horwich farrelly

Deregulation Act 2015 – What Insurers Need to Know

June, 25, 2015

Horwich Farrelly reviews what the Deregulation Act 2015 means for the motor insurance industry and identifies a number of areas of concern for insurers.

The Deregulation Act 2015, which received Royal Assent in March, will see changes to 3,000 regulations in areas such as transport, housing and the environment. Its introduction is intended to reduce the amount of ‘red tape’ and follows the recent scrapping of the paper tax disc and the abolition of the paper driving licence.

Overview

Section 9 together with Schedule 3 of the Deregulation Act, which comes into force on 30 June 2015, amends section 147 of the Road Traffic Act 1988 with further revisions to sections 148, 151 and 152. The amendments to these sections are primarily concerned with the delivery and recovery of motor insurance certificates.

The most significant changes are: –

  • While insurance certificates must still be delivered to policyholders – by post or electronically – delivery is no longer a legal requirement before a motorist is permitted to use the vehicle on a road or other public place.
  • In the event a policy is cancelled mid-term the policyholder is no longer required to return the certificate or make an appropriate declaration.
  • Failure to return a certificate or make a declaration will no longer be a criminal offence (as has, at least theoretically, been the case to date).
  • The recovery of a certificate by an insurer following cancellation will no longer be a prerequisite to avoid RTA liability in the event of a third party claim being made post-cancellation.
  • The requirement to update MID remains but this is not, contrary to what some have suggested, relevant to an RTA liability (merely Article 75).

These amendments are to be broadly welcomed. However we have identified a number of issues which insurers should be alert to which the Act, as written, does not appear to address.

Cancellation verses Voidance

The Deregulation Act simplifies the process of cancellation by doing away with the return of a certificate to extinguish the RTA liability. However the Act only deals with cancellation, it does not deal with voidance where there has been material non-disclosure/misrepresentation.

Section 152 of the RTA is not amended in respect of void policies: there is therefore still a need to secure section 152 declarations to extinguish an RTA liability with a policy that has been voided for material non-disclosure/misrepresentation.

In the event of fraud at inception being detected where there is no accident reported, particularly in the early days of the policy (when the majority of discrepancies are identified), it must be eminently preferable to cancel a policy rather than void it.

If the policy is properly cancelled, the cancellation will extinguish any future RTA liability (and an Article 75 liability so long as MID is updated). If however the policy is voided, the insurer will retain an RTA liability until a section 152 declaration is obtained. If, as is invariably the case, such a declaration is only sought after notification of an accident involving a third party, the insurer will invariably still be required to deal with the third party claim as Article 75 insurer. An Article 75 liability can only be guaranteed to be avoided post-voidance by a section 152 declaration commenced pre-accident.

The downside with opting for cancellation over voidance is the risk that a collision has occurred which the insurer is not aware of prior to cancellation (or which occurs during any cancellation period allowed for). However on a risk/benefit analysis that risk is easily justified, particularly the sooner after inception the cancellation takes effect.

Cancellation towards the end of a policy period would be rather less easily justified (albeit a case by case decision would be prudent). Whichever way you look at it, early identification of policy fraud is essential (assuming that it cannot be spotted prior to inception).

There is still a place for voidance: it is likely to be restricted principally to significant policy discrepancies which are uncovered following a collision being reported.

A change from voidance to cancellation might not easily sit with insurers’ general zero-tolerance policy to fraud. However not to adopt such an approach could prove costly if an insurer ends up liable for a catastrophic claim where all liability would have been avoided by simply opting for cancellation over voidance.

When the Changes Apply

The Deregulation Act failed to set out transitional provisions or to otherwise spell out exactly when the changes take effect. The Deregulation Act 2015 (Commencement No. 1 and Transitional and Saving Provisions) Order 2015 (SI No. 994) specified that the relevant sections would come into force on 30 June 2015 but failed to deal with transitional provisions.

The complete lack of certainty was highlighted to the government which has now acted by implementing The Deregulation Act 2015 (Commencement No.1 and Transitional and Saving Provisions) (Amendment) Order 2015. This makes it clear that the changes only apply to a policy which is cancelled on or after 30 June 2015.

Accordingly if a policy is cancelled on, say, Monday 29 June 2015, there will still be a requirement to return the certificate to extinguish the RTA liability. Insurers opting to cancel (e.g. for non-payment of premium) might now well be better off waiting until 30 June before cancelling (it is irrelevant that the policy was incepted prior to 30 June 2015).

Article 75 will be amended to spell out that an insurer will cease to have an Article 75 liability from the date the policy is cancelled, so long as MID is also properly updated.

There has been some uncertainty as to whether the amendments to Article 75 would have retrospective effect. However the MIB’s proposed revised wording to Article 75 (which the members must vote upon at the forthcoming AGM) makes it clear that a member’s ability to escape liability simply by virtue of having cancelled the policy pre-accident, will only apply for cancellations on or after 30 June 2015. In doing so it will mirror the Act and makes sense; to do otherwise would have produced some very inconsistent, unexpected and therefore unfair results.

Cancellation Periods

Policies are invariably cancelled on at least seven days’ written notice. Policies may however be voided without any notice where significant discrepancies arise (compromised payment details, false names and addresses etc). If those cases of significant dishonesty are to be dealt with in future by way of cancellation, why provide seven days’ written notice?

Insurers may wish to provide within their policies for cancellation without notice or by way of much shorter notice which would not put the customer in a worse position than voidance without notice (e.g. with false payment details).

Insurers will no doubt appreciate the continued exposure to third party risks where a vehicle is reported stolen until the claim is paid. Insurers may therefore also wish to include provision where a policy is immediately cancelled in the event a vehicle is reported stolen. That may well mean that if the vehicle is subsequently involved in a collision, no liability can rest with the insurer. This would obvious need to be done on the basis of not prejudicing the customer’s theft claim, i.e. they would have to be paid for the loss of their vehicle.

Conclusion

An obvious consequence of these changes is that the number of cases where liability rests with the MIB will increase. The degree to which claim volumes for the MIB will increase is difficult to predict as few insurers differentiate between different types of RTA liability (i.e. specifically liabilities arising from the non-return of a certificate post cancellation or voidance).

However the increase in liabilities for the MIB will of course result in an increased levy for insurers. The increase in levy might be thought to be approximate to the direct claims savings for an insurer. However insurers that are better able to quickly adapt to these changes will be at a competitive advantage.

Horwich Farrelly welcomes any legislation which reduces the amount of administration for clients, particularly when any savings can be passed on to policyholders. However, as evidenced by the aforementioned concerns, we consider the Act would have benefited from better drafting to specifically address the issue of voidance.

We therefore recommend insurers review their approach to dealing with fraudulent policies and voidance and also consider what other changes can be made to take best advantage of these changes.

If you would like any further information or to discuss these matters further please do not hesitate to contact Andrew Baker on 0844 330 0190 or by email andrew.baker@horwichfarrelly.co.uk.

Contact us

If you would like further information about any of our specialists or the services we offer please get in touch.