This year marks the 55th anniversary of the Law Reform Committee’s proposals for reform of English insurance law in 1957. Progress has been slow and complicated by a perceived (but still unaddressed) need to reconcile English common law with European civil law.
The English and Scottish Law Commissions’ projected insurance contract law proposals are however taking shape. Highlights include:-
- The proposer will be obliged to make a “fair presentation of the risk” in place of the current obligation to disclose every material circumstance.
- This will be accompanied by ancillary changes to the law encouraging the insurer to make a more searching enquiry about the risk. The case law on inducement and waiver will be put on a statutory footing.
- In place of avoidance, the insurer will have “proportionate” remedies for innocent or negligent non-disclosure or misrepresentation which retrospectively “re-underwrite” the risk. Where the insurer would have charged a larger premium, any claim payment will be reduced accordingly. Where the insurer would have accepted the risk on different terms, the policy will be treated as including those terms. Where the insurer would have declined the risk, the policy may be avoided as in the case of dishonest non-disclosure or misrepresentation.
- Turning to claims, it is proposed that damages for late payment of a valid claim should be recoverable.
- The law on dishonest claims will be due for some necessary tidying up so that although a dishonest claim will enable insurers to reject later (honest) claims, earlier (honest and paid) claims will not become repayable in the absence of contrary provisions in the policy.
This represents a significant scaling down of the Law Commissions’ original proposals. The current timetable aims for production of a draft business insurance Bill at the end of next year, 2013, followed (presumably) by legislation on the statute book in 2014. Legislation on consumer insurance has already seen the light of day in the Consumer Insurance (Disclosure and Representations) Act 2012.
When they are implemented, these changes will necessitate a review of both underwriting and claims handling procedures. For instance, insurers will have to reconsider their proposal forms and how they analyse the information contained in them and their policy wordings. Likewise, the spectre of liability in damages for failure to pay a claim (particularly to the impecunious insured suffering lost revenue when a claim is not paid promptly) will necessitate review and recording of the claims process.
There has, however, been a paradox at the heart of this debate. The proponents of reform assert that English insurance law is “unfit for purpose”. Despite that, London remains a world centre for insurance so evidently the insureds have not been unduly bothered by those shortcomings. Indeed, there may be a rational explanation for this paradox: it is precisely because English insurance law has favoured insurers that the cost of insurance in London has remained competitive in the world market. But will that pricing advantage disappear if the legal regime is made fairer for insureds?
It remains to be seen whether the comparatively limited proposals now under discussion will have an effect on pricing. In current market conditions that seems unlikely. However, even small changes to the law will necessitate an overhaul of insurers’ procedures and have the potential to generate expensive litigation. The cost of all that will inevitably be passed on to insureds. The Australian experience (in a less complex market) suggests that even simple legal changes may have unexpected consequences.