Europe: Impact of the Insurance Act on reinsurers

Brexit is currently dominating the headlines but it isn't the only piece of UK law making that will have an effect on the wider international community. The Insurance Act 2015 which comes into force on 12 August represents a fundamental change to English insurance contract law.

The effects of the Act on insurance are clear: a new duty for insureds to make a 'fair presentation of the risk' prior to inception, a new regime of proportionate remedies for breach of this duty, changes to the effect of warranties in insurance contracts and changes to the remedies for fraud at the claims stage.

What is not so clear is the effect of the Act on reinsurers. The Act does apply to reinsurance but does not deal expressly with the peculiarities of the relationship between cedant and reinsurer. Further, the application of the new law poses some particular questions in the context of reinsurance.

Reinsurers with cedants in the UK or whose reinsurance contracts are subject to English law will have to give detailed consideration to the consequences of the Act for them and to whether they wish to, or need to, contract out of the new regime.

To give some examples of the issues which reinsurers must consider:

• The insured's new duty of fair presentation and the effect of "follow the fortunes" language in the reinsurance contract
The ultimate insured now has a duty to make a fair presentation of the risk.

This represents a reduced disclosure obligation on the insured. The onus is placed on the insurer to ask further questions if the presentation of the risk suggests potential problems or the insurer needs more information to underwrite the risk.

Failure to make these additional enquiries might lead to the loss of any remedy for non-disclosure or misrepresentation on the part of the insurer. Where the reinsurer has agreed to follow the fortunes of the insurer it will suffer the same fate.

Reinsurers would, therefore, be well advised to reconsider the underwriting practices of their cedants and the terms of the follow the fortunes language in their reinsurance contracts to ensure that they do not suffer as a result of the failure of the cedant to ask the right questions of the insured.

• How does the new duty to make a fair presentation of the risk apply to cedants in the context of reinsurance?
The new duty to make a fair presentation of the risk applies equally to cedants in the context of the reinsurance contract.

The onus is placed on the reinsurer to ask further questions if the presentation of the risk suggests potential problems or the reinsurer needs more information to underwrite the risk. Failure to make these additional enquiries might lead to the loss of any remedy for non-disclosure or misrepresentation. Consideration must be given, therefore, to underwriting practices.

• The risk of a mis-match between the insurance and the reinsurance
This is not a new problem but is highlighted by the nature of the new regime and the possibility of the insurance and reinsurance contracts being subject to different governing laws.

To give a simple example: where there has been a non-disclosure on the part of the insured, the Act provides for a subjective approach depending upon what the insurer would have done differently if the true position had been disclosed. It is here that there may be material deviation. For example, an insurer may say it would have accepted the risk on different terms and the reinsurer may say it would have declined to accept the risk and that it should have the right to avoid. Without robust follow the fortunes language, it is possible that the insurer would have to pay the claim, but would not be reinsured.

• The effect of the Act on variations to and renewals of existing contracts
The Act applies to variations made after 12 August 2016 to existing contracts of insurance and reinsurance.

Care must be taken therefore to consider the effect of the Act when any pre-existing contract is varied or renewed.

• The question of whether or not to contract out of the effect of the Act
Insurers and reinsurers alike can contract out of the provisions of the Act, in whole or in part.

Subject to some 'transparency requirements' requiring such terms to be written in clear and unambiguous language with disadvantageous terms being brought to the attention of the insured, parties to an insurance or reinsurance contract may opt out of the new regime. Whatever the decision as to whether to contract in or out, reinsurers will need to act now to ensure they are ready before the changes are implemented next month.

To conclude, we recommend careful consideration is given to the terms of reinsurance contracts that are subject to the new law or that cover business insured under a contract that is subject to the new law.