The Insurance Act and large claims

What is driving the increase in insurance litigation?

Insurance-related court actions in England and Wales have risen significantly since the introduction of the Insurance Act 2015 (“the Act”). The reasons for this increase are likely twofold. First, a series of major geopolitical and social events have driven unprecedent volumes of claims: the Covid-19 pandemic generated a wave of business interruption disputes, an unsteady geopolitical landscape in Europe, particularly the war in Ukraine, produced a surge of aviation war risk claims, and climate-related catastrophe losses have added further volume.

Second, persistent systemic factors within the insurance market itself continue to drive disputes. It is still routine to contest high-value claims, with protracted settlement negotiations meaning resolution often takes years. Litigation is often employed as a tactic to help negotiate settlement value between parties, meaning that these claims can make their way through the judicial process before reaching an agreement outside of Court.

Has the Insurance Act been a success?

The Act has modernised the statutory framework, replacing the Marine Insurance Act 1906’s blunt remedy of avoidance ab initio with graduated, proportionate remedies. This has led to a decrease in previously frequent arguments around misrepresentation and non-disclosure. The abolition of basis of contract clauses removed an anachronistic device that could defeat otherwise valid claims on immaterial technicalities. Finally, the reform of warranty law (making breach suspensory rather than automatically discharging cover) is a further welcome structural improvement. On balance, the streamlined and modernised statutory framework has given the industry a fairer, more transparent foundation for resolving coverage disputes – even if its full potential is not yet realised.

Where has the Act succeeded and where has it fallen short?

As above, the Act’s successes are clearest in its structural reforms (e.g. proportionate remedies replacing inflexible predecessors, and duty of fair presentation clarifying disclosure obligations). Some may argue that the Act has somewhat fallen short in its tackling of the commercial dynamics that drive high-value disputes. Industry stakeholders have expressed that commercial wordings remain complex, internally inconsistent, and vulnerable to competing interpretations (as illustrated by the Scotbeef litigation). The lack of precision in policy drafting has led to claims requiring judicial consideration to untangle obligations described variously as conditions precedent, warranties, and representations within the same policy.

What needs to change to reduce the surge in disputes for large claims?

There are two areas which require attention in order to reduce this surge in disputes. First, contract certainty must improve. If policy wordings remain ambiguous and/or internally contradictory, they will continue to produce disputes regardless of the legal framework above them. Cases like Scotbeef illustrate the cost of imprecise drafting. Second, insurer’s claims management practices for high-value losses require scrutiny. A cultural shift towards earlier engagement, good-faith claims handling and greater use of alternate dispute resolution would likely help to reduce litigation volume.

Could AI/technology play a role in reducing disputes?

AI could potentially serve as a useful drafting tool to help identify ambiguous language and/or inconsistent policy provisions as this continues to be a key driver of insurance-related litigation. However, AI technology carries its own risks. The opacity of large language models means that there is a danger that AI-generated wordings could replicate or even introduce the very internal inconsistencies and drafting ambiguities the market is seeking to eliminate, potentially adding a further layer of confusion. Under the Senior Managers & Certification Regime, liability for the accuracy and suitability of policy wordings will continue to rest with the senior manager responsible for the function and the use of AI will not absolve the individual of their regulatory functions. Any firm who deploys these tools should ensure robust governance and human oversight to avoid compounding, rather than reducing, the risk of disputes.