The Deregulation Act removes the red tape but not the need for careful consideration
The Deregulation Act 2015 was introduced with the aim of reducing the burden of legislative “red tape” upon business. Section 9 and Schedule 3 of the Act will be of great interest to motor insurers as they make important changes to the processes that need to be followed when a policy is cancelled. Significant savings can be made if motor insurers update their underwriting and claims processes and procedures to accord with the Act. Nicola Dunk takes a look at the changes and considers the key areas for underwriters and claims teams.
The changes being made
The key change being made by Section 9 and Schedule 3 of the Deregulation Act is to amend the Road Traffic Act 1988 (“RTA”) so that:
The delivery of the Certificate is no longer required for the policy to be legally effective and so it is the issuing of a policy that will now be the trigger for an insurer to meet any liability under s.151 of the RTA;
The policyholder will no longer be obliged to return the Certificate following cancellation of the policy; and
It will no longer be a criminal offence not to return the Certificate.
It follows that insurers will no longer be required to secure the return of the Certificate or issue proceedings in respect of the failure to surrender the Certificate, to escape their statutory obligation under the compulsory motor insurance regime. Rather, provided the insurer has effectively cancelled the policy in accordance with the policy terms, the insurer will escape its RTA liability for accidents arising after the cancellation (remaining contractually liable for those accidents prior to the cancellation).
The MIB has also sought to reflect the amendments brought about by the Deregulation Act in their Articles of Association. The MIB at their AGM today are expected to ratify an amended Article 75 which will seek to release an insurer from its Article 75 obligations provided that prior to the accident, the insurer has (1) cancelled the policy in accordance with the policy terms and importantly (2) has updated the MID record for the policy in question (in accordance with the MIB’s guidance on cancellation).
The effect of those changes
The Deregulation Act represents a significant improvement in the insurers’ position. Before the Act, insurers faced an unenviable task of persuading the policyholder to return the Certificate within 14 days of cancellation or failing that, incurring the cost of issuing legal proceedings for the failure to surrender the Certificate. It would often be the case that neither option would be viable, and insurers therefore risked being on the hook as ‘statutory insurer’ under s.151 RTA for the remainder of the policy of insurance.
After the 30 June 2015, insurers will escape:
RTA liability for future accidents following cancellation, provided that cancellation occurred prior to the accident and in accordance with the policy terms; and
Article 75 liability for future accidents following cancellation, provided that prior to the accident the policy has been cancelled in accordance with the policy terms AND also the MID record has been correctly updated in accordance with the MIB’s guidelines.
Insurers will still remain contractually liable for accidents happening prior to the cancellation and in respect of Article 75, accidents happening prior to the MID being updated appropriately. Equally, if the cancellation is not in accordance with the policy terms or the MID is not updated in accordance with the MIB’s guidelines, then insurers may find themselves unable to escape their liabilities.
The Deregulation Act applies to cancellations only and has no impact upon policies which have been avoided for misrepresentation or non-disclosure. In respect of avoided policies, the insurer will still be required to obtain a Declaration from the court to escape its RTA and/or Article 75 liabilities.
In light of the changes being brought about by the Deregulation Act, we envisage that the number of policies being cancelled by insurers may rise, and indeed, where insurers are faced with a choice between cancellation and avoidance, the former may become an increasingly popular choice. That said, insurers should remain aware that cancelling a policy will, in effect, affirm its existence and insurers will become liable for all claims arising before the cancellation date (even if those claims are unknown at the date of cancellation).
Avoidance therefore still remains an effective tool for insurers, especially where the policy has been in existence for several months and/or the insurer is already aware of a claim on the policy. Unfortunately, no one size will ever fit all, and insurers need to be aware of the various pros and cons arising from the various options open to them.
Section 9 provides insurers with a more straightforward sequence of processes that need to be followed in order to escape any potential liability following cancellation, though it is essential that insurers carefully consider their own processes to gain the most from the new law:
Following the cancellation of a policy, the insurer needs to ensure that it immediately removes the details of cover from MID. If MID is not updated for 4 – 5 days after cancellation then an insurer may find itself tagged with an Article 75 liability for the period of the time lag.
In instances where the policyholder is given direct access rights to MID, insurers need to ensure that those rights are removed immediately upon the policy being cancelled.
Identifying errors on MID will become increasingly important and insurers should seek to rectify any faults as soon as possible.
Equally, an insurer will only escape an Article 75 liability where the MID record has been updated in accordance with the MIB guidelines and therefore it would be prudent for insurers to ensure that their teams are aware of and are following the guidelines.
There remains a requirement for insurers to issue Certificates, and as such, it will remain best practice to seek the return of the Certificate on cancellation in an attempt to reduce the amount of invalid Certificates in circulation.
There will remain circumstances where MID is not reflective of cover and it will be necessary to consider the Certificate, for instance, in respect of ‘passing vehicles’ under a motor trade policy.
With MID becoming the last word in whether a vehicle is on cover, insurers need to be aware of the potential for MID to be manipulated for nefarious purposes by those that have access to it.
Under transitional provisions, the amendments to Sections 151 and 152 only apply to policies cancelled after 30 June 2015, notwithstanding the inception date.
As a result of the amendment, the levy applied by the MIB to the industry is likely to hike as a direct response to more claims being picked up under the Uninsured Drivers’ Agreement. This is likely to impact the big players in the market given that the levy is based on market share.
For advice about these changes, please contact Nicola Dunk, Associate on 0161 603 5017.
This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.