The government acknowledged in Roadpeace v Secretary of State for Transport & MIB  that the Road Traffic Act was contrary to EU law in allowing an insurer to reduce its obligations through avoidance and these changes were therefore anticipated.
Currently, section 152(2) allows an insurer to remove its Road Traffic Act obligation to satisfy judgments obtained by third parties where a policy of motor insurance is avoided on the basis of misrepresentation on inception or variation of the policy. In most cases such avoidance must be in accordance with the Consumer Insurance (Disclosure and Representations) Act 2012 or the Insurance Act 2015. If an insurer obtains a court declaration that it has or is entitled to avoid the policy of insurance on the grounds that the policy was obtained by misrepresentation in proceedings issued before or within three months of issue of a third party claim, the insurer does not need to deal with the claim as Road Traffic Act insurer.
Usually, the insurer's position will then revert to that of Article 75 insurer in accordance with the agreements with the Motor Insurers' Bureau ('MIB'). Article 75 status carries with it various possible advantages. The insurer will stand in the position of the MIB meaning reliance can be placed on the provisions of Article 75 and the Uninsured Drivers' Agreement to potentially limit the insurer's exposure. The most likely advantage has always been where there is another insurer or insurer with a higher (or equal) status which may be left dealing with the claim (or at least sharing responsibility).
Effect of the changes and possible options for insurers
Under the proposals which are to be enacted under powers conferred to the DfT by the European Communities Act 1972, insurers will not be able to avoid Road Traffic Act liability where a post incident declaration is obtained after 1st November 2019. The new law applies to declarations obtained rather than just issued after 1st November 2019 and insurers will want to take stock of policies which have been avoided and where declarations are in progress or anticipated and expedite the court process.
The Road Traffic Act will still provide for a pre-incident declaration of avoidance to take effect, though in practice, cancellation of the policy may well prove a more effective and efficient option in limiting future risks to insurers. Following the Deregulation Act 2015 the option to cancel, as opposed to avoid, had already gained many advantages. Cancellation, if properly invoked, will allow an insurer to avoid Road Traffic Act liability for the remainder of the term and removal from the Motor Insurance Database will remove all liability from the point of removal. With the proposed amendments to the Road Traffic Act, insurers will not be able to achieve Article 75 status for pre-declaration incidents and the existing advantage to avoidance will therefore be lost. Cancellation for the future, particularly where some term of the policy and a risk of future claims remains, is very likely to be the preferred route.
Insurers should, as ever, take care to ensure cancellation processes are followed in accordance with the policy since they risk being left with contractual liability if not. Insurers should bear in mind that effective cancellation may mean they are required to deal with past claims contractually and consider whether this creates any disadvantage particularly in dealing with first party claims. Consideration should be given to whether cancellation can be combined with other remedies such as policy breaches to avoid first party claims. Avoidance of the policy will still allow an insurer to avoid first party claims and the pros and cons of available options will need to be weighed.
The proposed amendments remove the advantage to be gained from a declaration of avoidance but at present, other routes remain to achieve Article 75 status or lower, including reliance on breaches which fall outside the ring fenced issues in section 148 of the Road Traffic Act and, in some circumstances, attempts to incept a policy through fraud and stolen identity.
It will become increasingly important, particularly as 1st November 2019 draws nearer and the possibility of securing a declaration in time becomes uncertain or unlikely, that all options are considered with care. A decision to avoid may well render other options untenable and vice versa. Insurers should also bear in mind that other routes to Article 75 may be open to challenge particularly under the influence of European decisions.
Charting the best course
DWF considers that insurers will want to review not only those cases where avoidance is an option open to them but also any claims where another insurer's position may change as a result of the proposals. The pursuit of declarations of policy avoidance has primarily been used between insurers, where there is more than one insurer in the frame for the liability. It is likely therefore that insurers will find the Regulations may disadvantage them in some cases but benefit them in others. Insurers will want to ensure they have identified the best course in each individual case.
DWF's Commercial Insurance team can assist in:
- Reviewing grounds for avoidance and advising on merits of declaratory action
- Expediting declaration cases where policies have been avoided or where any entitlement exists
- Considering the best course in individual cases including reviewing other possible routes to Article 75/reduced status
- Reviewing and advising on cases where insurers may gain advantage as a result of the amendments
Reviewing wider strategy in the lead up to 1st November 2019 and beyond.