Section 152 Road Traffic Act 1988 amendment: removal of statutory declarations following an accident
On 1 July 2019 the Department for Transport (DfT) laid regulations before parliament that will end the ability of motor insurers to avoid statutory liability for third party claims in circumstances of fraud or misrepresentation by the insured.
In recent years, several decisions made by the Court of Justice of the European Union (CJEU) have drawn attention to discrepancies between provisions under UK legislation and the European Motor Insurance Directives.
One such example is the CJEU decision in 2017 in Fidelidade-Companhia de Seguros SA v Caisse Suisse de Compensation. The CJEU held that where the nullity of a contract for motor vehicle insurance is sought due to false statements at inception by the policyholder, “the Second Directive must be interpreted as precluding national legislation which would have the effect of making it possible to invoke against third-party victims”.
The Motor Vehicles (Compulsory Insurance) (Miscellaneous Amendments) Regulations 2019
In order to bring existing legislation in to line with European law, The Motor Vehicles (Compulsory Insurance) (Miscellaneous Amendments) Regulations 2019 (the Regulations) will alter s.152 of the Road Traffic Act 1988 (RTA).
The RTA currently enables insurers to avoid payment as the relevant motor insurer issuing the certificate of insurance on the relevant vehicle, on the grounds that the policy was obtained by “the non-disclosure of a material fact” or misrepresentation of material facts.
Upon obtaining a court declaration, the policy is deemed void from the start, discharging the insurer its statutory obligations to meet any third party claims during the original period of cover. This is so long as a court action to obtain the statutory declaration is brought within three months of the date of issue of any third party proceedings arising from a road accident in the original period of cover. Unfortunately, this is not the end of the story.
The very same insurer may well then have to meet all elements of a civil judgment arising from a third party claim during the original period of cover as Article 75 insurer – effectively paying as an agent of the Motor Insurers’ Bureau (MIB) under the Uninsured Drivers Agreement and Article 75 of the MIB’s articles of association. The MIB will usually deem such an insurer the Article 75 insurer. An Article 75 insurer (having successfully obtained a statutory declaration) can though avoid payment of third party subrogated claims – typically, third party insurer outlay.
So, currently, obtaining a statutory declaration can be commercially valid as a tactic. The obtaining of a statutory declaration can also strengthen an insurers hand in bringing a claim for recovery against their own insured for breach of the contract of insurance and can otherwise improve the insurer’s chances of succeeding in a related claim alleging fraud.
The Regulations will come into effect on 1 November 2019 and will mean that insurers will no longer be able to obtain and rely upon declarations to void a policy following an accident, to refuse payment of compensation to third parties. Insurers will however be able to rely on declarations obtained prior to an accident, and any court declarations validly obtained prior to 1 November 2019, will not be affected by the Regulations.
Insurers who are in the business of underwriting higher risk policy lines are now perhaps most prone to these Regulations. They may have relied on obtaining statutory declarations to, in part, police and drive down dubious claims when policyholder misrepresentations and material non-disclosures then later come to light. The very real problem is that often these issues only surface when a third party claim comes in and further information, from the police or otherwise, comes to light. Very few insurers make heavy use of statutory declarations in this context though, so the impact is unlikely to be acute, even when underwriting these riskier lines.
The DfT and MIB no doubt hold the view that insurers will now have to calculate-in the increased risks when setting premiums. This may prove problematic for insurers running these policy lines in such a competitive market, at least in the short term.
Insurers of course have many other options when faced with third party claims, in circumstances where a policyholder has been economical with the truth. Insurers may able to:
- Establish that other insurers are on cover who can share the pain.
- Bring a claim for a contribution or recovery against the policyholder, whether based on a signed form of indemnity and a form of assignment, or not.
- Demonstrate that the offending motor vehicle was sold on and/or that the policy was properly cancelled before the accident giving rise to the claims.
Evidence of misrepresentation or non-disclosure by the policyholder is also often a very strong indicator of fraudulent activity stretching over to the third party and could assist in defeating a fraudulent third party claim. In short, there are and there have always been other options open to insurers.
However, in terms of managing down potentially fraudulent activity at inception, removing the option to void policies after the event and from the start presents insurers with exposure to ghost brokered policies, which was previously avoidable. It also exposes insurers to drip fed claims arising from multiple accidents. Combined with the reduced incentives for fraudsters that will likely follow the whiplash reforms, we may see an increase in opportunistic attempts to pursue claims against insurers perceived as soft targets – at the point of inception of policies.
The spectre of these reforms to the RTA really underlines the importance of building a process designed to protect against unwanted risks by vetting potential insureds and policies at the frontend and then by validating claims at the backend of any claims process. It also heavily emphasises the critical need, again, for insurers to cancel policies expeditiously and on the Motor Insurers Database – or to increase premiums - when something goes awry or they get some indication that a policyholder has undersold the risk in some way at inception.