"It will make life easier for policyholders who will no longer be deprived of cover for insignificant lapses," says Michael Mendelowitz, Chairman of the British Insurance Law Association and Head of Legal at the UK Branch of ERGO Versicherung AG. "On the other hand, it will make life more complicated for underwriters who will have to be careful to keep notes of their thinking so they can provide credible evidence later on of what influenced the terms on which they accepted the risk."

Claim examples

The change will protect people such as the man whose medical insurer repudiated the policy when it was discovered he had been taking an aspirin a day - thus proving, they said, that he knew he had a heart problem. Under the new law, the policy will be rewritten to cover the medical reality. If the risk is higher, the premium can also be increased retrospectively by adjustment of the claim, Mr Mendelowitz explains.

Another way that policies can be invalidated at present is if the insured fails to comply with a condition of cover known as a warranty, even if this had nothing to do with the claim. "Say someone insures their car and warrants that the car will be locked and the key removed when it is unattended. If the owner parks and carelessly leaves the key in the ignition, and a tree falls on the car, under the current legislation there would effectively be no insurance even though the breach is not causally related to the loss. This will not be allowed in future," Mr Mendelowitz says. The new Act also outlaws the practice of making every statement in a proposal form the “basis of the contract”, which is a trap for the unwary as all such statements are converted into warranties.

Breach of warranty

The idea that policies can be rewritten as new information comes to light or to align the conditions with real life will protect policyholders from losing all insurance for minor technical matters - it is a common-sense approach to an old problem. "Instead of the all-or-nothing remedy of avoidance, the underwriter will have to show what he would have done had he known the truth and the policy will be re-written to reflect that (or, if the underwriter would have charged a higher premium, the indemnity payment will be reduced proportionally).  Also, breach of a warranty will – if the breach can be cured – suspend cover rather than discharge the insurer completely," Mr Mendelowitz explains. 

Establishing exactly what a reasonable underwriter would have done had he known the truth could undoubtedly give rise to a considerable amount of litigation and a lot of work for lawyers, but it is not just lawyers who will benefit. "It might be a nice little earner for retired underwriters who are willing to act as expert witnesses in cases revolving around what an underwriter would have done had he known the true facts," he says. "They may appear on the policyholder’s side in such disputes."

Summing up

Insurance companies are going to have to tighten up processes to ensure all relevant information is disclosed, possibly using software to ensure checklists are gone through and decision trees followed.

The industry is already making a virtue of necessity, Mr Mendelowitz says. "Companies are advertising that they are already 2016 compliant and even though they can opt out of the new regime, none of them is likely to do so as this could be commercial suicide."