On 15 December 2009 The Law Commission published their report and draft Bill to reform the law on what a consumer must tell an insurer before taking out insurance. If this draft Bill becomes law it will represent a significant change of direction in the law, with major implications for the insurance industry. For affected classes of business it will require insurers to review their application forms, precontractual processes and policy wording. Amendments will then need to be made accordingly to ensure that any changes in the law are compiled with. Further information is available from The Law Commission's website - http://www.lawcom.gov.uk/insurance_contract.htm

The draft Bill will apply to consumers, namely only to those individuals who enter into an insurance contract for purposes wholly or mainly unrelated to their trade, business or profession. It deals solely with the issue of what a consumer must tell an insurer before entering into or varying an insurance contract. The following proposals are set out in the draft Bill:

1. No duty to volunteer information but a new duty to take reasonable care not to misrepresent:

  • Removal of the current duty on a consumer proposer to volunteer information about anything which a "prudent insurer" would consider relevant
  • Introduction of a new duty to take reasonable care not to make a misrepresentation to the insurer. This involves answering the questions put to them by the insurer fully and accurately
  • A failure to comply with the insurer's request to confirm or amend particulars previously given would be capable of being a misrepresentation

2. Insurers' remedies for misrepresentation:

The insurer will have to demonstrate that without the misrepresentation it would not have entered into the contract at all or would have done so on different terms. In contrast with the current position, the insurer need not show that the matter would have been relevant to another hypothetical prudent insurer in the market.

2.1 Where a consumer makes a mistake on the application form the remedy available will vary according to the state of mind of the consumer:

a) Deliberate or reckless misrepresentations

  • Where it is proved that the consumer knew that the statement was untrue or misleading and they knew or failed to care that the matter was relevant to the insurer, the insurer may avoid the policy and refuse all claims.  
  • The insurer will have to show, on the balance of probabilities, that the consumer acted deliberately or recklessly. However, this task should be made easier by the following two presumptions that the consumer:  

i) Had the knowledge of a reasonable consumer; and  

ii) Knew the matter was relevant, if the insurer asked a clear and specific question.  

  • Where the above is made out the insurer need not return any of the premiums paid, except to the extent that it would be unfair to the consumer to retain them.  

b) Careless misrepresentations  

  • Here the insurer is entitled to a compensatory remedy based on what the insurer would have done had it known the facts:  

iii) If the insurer would not have entered into the contract at all the insurer may avoid the contract but return the premiums;  

iv) If the insurer would have entered into the contract on different terms the contract is treated as if it were made on those terms; or  

v) If the insurer would have charged a higher premium, the insurer may reduce the amount of the claim proportionately.  

c) Honest and reasonable misrepresentations –  

vi) Where a consumer acts honestly and with reasonable care when making a misrepresentation the insurer will not be granted a remedy and must pay the claim.  

  • The standard of reasonable care should be that of a reasonable consumer, only taking into account individual circumstances if the insurer was or ought to have been aware of them.  
  • A dishonest misrepresentation will always be taken as showing a lack of reasonable care.  

3. Other issues  

In addition to the above, the draft Bill:  

  • Abolishes "basis of the contract" clauses;  
  • Prevents insurers from contracting out of the proposed scheme to the consumer's detriment;  
  • Makes special provisions for group insurance schemes so that where a member of the group provides information to the insurer, any misrepresentation should have consequences only for the cover of that individual;  
  • Deals with situations where a consumer takes out insurance on the life of another so that if the person whose life is insured makes a careless or deliberate misrepresentation, the insurer has a remedy; and  
  • States that intermediaries should be considered to act for the insurer at the time of the conduct in question if:  

vii) The intermediary was the appointed representative of the insurer;  

viii) The intermediary had express authority from the insurer to collect pre-contract information as its agent;  

ix) The intermediary had authority to enter into the insurance contract on behalf of the insurer.  

In other cases, the intermediary acts for the consumer, unless it appears that the intermediary acts for the insurer.  

The draft Bill is to be laid before Parliament this month. As yet there is no timescale in place as to Parliamentary progress. However, in its current form, the draft Bill provides a one year lead-in time between being passed and coming into effect. This will ensure that insurers will have time to carry out a final review of their processes in light of the legislation. The Bill's progress can be monitored via the Parliamentary website - http://www.parliament.uk/business/bills_and_legislation.cfm