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Shaking up the Insurance Industry: Proposal to Reform Insurance Law in Singapore

  • 23 March 2020 23 March 2020
  • Asia Pacific

  • Insurance & Reinsurance

Shaking up the Insurance Industry: Proposal to Reform Insurance Law in Singapore

On 28 February 2020, the Singapore Academy of Law's Law Reform Committee published its Report on Reforming Insurance Law in Singapore. The report reviewed areas of Singapore's insurance laws the Committee considered might be potentially outdated and whether reform was needed. In respect of non-marine insurance, the report sets out four key areas for possible reform:

  1. The duty of utmost good faith;
  2. Warranties;
  3. Late payment of claims; and
  4. Insurable interest in property insurance.

The report calls for Singapore's insurance laws to be codified into a single piece of legislation. It is recommended that this legislation should be modelled on the UK's Insurance Act 2015 (IA) and the Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA), and parts of the Australian Insurance Contracts Act (ICA) 1984.

The proposed reforms would provide a substantial update to Singapore's insurance Law, some of which are still based on the English Marine Insurance Act 1906 (MIA).

The proposed reforms are generally focused on rebalancing the rights between insureds and insurers to ensure that insured's rights are appropriately protected whilst ensuring that insurers can continue to appropriately consider, manage and price risk.

The Duty of Utmost Good Faith

The most significant change proposed in the report is the recommendation to adopt the UK's and, to a lesser extent, the Australian reforms to the duty of utmost good faith in the MIA, specifically, the duty of disclosure, misrepresentation and the remedies available for fraudulent claims. 

Duty of Disclosure

Currently, an insured is under an obligation to disclose to the insurer every material circumstance known to the insured or that ought to be known in the ordinary course of business. This can be onerous on insureds and allows an insurer to play a passive role without a requirement to ask questions that they view as relevant. The report highlights that the current duty can be poorly understood by insureds who do not know how to comply with its onerous obligations.

The report proposed a bifurcated approach with different obligations for business and consumer insureds. For business insurance, the current duty would be replaced with a duty of fair presentation. The new duty would require an insured to disclose all material facts or make a fair presentation, sufficient enough to put a prudent insurer "on notice" if it needs to make further enquires. For consumer insurance, the insured would have an obligation to honestly and reasonably answer an insurer's questions. Consumers would also have protection from catch-all type questions, for example, "Are there any circumstances known to you which might be relevant to our decision to accept the risk?". Further, if an insurer fails to ask a specific question it will have waived the disclosure requirement in that regard.  

The report also proposes reforms to place new disclosure obligations on insurers as well. An insurer would be required to disclose "unusual terms" in business insurance or, for consumer insurance, any deviations from standard cover. Failure to do so would prevent an insurer from relying on that unusual term or deviation from standard cover.

Remedies for Breach of the Duty of Disclosure

Currently, the remedy for breach of the duty of disclosure is avoidance of the policy. The report recommends adopting a scale of proportionate remedies, as currently available in the IA. The significant change would be with regard to innocent failures to disclose information. The appropriate remedy would depend on what the insurer would have done if the disclosure had been made at the time of the formation of the contract:

  1. Where the insurer would have declined the risk, the policy can be avoided with a return of premium;
  2. Where the insurer would have accepted the risk but included a contractual term, the contract would be treated as if it included that term; or
  3. Where an insurer would have charged a higher premium, the claim would be paid but reduced in proportion to the increased premium, for example, if the insurer would have charged double the premium then it would be only liable for half of the claim.

Remedies for Fraudulent Claims

The report recommends codifying the remedies for fraudulent claims, aimed at giving insurers more commercial flexibility. The legislation would confirm that in the event of a fraudulent claim the insurer would be under no obligation to pay the claim and could recover any payments made in respect of fraudulent claims.  An insurer would also be able to give notice to terminate cover from the date of the fraudulent act and keep the premium paid under the contract.  

Warranties

The Committee proposed three changes to the law on warranties:

  1. To abolish 'basis of contract clauses'. This would mean that it is no longer possible to convert answers in a proposal form into a warranty;
  2. Provide that a breach of warranty suspends, rather than discharges an insurer's liability, for as long as the breach continues. For example, a warranty requiring a burglar alarm to be inspected every six months. If the insured is one month late in carrying out the inspection, cover will be suspended for that one month. But once the inspection is carried out, cover would resume; and
  3. Non-compliance with a warranty designed to reduce the risk of a particular loss has no affect in respect of a different type of loss. For example, a claim could not be denied where an insured had failed to comply with a warranty to install a smoke alarm when the cause of the loss was storm damage.

Late Payment of Claims

The report proposes inserting an implied term into all insurance contracts requiring insurers to make payment within a reasonable time. If an insurer breaches that, an insured would be entitled to damages if it suffers prejudice or damage as a result.  "Reasonable time" and the factors necessary to determine whether a payment has been unreasonably delayed will not be fixed but would depend on "all relevant circumstances", including the type of insurance, the size and complexity of the claim, compliance with statutory or regulatory rules and factors outside of the insurer's control.

An unreasonable delay would also include situations where new information was presented on a claim, but an insurer was slow or refused to consider changing their position on indemnity.

Insurable Interest

The report proposes changes to requirements around insurable interest in both life and property insurance. In respect of property insurance, the report recommends abolishing the need to establish an insurable interest. This means that an insured is able to insure property even if they do not have a strict legal or equitable interest in that property. Insurable interest would be replaced by a broader interpretation of the indemnity principle, which recognises that pecuniary and economic losses need not be strictly legal or equitable.

The practical effect of this reform is likely to be minimal as issues regarding insurable interest in property insurance claims are rare.

Moving Forward

At this stage, the report is only a proposal and the Ministry of Law and the Monetary Authority of Singapore's views are awaited. A broader public consultation process by the Ministry of Law is likely to follow.  We will continue to monitor the situation and report as developments unfold.

If you would like to discuss the potential impact of the report please contact, Ian Roberts or Nicholas Sykes.  

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