The Deregulation Act 2015 – its impact for motor insurers and policyholders
The wide-ranging Deregulation Act 2015 finally received Royal Assent on 26 March 2015 as part of the Government’s “red-tape challenge” aimed at simplifying regulatory processes.
The Road Traffic Act 1988 (RTA) is amended in respect of recovery of certificates of insurance and our update summarises the implications for motor insurers and policyholders.
- Section 9 of the Deregulation Act amends section 147 of the Road Traffic Act 1988 and there are some consequential changes of wording in sections 148, 151 and 152.
- Insurance certificates must still be delivered to policyholders but delivery is no longer required for the policy to be effective.
- Where a policy is cancelled mid-term the policyholder is no longer required to return the certificate or make a statutory declaration or any statement acknowledging the policy has ceased to have effect (and not doing so ceases to be an offence).
- Insurers are relieved of the burden of seeking surrender of certificates for cancelled policies as a pre-requisite of avoiding contractual liability.
- Insurers will have greater control and clarity as the period of contractual liability can more easily be determined and the period of statutory or “RTA liability” reduced.
- Insurers’ potential statutory liability can be minimised provided the Motor Insurance Database (MID) is immediately updated.
- These changes will come into effect on 30 June 2015.
What do the changes mean for motor insurers and the motor market?
To date, an insurer’s liability is triggered by the delivery of the certificate of insurance. That liability continues even after cancellation of the policy, unless the policyholder surrenders the certificate (section 152(1)(c) of RTA 1998) or the insurer commences proceedings in connection with the failure to surrender.
At inception (and from commencement of these changes) the policy will be effective whether or not the certificate of insurance has been delivered and delivery ceases to be the trigger. Although issue will still be a legal requirement, inception will be recorded in the MID and actual issue will diminish in significance for some classes of policyholder or be dealt with differently. Fleet insurers however are likely to want to retain the practice of issuing certificates promptly as individual vehicles are not always entered onto the MID.
At cancellation, insurers will find it easier to bring their liability to an end, though it will be incumbent on them to update the MID immediately to show the correct insurance position.
Cancellation in respect of policyholders who fail to act in accordance with the terms of their insurance contract will also be easier and insurers will not need to commence proceedings in respect of the policyholder's failure to return the certificate. Insurers can simply cancel the policy in accordance with the cancellation terms and section 152(1) of the RTA is amended accordingly.
That said, insurers must abide by the terms of the contract as any cancellation which is not in compliance with the policy could be challenged and an insurer’s obligations under section 151 of the RTA 1988 will remain in force if cancellation is shown to be ineffective.
As well as greater control, these changes also offer the opportunity to reduce the operational on-costs currently associated with cancellations, surrender of certificates and associated complaints processes.
The changes may lead to development of a lower tolerance threshold by insurers and a higher number of cancellations and/or swifter cancellations if insurers uncover minor breaches.
Insurers should ensure the wording of their insurance contracts is clear and unambiguous. Change always increases the risk of additional challenges from policyholders where an insurer wishes to cancel a policy and poor communication of rights and obligations might attract the attention of the Ombudsman if the effect of these changes is to increase the level of unequivocal cancellations and results in a rise in complaints.
To ensure there is a clear understanding between insurers and policyholders, especially commercial operators, it would be prudent for insurers and brokers to work closely in making sure that both the insurer and end-user understand their respective obligations, so that the transition into this new regime is smoothly implemented.
In major injury cases increased scrutiny of purported cancellations is likely as, if the contractual cancellation is not wholly in accordance with the wording of the policy, then the liability under Section 151 will remain. This could lead other insurers involved in the same accident to challenge the cancellation.
Should that happen the insurer concerned may or may not have grounds to apply for a declaration under section 152(2) to avoid the policy but compliance with the time limits must be observed. For the avoidance of any doubt, the new Act does not affect an insurer’s right to pursue declaration proceedings for material non-disclosure/fraud under section 152 (2) but it is important to distinguish between cancellation and avoidance given their different consequences.
One immediate area of uncertainty is the status of an insurer who has cancelled a policy but not updated the MID. Arguably between the period of cancellation and alteration of the MID that the insurer will have Article 75 status.
The Motor Insurers’ Bureau and Article 75
It is likely that Article 75 will be amended to reflect the changes to section 151 of the RTA as currently Article 75 provides that an insurer who has cancelled the policy remains an Article 75 insurer unless the policyholder has surrendered the certificate or commenced proceedings for its return. Policy cancellations will have to be promptly recorded on the MID if the insurer is to avoid an Article 75 risk occurring and insurers will be alert to this.
It is understood that there will be changes to the Domestic Regulations that will make it clear that Article 75 liability will continue until the MID has been updated in accordance with the guidance on cancellations that has been issued.
It has been suggested elsewhere that the Motor Insurers’ Bureau (MIB) is likely to see considerable increases to third party claims. We are not persuaded that the number of cases affected will escalate so dramatically or that the majority policyholders who have been advised of a policy cancellation will then choose to drive without insurance. It does remain to be seen.
The Deregulation Act will be implemented in stages from 1st April 2015. The amendments made by section 9 however (and the associated text changes to sections 148, 151 and 152 which are set out in Schedule 3 of the Act) will not come into force until 30 June 2015.
We anticipate the industry will welcome this three month lead-in time as an opportunity to review the efficacy of existing policy wording on policy cancellation and to put in place – if needed – any enhanced MID processes and internal guidance on non-recovery of certificates.
If additional information is required on the changes to the Road Traffic Act 1988 brought in by the Deregulation Act 2015, please contact us.