Contracting Out

Commercial Insurance

With the exception of the abolition of “basis of contract” clauses (which is mandatory), parties to commercial insurance contracts can contract out of the Insurance Act and substitute their own agreed terms. If a term would put the insured in a worse position than they would be in under the Act, the insurer must meet the transparency requirements contained in the Act.

Transparency Requirements

To be effective, a term that would put an insured in a worse position than they would be in under the Act must be:

  • sufficiently drawn to the insured’s attention before the contract is entered into; and
  • clear and unambiguous as to its effect.

The insurer must satisfy both requirements.

Sufficiently drawn to the insured’s attention: the insurer must take sufficient steps to bring the term to the insured’s attention before the contract is entered into. In deciding whether the insurer has complied with the requirement, the characteristics of insured persons of the kind in question and the circumstances of the transaction will be taken into account. For example, the relative sophistication of the insured will be relevant.

The insured will not be able to rely on a failure by the insurer to bring the term to its notice if it (or its broker) had actual knowledge of the term.

Clear and unambiguous: the effect of the term must be clearly and unambiguously set out. Again, in deciding whether the requirement has been met, the characteristics of the insured and the circumstances of the transaction will be taken into account. Factors such as the sophistication of the insured and involvement of a broker are likely to be relevant.

Late Payment of Claims

As well as complying with the transparency requirements, an insurer can only contract out of the duty to pay claims within a reasonable time if the failure to pay is not deliberate or reckless.

Consumer Insurance

Parties to consumer insurance contracts cannot contract out of the Insurance Act and substitute terms that would put the consumer in a worse position than they would be in under the Act.

Settlement Agreements

For both commercial and consumer insurance, the contracting out provisions do not apply to settlement agreements. An insured can therefore still enter into a settlement agreement containing terms that are less favourable than under the Act.