The Law Commissions of England and Wales and of Scotland (the Commissions) have produced an issues paper on whether the very smallest businesses should be treated as consumers for the purposes of pre-contractual information disclosure and the impact of unfair contract terms. The issues paper has been produced as part of the Commissions’ review of current insurance contract law in the UK.

The Commissions have been examining whether, and how best, to reform the principle in insurance law that the insured should disclose all material facts that would influence a prudent underwriter in deciding whether to accept a risk or determine the premium. This principle currently governs the unsophisticated consumer and small business owner as well as large businesses with access to expert advice and broking services. The current principle requires the prospective insured to disclose information which they have not even been asked to supply to the insurer. The present situation has been viewed by the Commissions as potentially harsh on policyholders. As a consequence two distinct regimes have been proposed for consumers and businesses.

The issues paper has proposed that ‘micro-businesses’ should be included within the proposed consumer regime. Under the Commissions’ proposals consumer policyholders would no longer have to volunteer information but must give accurate answers to all of the questions put to them by insurers. The consequences of any inaccurate answer given by consumers will depend upon whether the inaccurate information was given: deliberately or recklessly; negligently; or was reasonable in the circumstances. Where reckless, the insurer would be entitled to avoid the policy. Where negligent, the insurer’s remedy will be proportionate i.e. the outcome will depend upon what would have occurred had the insurer had the full facts. Where the consumer’s behaviour was reasonable the insurer should pay the claim in full.

The Commissions have not defined micro-business but have proposed three options to determine which firms would be included in the category. The first option would define micro-insurance by firm turnover, the second option would determine by the number of employees, and the third would define micro-insurance in accordance with the Financial Ombudsman Service jurisdiction limit.

Under the proposals micro-businesses would not only benefit from the consumer regime for pre-contractual information but would also benefit from the application of the Unfair Terms in Consumer Contract Regulations 1999 (UTCCR) for insurance policies. Furthermore, the Commissions are proposing that a causal connection test be applied for terms which apply to future conduct in micro-business insurance contracts. Where the breach of warranty has no causal connection to a loss the claim should be paid.

Amongst the proposals is an exclusion for those entities which would otherwise fit within a description of micro-insurance (SPVs for example) which would, in fact, be sophisticated insurance buyers.

Comments on the proposals are invited to be submitted to the Commissions by 17 July 2009. For further information: Reforming Insurance Contract Law: Issues Paper 5: Micro-Business