The Contracts of Insurance Act 2024: Insurance reform 25 years in the making

The Contracts of Insurance Bill has now become law. The Contracts of Insurance Act 2024 enacts changes to insurance contract law which have been in the making for over 25 years

Insurance contracts have been governed for decades by laws from a melting pot of six Acts (some of which are over 100 years old) and common law principles.

As an incrementally developed area of law, the existing principles of insurance contract law have become complicated and dated. There has been a longstanding recognition by both Government and industry stakeholders that there has been a need to reform insurance contract law to ensure the law is easy for both insurers and policyholders to understand, and to make sure the law continues to function efficiently and consistently moving into the future.

The Act looks to meet these needs by repealing and amending the existing legislation on insurance contracts, and consolidating the law into a clear and modern format.

The Act will not come into force until the government sets a date for it to do so, which will be no later than 15 November 2027. This will allow insurers time to change their policies to align with the new law.

Several of the key changes under the new Act are summarised below.

Consumer and Non-Consumer Insurance Contracts

The Act makes a new distinction between consumer insurance contracts and non-consumer insurance contracts. Consumer insurance contracts are defined as contracts ordinarily entered into predominately for personal, domestic, or household purposes, and all other insurance contracts are defined as non-consumer contracts.

Disclosure Duties

The Act revises what duties policyholders have to insurers to disclose information under the newly distinguished consumer and non-consumer insurance contracts.

Consumer Insurance Contracts

Policyholders of consumer insurance contracts have a new duty to ‘take reasonable care not to make a misrepresentation’ to their insurer before they enter into, or vary, their insurance contract.

The new duty is assessed based on the standard of care that a ‘reasonable policyholder’ would exercise to avoid making a misrepresentation to their insurer. Dishonest statements by policyholders are treated as evidence of a failure to demonstrate ‘reasonable care’.

Under the new Act, the onus is shifted from policyholders to insurers, requiring them to ask sufficiently clear and specific questions of policyholders, and follow up if a non-answer or obviously incomplete answer is provided, to avoid misrepresentations.

When assessing whether a policy holder is being reasonable, insurers must consider the particular circumstances and characteristics of a policyholder of which they ought to be aware.

Non-Consumer Insurance Contracts

Policyholders of non-consumer insurance contracts have a new duty to make a ‘fair presentation’ of potential risks to their insurer before they enter into or vary an insurance contract.

To meet the requirements of this new disclosure duty, policyholders must disclose all facts and circumstances they know, or ought to know, that could influence a reasonable insurer’s decision to accept the insurance policy.

Facts disclosed by a policyholder to their insurer should be substantially correct, and clear. At a minimum, a policyholder’s disclosure should give their insurer sufficient information to put them on notice that they need to make further inquiries.

Again, the Act places an onus on insurers to ask sufficient and detailed questions of policyholders when a contract of insurance is being entered into.

Insurer’s duty to disclose certain matters

The Act also imposes a duty on insurers to take reasonable steps to make sure policyholders are clearly informed of their disclosure duties, and to explain the potential consequences of a failure to comply with that duty.

An insurer’s failure to adequately inform a policyholder of their disclosure duties will be considered relevant when considering whether a policyholder has breached their new duties under the Act.

Remedies for breach of disclosure duties

Under the Act, insurers are entitled to a remedy when a policyholder fails to comply with their disclosure obligations.

To qualify for a remedy, an insurer must prove that they would not have entered into the insurance contract on the terms agreed with the policy holder, had they been aware of the policyholder’s misrepresentation or breach of fair presentation of potential risks.

Implied reasonable time for payment

The Act places an obligation on insurers to pay claims to policyholders within a reasonable time.

What is considered a reasonable time will depend on the circumstances of each claim, and will take into account factors such as the time to investigate and assess a claim, the complexity of the claim, whether there are reasonable grounds for an insurer to dispute a claim, and any factors outside of the insurer’s control.

Third party claims

The Act introduces updated provisions allowing a third -party who is owed an insured liability by a policyholder to bring a claim directly against the insurer, rather than claiming their liability from the policyholder. Court approval is required for a third party to bring such a claim against an insurer.

When a third party makes a claim against an insurer, the insurer takes the place of the policyholder, and the insurer may generally rely on the defences which would have been available to the policyholder.

Want to know more?

If you have any questions about insurance law, or the Act, please contact our specialist Litigation Team.

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