Insurance law and regulation in United Kingdom

Insurers are dual regulated firms in the UK. They are authorised and regulated from a standards and policies perspective by the Prudential Regulation Authority (“PRA”) and are regulated from a conduct perspective by the Financial Conduct Authority (“FCA”). The regulation of insurers operates under the framework of legislation established by the Financial Services and Markets Act 2000 (“FSMA”).  Insurers are also subject to the rules and guidance set out in the FCA Handbook and PRA Rulebook (“Rules and Guidance”). The Rules and Guidance have been heavily influenced by EU insurance directives, which sought to put in place a harmonised regime of insurance regulation across the EU.  Must of this has, to date, been retained following the UK’s exit from the EU.

The PRA (or FSA as it was at the time) decided some years ago to introduce a modern risk-based approach to financial requirements for UK insurers based on individual capital assessment by firms adjusted, where necessary, by capital guidance from the PRA. In many respects the UK regime anticipated many of the techniques in Solvency II, which was implemented in the UK in January 2016. Despite this, the implementation of Solvency II did pose a major challenge for UK insurers and the PRA continues to monitor its effects to ensure that gaps in the regulatory framework do not emerge.  The extent to which UK regulation will diverge from Solvency II following Brexit remains to be seen.

Following the end of the Brexit transition period on 31 December 2020, UK insurers no longer have passporting rights into the EU, and EU insurers no longer have passporting rights into the UK.  This has meant that insurers have had to reconsider and restructure the manner in which business is written across borders between the UK and the EU.  EU insurers that had previously passported into the UK have been permitted to continue their UK activities under the temporary permissions regime (“TPR”), which has granted deemed authorisation to such firms.  Such deemed authorisation is, however, temporary in nature and insurers currently operating in the UK under the TPR will need to either apply for full authorisation by a date prescribed by the PRA or withdraw from the UK market.  No comparable regime exists within the EU, and so UK insurers that previously relied on passporting to carry out EU business have had to take more immediate steps to alter their structure.  Typically this has involved writing EU business to an affiliated insurer that is licensed within the EU.

One feature of UK insurance is the unusual structure of the Lloyd’s insurance market. This is expressly recognised in the EU Directives, which include the association of underwriters known as Lloyd’s as a permitted form of insurer. The structure of the Lloyd’s market does, however, give rise to complexities both under domestic arrangements and when applying the UK prudential regime to the different participants in the Lloyd’s market – at the level of the Society of Lloyd’s, underwriting members, syndicates and managing agents.

In the UK, insurance regulation comprises not just regulation of an insurer itself, but also the personal regulation of certain individuals as part of the Senior Managers and Certification Regime (“SM&CR”). Pursuant to this regime, certain individuals holding senior management functions require approval from the PRA and/or the FCA and may personally be held accountable for failures to fulfil their responsibilities.  Further, firms must certify, at the outset and on an ongoing basis, the fitness and propriety of employees who pose a risk of significant harm to the insurer or its customers.  All certification staff and any other employees who do not fulfil ancillary functions are subject to the PRA and FCA’s conduct rules, breach of which may result in disciplinary action. This aspect of insurance regulation is specific to the UK rather than being derived from the EC Directives.

Customers that are dissatisfied with insurers may, in certain circumstances, take their complaint to the Financial Ombudsman Service (the “FOS”), which was established under FSMA. The FOS has jurisdiction over:

• consumer claims
• claims by micro-enterprises, i.e. businesses employing fewer than ten people and with a turnover or annual balance sheet that does not exceed EUR 2m
• claims by small or medium sized enterprise (SME), i.e. a business that is not a micro-enterprise which has an annual turnover of less than GBP 6.5 million and has either a balance sheet total of less than GBP 5 million, or employs fewer than 50 people
• charities with an annual income of less than GBP 6.5 million at the time of the relevant complaint
• a trustee of a trust which has a net asset value of less than GBP 5 million at the time of the relevant complaint.

The FOS has jurisdiction to make awards of up to GBP 350,000 (excluding interest and costs) for a complaint relating to an act or omission that occurred on or after 1 April 2019, or GBP 160,000 for one that occurred before 1 April 2019. It provides a scheme whereby disputes between qualifying insureds and insurers may be resolved quickly and with minimum formality by an independent body, without recourse to UK courts. The FOS is not bound by precedent, but rather must determine cases based on what the Ombudsman considers to be fair and reasonable in the particular circumstances of the case. As a result, FOS decisions can be unpredictable and there is a perception that they tend to favour the complainant.

In addition, the London Market through the Contract Certainty Steering Committee and Market Reform Group (a cross London Market organisation) has implemented a code of practice called the Contract Certainty Code of Practice along with a template insurance contract, the Market Reform Contract, of which version 2.1 was issued in April 2021 on a phased basis.  The new version will be the required standard for new and renewal business from 1 August 2021. The idea is to (a) ensure that contract terms are clear and unambiguous by the time the offer is made to enter into the insurance contract, or the offer accepted; and (b) have the contract documentation provided to the insured promptly. This means within seven working days for retail customers and 30 calendar days for all other client classifications, with the timescales measured from the later of (1) the date on which the contract is concluded or (2) the policy incepts (and where there is more than one participating insurer, the date on which the final insurer enters into the contract). The Market Reform Contract sets out certain policy terms which must be separately and clearly labelled.

Scotland

Although there are separate legal systems and procedural differences between the jurisdictions of the UK, the law relating to insurance in England, Wales, Scotland and Northern Ireland is substantially the same. Most insurance in the UK is written out of London and is consequently governed by English law.

Under sections 18 and 20 of the Marine Insurance Act 1906, the insured was obliged to disclose all material circumstances that it knew or ought to have known in the ordinary course of its business. The insured was also obliged not to make a misrepresentation to the insurer.
To rely on a misrepresentation or non-disclosure, the underwriter must have been 'induced' by that misrepresentation or non-disclosure, i.e. had they known the true position, the underwriter would have amended the terms or not have written the risk at all.

The insured was not required to disclose matters that:

1. diminished the risk;
2. were known by the underwriter;
3. were matters of common notoriety;
4. were waived by the insurer; or
5. were superfluous because of a warranty in the policy.

Where an insured had made a non-disclosure and / or misrepresentation, the insurer’s only remedy was avoidance of the policy ‘ab initio’. The insured was entitled to avoid even where the insured acted innocently. This means that the policy was treated as never having existed and the insurer must refund the premium (save where the insured acted fraudulently).

Non-consumer Insureds

For policies entered into on or after 12 August 2016, non-consumer insureds are subject to a new duty of fair presentation. A fair presentation is one:

1. that discloses every material circumstance that the non-consumer insured knows or ought to know (based on what would have been revealed by a reasonable search for information and what was known to the non-consumer insured if an individual or senior management in the case of an entity), or gives sufficient disclosure to put a prudent insurer on notice that it needs to make further enquiries;
2. that makes the disclosure in a reasonably clear and accessible manner to a prudent insurer; and
3. in which every material representation as to a matter of fact is substantially correct and every material representation as to a matter of expectation or belief is made in good faith.

Non-consumer insureds are not required to disclose matters that:

1. diminish the risk;
2. are actually known by the insurer;
3. ought to be known by the insurer (what an insurer ought to know is defined in the Insurance Act and imposes a positive duty on employees of an insurer to pass on knowledge to the relevant underwriters and also includes information that is held by the insurer and readily available);
4. the insurer is presumed to know; or
5. have been waived by insurers.

If the insured acted deliberately or recklessly in breaching the duty of fair presentation, the insurer can avoid the policy and keep the premium. Otherwise, the insurer’s remedy depends on what it would have done had it been fully apprised of the facts:

• if the insurer would not have entered into the contract of insurance at all, it can avoid the policy but must return the premium; or
• if the insurer would have written the policy but on different terms or for a different premium, it can treat the policy as if those different terms applied and can reduce any claims payments in proportion to the additional premium that it would have charged (i.e. if the insurer would have doubled the premium, it can halve all claims payments under the policy).

Consumer Insureds

CIDRA defines a “consumer” as an individual who enters into a contract of insurance wholly or mainly for purposes unrelated to the individual’s trade, business or profession.

For consumer insureds, CIDRA replaces the duty to disclose material facts with a duty to take reasonable care not to make a misrepresentation to the insurer before the insurance contract is entered into. A statement can be a misrepresentation if it is incomplete, even if it is literally true.

The insurer’s remedy depends on whether the breach of the duty not to make a misrepresentation is deliberate or reckless; or careless.

1. Deliberate or reckless: the insurer can avoid the contract (and retain premium paid, unless that would be unfair to the consumer). Deliberate or reckless means that the insured either knows that the misrepresentation is untrue or misleading (or does not care whether it is) and knows that what is misrepresented is relevant to the insurer (or does not care whether it is or not). This is for the insurer to prove.
2. Careless: a scheme of proportionate remedies applies, depending on what the insurer would have done if the insured had complied with the duty. If the insurer would not have entered into the contract on any terms, it can avoid the contract and refuse to pay claims (but must return the premium). If the insurer would have entered into the contract on different terms (for example by including an exclusion or excess), the policy is treated as though the different terms apply. In addition, if the insurer would have charged a higher premium, a claim is reduced proportionately using the formula set out in CIDRA. If, for example, the insurer would have charged a premium of GBP 200 but the premium actually charged was only GBP 100, the claim is reduced by 50%.

If a misrepresentation is careless, but does not relate to an outstanding claim and the insurer would not have written the risk (or only on different terms) or charged a higher premium, the insurer can either give notice to that effect to the insured (in which case the insured has the option to terminate the contract); or (except in the case of life insurance policies) give reasonable notice to terminate the contract.

The Marine Insurance Act 1906 defines a warranty as a term “by which the assured undertakes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or whereby he affirms or negates the existence of a particular state of facts”. A bare condition, on the other hand, stipulates an obligation. It would normally state what the insured's conduct during the term of the policy should be, such as in relation to a claim submission. Some conditions may be stated to be a condition precedent to risk or liability; these are collectively called conditions precedent. Conditions precedent to the risk are those that must be satisfied before the insurer comes on risk, for example, payment of a premium. Conditions precedent to liability are those that need to be satisfied before the insurer liability for payment arises (but once the insurer is already on risk). It may, for example, state that the insured is to submit any claim within two weeks of becoming aware of it.

Breach

Warranty: For policies entered into (including renewals) before 12 August 2016, warranties must be “exactly complied with” pursuant to section 33 of the Marine Insurance Act 1906. Thus any inaccuracy would discharge the insurer from all liability for loss from the date of the breach of warranty regardless of whether or not the breach of warranty was in any way connected to any loss(es) suffered by the insured or whether the breach was remedied before any loss was incurred.
The law pre-dating the Insurance Act was considered outdated and too insurer friendly by the Law Commissions and the following changes were introduced in the Insurance Act for both consumer and non-consumer insureds (although it should be noted that reliance on a breach of warranty or condition precedent against a consumer insured is unusual):

1. “basis of contract” clauses were abolished. A “basis of contract” clause is one that converts a pre-contractual representation by the insured into a warranty, for example, a clause incorporating the responses in a proposal form as warranties in the policy. It is not possible for the parties to contract out of the abolition of basis-of-contract clauses
2.  breach of warranty no longer terminates the insurer’s liability from the date of breach, rather, it suspends the insurer's liability until the breach is remedied. Where the breach is remedied before a loss, the insurer is liable to pay the claim
3. if the term (whether a warranty, condition precedent or other term) was intended to reduce the risk of loss of a particular kind, at a particular location or at a particular time, the insurer cannot rely on breach of the term if the non-compliance could not have increased the risk of the loss that actually occurred

Condition: If insurers can demonstrate that they suffered prejudice, breach of a condition will give rise to a claim in damages, for breach of contract.

Condition Precedent: For policies taken out before 12 August 2016, failure to comply with a condition precedent amounted to an absolute bar to making a claim although, in practice, insurers' reliance on a condition precedent would depend on the circumstances.

However, under the 2015 Act, and therefore from 12 August 2016, a breach of condition precedent will not release an insurer from liability if the breach did not affect the loss for which the insured is claiming.

Insurance policies will usually contain loss or claim notification obligations imposed on the insured. These may impose specific time limits in which a notification must be made (for example within 30 days of the insured under a professional indemnity policy first becoming aware of a claim against it or a circumstance which may give rise to a claim). Alternatively, it may require notification 'immediately' or 'within a reasonable time'. The consequences of late notification will depend on whether the clause is designated a condition precedent to liability or not. If the clause is not a condition precedent, then the breach will entitle the insurer to damages only. To claim damages, the insurer must have suffered prejudice. For more information on breach of conditions precedent, please refer to item 3 above.

A claim under an insurance contract is a claim for damages for breach of contract, even where the insurer admits liability. Damages are categorised as the insurer’s promise to indemnify the insured.

In the case of non-indemnity insurance (e.g. life, accident or health, which pay out a fixed sum in the event of a loss), the claimant recovers the amount stated in the policy. In the case of indemnity insurance, the claimant recovers the amount of his actual loss, subject to the maximum sum insured (the limit of indemnity) and to any deductible provisions (the amount for which the insured is liable before recovery can be made from the insurer). Although, as a general rule, a contract of property insurance is a contract of indemnity, the parties are free to contract out of this by agreeing that a certain sum is payable in the event of a loss. This is known as a valued policy.

A new section 13A was added to the Insurance Act by the Enterprise Act 2016, which came into force on 4 May 2017. It implies a term into all consumer and non-consumer insurance contracts that the insurer must pay any sums due in respect of a claim within a reasonable time.

Section 13A does not define “reasonable time” but says that it will depend on the relevant circumstances. This is in line with the approach that has generally been taken by the courts when interpreting the phrase, for example, where notification of a claim is required to be within a reasonable time. The section sets out the following, non-exhaustive, examples of factors that the courts may take into account:

• The type of insurance;
• The size and complexity of the claim;
• Compliance with any relevant statutory or regulatory rules or guidance; and
• Factors outside the insurer’s control.

Section 13A states that a reasonable time will include time to investigate and assess the claim. In addition, if the insurer can show that it had reasonable grounds for disputing the claim (including how much is payable), it will not be in breach of the implied term but the insurer’s conduct may be a relevant factor in deciding whether the implied term had been breached.

For commercial insurance, insurers can contract out of the new duty and exclude or limit their liability for late payment of claims if:

• they satisfy the transparency requirements, and
• they have not acted deliberately or recklessly

An insurer would act deliberately or recklessly if it knew it was in breach of the duty to pay a claim within a reasonable time or did not care whether or not it was.

Parties to consumer insurance contracts cannot contract out of the late payment of claims provisions and substitute terms that would put the consumer in a worse position than they would be in under the Insurance Act.

The limitation period for an action for breach of contract is six years (Limitation Act 1980, Section 6). Under a liability policy (third-party loss), a cause of action does not accrue until the liability of the insured is established, whether that is by judgment, arbitration or agreement. In all other forms of insurance (including property, life and marine) the insurance policy is to be construed as insurance against the occurrence of an insured event. The occurrence of that event is treated as equivalent to a breach of contract by the insurer. Therefore, absent any specific terms in the policy, for non-liability policies the limitation period begins to run as soon as the insured event occurs, even if the insured has not made a claim.

There is also a one-year time limit for bringing a claim against the insurer for late payment of claims. The one-year period for bringing a claim will run from the date when the insurance claim is settled. The intention behind the time limit is that it will assist insurers in reserving for claims where there is a risk of a claim for late payment. The one-year time limit will operate in addition to the usual limitation period of six years from the date of breach of contract so that a claim for late payment will be time-barred by whichever period ends soonest. For example, a claim under a policy is made on 31 January 2016 and settled by the insurer on 31 January 2020. The limitation period for breach of contract (six years) would expire on 31 January 2022 but under the new rule (one year from settlement of the claim) would expire on 31 January 2021. A claim for damages for late payment would have to be brought by the earlier date, in this case 31 January 2021.

There are broadly three common ways in which cover under a third-party liability cover is triggered.
The first is on a 'claims made' basis, where the claim against the insured is first made during the policy period even if the event giving rise to the claim occurred prior to the policy period. This type of cover is common in professional indemnity and directors and officers insurance policies, for example. In addition, the policy may extend cover to include circumstances notified during the policy period which 'may' or 'are likely to' (or some other causal link) give rise to a claim, even if the claim subsequently materialises after the end of the policy period. This is commonly known as a 'deeming provision'.
Secondly, the policy may be a 'losses occurring' policy. This requires the third party to have suffered injury during the policy period.

Thirdly, the policy may provide cover where the event giving rise to the loss occurs during the policy period, even where the loss does not occur until after the policy period. These are ‘event occurring’ policies.
The difference between 'losses occurring' and 'event occurring' policies may be important in exposure cases under employers’ or public liability policies where the third party is exposed to a harmful substance (such as asbestos) for a number of years but there is no injury until a later date.

COVID-19 and the FCA test case

In June 2020, the High Court was asked to make declarations about the meaning and effect of 21 sample policy wordings.  The policies being considered provided cover for Business Interruption Insurance, and the requested interpretation related to (i) disease extensions, (ii) prevention of access/public authority extensions, and (ii) hybrid clauses.  The case was brought on behalf of SME policyholders who had claimed for significant losses resulting from the Covid-19 pandemic.  Judgment was handed down on 15 September 2020 in which the FCA was largely successful in its claim.

On 15 January 2021 the Supreme Court of England and Wales handed down judgment on the appeal brought by several Insurers affected by the September 2020 judgment.  The Supreme Court largely upheld the September 2020 judgment and as a result, many Insurers had to reconsider the interpretation of similar policy wordings and claims they had previously declined. Full details of the test case can be found here: https://www.cms-lawnow.com/ealerts/2021/01/business-interruption-insurance-and-covid19-fcas-expectations-following-supreme-courts-judgment

However, the Supreme Court’s judgment did not resolve a range of complex coverage issues that subsequently arose, relating to the adjustment of Business Interruption losses.  In three related actions that concerned the UK’s restaurant and hospitality industries, (Stonegate, Greggs and Various Eateries),  two key issues were considered: i) whether multiple losses can be aggregated so as to constitute only one loss; and ii) whether insurers are entitled to take into account government support payments in calculating policyholders’ losses.  Further details of those claims can be found here: Business Interruption Insurance and Covid-19: aggregation and furlough - further guidance (cms-lawnow.com)

Insurance policies governed by English law usually include cover for the costs incurred by the insured in defending a claim, if such claim would (at least in principle) be covered by the relevant policy. Some policies will include limitations to such defence cover, however, including the requirement for use of one of the insurer's solicitor’s panel firms or a cap on solicitor fees.
At least some of the legal costs incurred when defending a claim may be recoverable by the defendant insured (and the insurers themselves, consequently, if they provided defence cover) if the defendant is successful. The court will govern the recovery process, but it tends to include the costs of legal representatives (including solicitor and counsel’s charges) and disbursements incurred in defending the claim, such as for experts’ opinions and the costs incurred in instructing foreign lawyers.\Note that the defendant, if the successful party, is only entitled to recover the costs he or she has actually incurred, i.e. no profit can be made out of a successful court decision. In practice, a full payment of the costs incurred will rarely (if ever) occur as the losing party will normally challenge the winning party's costs and the award of costs is subject to:

• the conduct of the parties;
• the reasonableness of the costs incurred;
• whether the “losing party” has succeeded on part of his / her case; and
• any admissible offer to settle made by a party which is drawn to the court’s attention.

The general position is that the ex turpi causa non oritur actio defence (which prohibits a party from recovering damages which are a consequence of that person’s own illegal or unlawful act) is likely to apply, meaning that insurance contracts covering criminal fines are unenforceable.

With respect to administrative fines, and subject to any regulator specific rules, the application of the ex turpi causa non oritur actio defence is not as clear as the insurability of an administrative fine will depend on a number of factors, such as whether:

• the law bringing about the fine is enacted for the protection of the public interest;
• the breach of law is intentional / malicious and causes significant harm (“moral reprehensibility”); and insurability prevents an organisation from taking their obligations seriously.