The 2012 Act
The long standing duty of 'utmost good faith in retail insurance transactions' was effectively abolished from April 2013 by the Consumer Insurance (Disclosure and Representations) Act 2012. Retail policyholders (consumers) are not now expected to volunteer information to their insurer except in answer to specific questions.
Section 2(2) of the Act requires them, however, to 'take reasonable care not to make a misrepresentation to the insurer'. Where they fail to take that care the consequences depend on whether the misrepresentation was (1) deliberate or reckless or (2) careless.
These changes might appear to represent a fundamental change to insurance law. They are, however, less significant than that, since they mainly codify existing FOS practice. But they will probably make the law and FOS's approach to it more predictable.
The changes have not affected the substance of the law on insurance fraud. An insurance policy may still be avoided and any claims repudiated when the consumer has committed a fraud on the insurer, most notably, when making a claim. The Law Commission has recently considered the law in relation to insurance fraud and has not recommended significant changes.
Regulatory objectives and principles
Consumer protection is an objective of both the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). So the 2012 Act reinforces the consumer protection objective. Sometimes insurance sales practices discourage consumers from making full disclosures, or do not encourage them enough. Sometimes insurers have taken unfair advantage of consumers who have made minor misrepresentations. This issue is addressed in the FCA rulebook and in the published approach of FOS.
The FCA's predecessor, the Financial Services Authority, once commented in a paper on critical illness insurance:
'The other main reason [apart from customers not understanding the nature of the product] why claims are rejected is that customers do not fully disclose information about their medical history. We know that there are cases where customers deliberately mislead the insurer, but in most cases, consumers simply do not understand what is required of them. The fact that dishonest consumers think they can hide information and still make a claim shows how little they understand their obligations and the consequences of not disclosing. This, in turn, is a telling indicator of how effectively firms explain about the need to disclose relevant information.'
Martin Wheatley, chief executive of the FCA, does, however, seem to accept that there are two sides to this problem. In a recent speech focusing on the fairness challenge for regulated firms and the problems arising when consumers are taken advantage of, he commented:
'Not all the time. Not in 100% of cases. There will be many cases of mis-buying or buyer remorse'.
The Financial Services and Markets Act 2000 recognises the general principle that 'consumers should take responsibility for their decisions'. This includes decisions as to whether to exercise care in completing insurance forms. If deliberate or careless disclosures do not result in negative consequences for consumers, there may be a moral hazard and a significant impact on consumer behaviour patterns.
Deliberate, reckless or careless?
Under the 2012 Act, where a misrepresentation is deliberate or reckless, the insurer may avoid the policy, reject the claim, and retain the premium. Where the misrepresentation is merely careless:
- the insurer may reject the claim and return the premium, if it would not have offered the cover with knowledge of the true facts,
- otherwise an ex post facto adjustment of premium will be made and the misrepresentation will not prevent the claim succeeding.
A misrepresentation is deliberate or reckless if the consumer:
(a) knew that it was untrue or misleading, or did not care whether or not it was untrue or misleading, and
(b) knew that the matter to which the misrepresentation related was relevant to the insurer, or did not care whether or not it was relevant to the insurer.
The courts and FOS require cogent evidence to establish deliberate, reckless or fraudulent behaviour, whether for retail or the wholesale customers.
We were able to find only one FOS determination where a representation was found to be fraudulent and resulted in the complaint failing. This was the case of Mr G, who did not disclose his penalty points when applying for motor insurance. The ombudsman, Sean Hamilton, commented:
'Mr G told the adjudicator that he forgot to mention the penalty points when taking out the policy as he thought he had a "clean" licence. I am not persuaded by this explanation on the basis that the offences for the fixed penalty notices were likely to have involved Mr G being stopped by police rather than being "caught" on a camera […]'
'The points were endorsed by way of "type script" rather than handwriting and this indicates that the licence was sent away either by Mr G or by police on his behalf […] Given these factors I am not persuaded by Mr G that he considered the question asked and simply forgot about the endorsements.'
'In my opinion it is highly likely that Mr G gave no thought, concern or care to the answer he gave and so I am of the view that his response was at best reckless but more than likely a deliberate attempt to withhold the information. Consequently, [the insurer]'s voidance of Mr G's policy was, in all the circumstances, fair.'
The FOS archive of determinations suggests that the outcome of this case might possibly have been different, if Mr G had made his declarations over the telephone, especially if they had not subsequently been confirmed to him in writing.
In a case perhaps more typical of FOS practice, Mr B applied for critical illness insurance. He was asked on the proposal form:
'Do you drink, or have you ever drunk, more than 35 units of alcohol per week on a regular basis?'
'Have you ever been given, or sought, advice from any medical practitioner in relation to your consumption of alcohol?'
Mr B answered 'no' to both questions. However, according to his GP records, Mr B was drinking a bottle of wine a day in March 2006 and was drinking 7-9 units a day in June 2008. In November 2008, shortly before applying for the policy, Mr B was referred by his GP for a blood test and liver function test and this was apparently prompted partly by his level of drinking. Mr B explained that he interpreted 'on a regular basis' to mean 'without fail'.
The ombudsman, David Poley, considered that the GP records suggested that Mr B should have answered 'yes' to both of these questions. However, Poley was satisfied (without explaining why - there may not have been much evidence on the issue) that this was careless not deliberate. So the policy was re-rated and the insurer required to consider the claim.
Two points are worth noting here. First the 2012 Act does not distinguish between degrees of carelessness (Mr B was clearly at the top end of the scale). Carelessness can, however, qualify as recklessness when the consumer does not care (1) whether or not a statement was untrue or misleading and (2) whether or not it was relevant to the insurer.
Secondly, in civil court proceedings the insurer has the opportunity of cross-examining the policyholder. This is not possible in a FOS complaint. Procedural points of this kind can significantly affect the outcome of claims. FOS has the power to dismiss claims when it considers that they are more appropriately dealt with in court, but this power seems to be rarely exercised.
FOS's apparent reluctance to make a finding of deliberate misrepresentation extends to cases where the consumer stands significantly to gain from giving inaccurate information. An example is the case of Mr T who advertised his car for sale as having been converted after declaring it to the insurer as 'un-modified'. The ombudsman, Susan Ewins, held that this misrepresentation was not deliberate, as opposed to 'careless'. However, if the 2012 Act had been in force at the time, the misrepresentation might perhaps have qualified as 'reckless'.
Insurer enquiries as to the truth of consumer statements
In a case concerning Mr R, ombudsman Greg Barham commented:
'[FOS] has long taken the view that it is not reasonable for insurers to request and obtain consumers' full medical records in order to assess claims. Where medical information is needed to assess a claim, insurers should ask only for sufficient information to verify the claim. Where the insurer has reasonable grounds to suspect non-disclosure, it can seek relevant information to investigate further, but I would not expect it to make blanket requests for a consumer's full medical history, I would expect it to ask targeted questions of the consumer's GP.'
Other determinations indicate that this policy extends beyond medical questions to issues concerning lifestyle, such as drinking, smoking and exercise. This is in line with a code published by the Association of British Insurers.
Mr R took his own life a year after getting life insurance. The ombudsman held that the insurer should not have sought medical evidence. The evidence revealed that a misrepresentation had actually been made. So the complaint was upheld on what were effectively 'due process' grounds. The fact that only a year had passed since the insurance was taken out was clearly not sufficient to amount to 'reasonable grounds'. Evidence emerging from court proceedings, such as an inquest, might perhaps have been.
Determinations such as this may encourage insurers to withhold cover for suicide risks until a longer period after start of cover. Insurers may also exclude cover for some risks which are commonly the subject of misrepresentation, such as alcohol related accidents, mortality and morbidity. In motor cases insurers may sue the consumer to recover third party claims arising from driving while under the influence. In the case of Mr S, he argued that this was unfair but his complaint to FOS was not upheld.
Would the insurer have offered cover if it had known the true facts?
Insurers commonly answer 'no' to this question with a view to seeking to repudiate liability where a misrepresentation is careless. The FOS determinations indicate, however, that it requires that such a response must be fully demonstrated by reference to the insurer's underwriting practices. Mere assertion is not enough.
Does FOS practice encourage consumers to be truthful and careful?
It is striking how reluctant FOS appears to be to make a finding of deliberate misrepresentation. The issue of recklessness has not often arisen so far, but may do so more regularly when post April 2013 cases start to come in. It not always clear, however, whether FOS outcomes are partly a factor of how the case is presented and how much evidence is available. Establishing deliberate misrepresentation or fraud is a resource intensive exercise, even in FOS proceedings. It can be embarrassing for the insurer when it is unsuccessful, since it may suggest an over-defensive approach to claims management.
It may also be that many cases of deliberate misrepresentation are identified when cases come before a FOS adjudicator and are not appealed to the ombudsman.
Further study of FOS procedures might be productive to establish how effective they are at getting to the truth and how they may influence consumer behaviour.