The United Kingdom is considering commercial insurance law changes that would strengthen risk managers' hands by making it more difficult for insurers to void coverage for innocent nondisclosure of information, says Ian Lupson, a partner in law firm Jones Day's London office. While an insurer still would be entitled to a fair presentation of the risk, a Law Commission proposal would in certain circumstances shift more responsibility onto insurers and make the underwriting process less one-sided.

Risk managers with exposures in the United Kingdom may have a strengthened hand in claims negotiations with insurers if recommended changes to commercial insurance law are approved.

The proposed reforms would leave more room for negotiation in cases where material issues were not disclosed to an underwriter and make it harder for insurers to void an entire insurance policy as a result of nondisclosures.

While it is still uncertain whether the reforms will be approved, they would mark a significant change in U.K. commercial insurance law.

The Law Commissions of England, Scotland and Wales in June issued a joint consultation paper recommending changes in English and Scottish insurance law on the topics of disclosure and warranties. The Law Commissions are independent bodies charged with reviewing law in the United Kingdom.

This article focuses on English law.

As a result of earlier work by the Law Commission, English insurance law in this area as it applies to personal lines business has been dramatically changed by the Consumer Insurance (Disclosure and Representations) Act 2012.

That statute, which comes into force in March 2013, modifies the holy grail of insurance law—an insured's duty of utmost good faith—and replaces it with an obligation to answer questions as asked with reasonable care. It also removes an insurer's rights to rescind coverage for innocent nondisclosure.

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The Law Commissions' recommendations for commercial insurance law are less revolutionary and more evolutionary. Still, if enacted, they would represent a significant shift in the balance of power between insurer and policyholder and improve the position of the risk manager in a coverage dispute.

The first point to note is that—unlike the consumer sphere—it is not being suggested that a commercial policyholder should no longer be under a duty to disclose all material facts.

Rather, an insurer will remain entitled to a fair presentation of the risk. Where the change would come is that if a presentation leaves questions unanswered, the proposed law would place the insurer under a positive duty to ask those questions.

While this may still leave room for argument (Was the point unclear? Should the insurer have sought clarity?), imposing any positive duty on the insurer is to be seen as a move towards a more reciprocal and less one-sided underwriting process.

How insurers would react if the law changes in this way is unknown, but they could be exhaustive in their questioning.

When misrepresentation or nondisclosure is established, the proposal is to bring English law more into line with the position in civil code countries where the law is less draconian.

Currently, an insurer can void a policy for nondisclosure of a material fact, leaving a policyholder without any coverage. Under the proposed changes, provided that the nondisclosure was not deliberate, the insurer would be entitled only to a proportionate remedy. For example, if an insurer could establish that it would have charged a higher premium had it known an undisclosed fact at the time of underwriting, it would be permitted to charge an additional premium retroactively, but it still would be obliged to pay claims under the policy.

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Voiding or rescinding the policy would be permitted only in cases of dishonest nondisclosure or misrepresentation.

Experienced hands will recognize that this is a change indeed, and one likely to be a significant benefit to commercial policyholders.

It is not to say that there might not still be coverage disputes—there are likely still to be many—but they will be about what the insurance says, not whether it is there at all.

So these are big changes that are being proposed, which I believe will help level the playing field in commercial insurance disputes.

Risk managers responsible for insurance programs that are in part or in whole subject to English law should be pleased with the Law Commission's recommendations thus far.

And there are other elements of the recommendations that risk managers should find favorable.

Another area in which leveling the playing field, from the policyholder's perspective, is proposed is in how English law treats breaches by policyholders of policy terms called warranties.

These are terms where, for example, a policyholder warrants that a building has a functioning fire alarm or sprinkler system.

Under English law, if such a term is breached, then the policy is void and, absent a waiver by the insurer, a claim likely would go unpaid as a result.

This is so even if the breach is not causative of or related to the loss, and even if it has been put right by the time that loss occurs. So, for example, if a building's fire alarm system has been off-line but is subsequently restored, the policy is void and a later loss for, say, theft risks would not be covered.

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To help address this perceived unfairness, the Law Commission suggests that a policyholder should be given the chance to remedy a breach of warranty so that, rather than being automatically void, the policy is suspended during the breach period and then reinstated. The Law Commission also suggests that to justify avoidance or recision, a breached warranty must at least be relevant to the loss.

So, in the above example, if the Law Commission's proposals were adopted, it would mean that the policyholder would have the chance to fix the fire alarm so the building is covered if the building subsequently suffers a fire, and the building owner would remain covered for theft, and other unrelated risks, even during the period when the fire alarm system is inactive.

The Law Commission has not gone so far as to suggest, however, that the insurer needs to establish a casual link between a breach of warranty and a loss, so warranties still remain an issue.

Last in terms of warranties, and importantly, the Law Commission suggests that if an insurer requires an applicant for insurance to warrant the accuracy of its information, it must say so. Currently, an applicant who agrees that his answers will be the “basis of the contract”—words that usually appear in very small type just above the signature block—is providing just such a warranty without necessarily realizing it.

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It is important to remember that this article is considering proposed—not actual—changes to the law. However, given the way in which the Law Commission's personal lines recommendations went much further in the changes suggested and were accepted by the U.K. government, it seems reasonable to assume that these proposals, or a near likeness, will pass into law.

The spur for examining this area of the law was in part a survey conducted by British risk management organization Airmic Ltd. that found that some 31% of its members had had nondisclosure issues raised against them between 2005 and 2010. These proposed changes in the law are aimed at reducing the incidences of dispute and would, I think, strengthen the risk manager's hand in the event that a dispute does arise.

In the meantime, it's important to remember that English law recognizes freedom of contract. It is therefore perfectly permissible for a policyholder to seek to negotiate the benefits referred to in this article even before any change in the law has been enacted. Many large policyholders already do so. Those that don't, and smaller and mid-size players that haven't perhaps thought about it might consult with their brokers and lawyers about doing so.

Ian Lupson is a partner in Jones Day's London office. He is responsible for the firm's policyholder coverage practice in Europe, the Middle East and Africa. He can be contacted at iflupson@JonesDay.com. This article is for general information only. It is not to be construed as legal advice on any specific facts or circumstances.