing presentations are being disapproved.
As for the remedy to a breach, MIA provided the insurer with the right of avoidance of the contract and the contract was treated as it was never concluded. The new Act brings more balanced solutions. In case the breach was caused deliberately or by recklessness, the insurer has the right to avoid the policy, in which case the contract is considered as it never took place. However, in case the breach was neither deliberate or reckless the options for the insurer are not absolute and may range depending on the breach, and on what would be the difference in case the specific material information was actually disclosed to him. This may refer to damages that occur from the non-disclosure and can range even from either a small difference in the premium or even the complete avoidance of the contract, if the insurer proves that he would not enter into this contract would he know about the non-disclosed circumstance. If the insurer would accept the risk but on different terms or on charge of a larger premium, then the coverage of the claim by the insurer will follow a reduction of the extra premium that should have been paid should the appropriate terms have been included. The test of what the insurer would do if he knew the non-disclosed fact is purely subjective and it seems likely to give rise to litigation regarding the severity of the breach.
Warranties and fraudulent claims
The former harsh remedy of a breach of a warranty is being replaced by a milder one, that facilitates the contemporary business practice. MIA 1906 provided that the insurer is automatically disposed of liability (Good Luck) from the moment the warranty is breached, even if the breach does not alter the undertaken risk. Now with the Act the warranties become suspensive provisions (s.10), lifting the coverage only for damages arising from the breach of warranties. Years ago, a long academic discussion about the harsh remedy of MIA began and leaded to its reconsideration and now to its reform. Following the remedy of breach of a warranty, the insurer’s liability is reinstated.
Lastly, the remedy to a fraudulent claim under MIA was that the claim would not be covered by the insurer. With the Act, new measures against fraud are being established. An innovative remedy is available to the insurers, in addition to the forfeiture of the claim. The Act gives the right of termination (s.12) of the policy from the moment there was a fraudulent act. There is no obligation that the premium shall be returned. However, no definition of the fraudulent claim is being provided, as someone may assume there is a distinction between the purely fraudulent claims and the genuine claims that may be presented with the support of fraudulent device. It is noticeable that while the pre-contractual duty of utmost good faith is mitigated, the post-contractual duty of utmost good faith that was not clearly provided by MIA is reinforced in the Insurance Act 2015.
Marine insurance professionals are preparing for the upcoming change. However, this preparation has to deal with the lack of relevant case law. In addition, the uncertainty over the interpretation of the new sections is likely to give rise to extended litigation. In any case, the attempt of the Law Commission to bring balance to both parties is obvious and promising. More reforms are under construction such as clauses for the damage of a non-payment or late payment of a claim. This issue was omitted from the Bill and the Government expressed its support and its intention that this measure will be included in further legislative opportunities. Some of the rest issues that the Law Commission will examine are the redundancy of the need for a formal policy (s.22 of MIA), the liability of the broker for the payment of the premium (s.53(1) MIA) and the insurable interest provisions.
*Nadia A. Zorba is a maritime lawyer, holder of LL.M. in Maritime Law from Swansea University . Having worked for ITOPF in London and shipping companies in Greece she has international background and both legal and shipping experience. She is also now a Lecturer of Maritime Law at the London Metropolitan University.’