In July 2007 the Law Commission published a Consultation Paper that made provisional proposals and asked questions in relation to both business and consumer insurance on the specific issues of misrepresentation, non-disclosure and breach of warranty. The Law Commission has now published a summary of the responses it received to the Consultation Paper in so far as they relate to the reform of business insurance law.
In summary, whilst some insurers felt that there was no need for reform of the law and some suggested that changing the law would put insurance companies at a commercial disadvantage, there was clear support for reform amongst buyers of insurance and many brokers.
The majority of those consulted agreed to the proposal that a duty of disclosure should continue to apply to business insurance. Whilst some of those in support of retaining the duty of disclosure for business insurance admitted that it could lead to harsh results for unsophisticated businesses, they felt that it would be mitigated by the proposed reforms to the test for materiality.
The Law Commissioner's proposal that the test for materiality be changed, from being a representation that would influence a prudent insurer to a "reasonable insured" test, divided the consultees. Whilst some consultees welcomed the proposed reform saying that it would be flexible and fair in the business context, those who disagreed were concerned that the test was too uncertain and that it would be difficult to create a unitary concept of the reasonable insured.
In relation to the proposals for reform of the law relating to warranties of past and present fact, the majority of consultees agreed that basis of the contract clauses should be abolished. Further, the majority of consultees also agreed with the proposal that strict liability should remain for breach of a warranty of fact by businesses but, unless the contract provides otherwise, the insurer should not be able to rely on the breach of warranty if it was not material to the contract or as a defence to a claim for a loss that was in no way connected to the breach of warranty.
The proposed reform of warranties of future conduct attracted wide support. The majority of consultees agreed with the proposal that, in both consumer and business insurance, the policyholder should be entitled to be paid a claim if the policyholder can prove on the balance of probability that the event or circumstance constituting the breach of warranty did not contribute to the loss (the "causal connection test"). Further, there was unanimous support for the proposal that the causal connection test be mandatory in consumer insurance. However, in the context of business insurance there was mixed feedback with some consultees complaining that the parties' freedom to contract would be damaged if a casual connection rule was mandatory.
The final area covered by the Consultation Paper related to intermediaries and pre-contractual information. The majority of consultees did not support the proposal that intermediaries who make a limited search of the market should be regarded as acting for an insurer for the purposes of obtaining pre-contractual information from the policyholder. The main objection raised was that the test, aimed at small and medium sized businesses, would also catch larger businesses. However, there was wide support for the proposal that intermediaries who make more than a limited search of the market should use the common law to determine their principals.
For further details on the responses to consultation, please click here.
There is support for reform of business insurance law and the Law Commission will be consulting further on this subject. The Law Commission will also publish an Issues Paper this winter which will contain details of some revised proposals for businesses. We will continue to keep you updated on further developments relating to the reform of insurance contract law on www.insurereinsure.com.