The Law Commission has today published its draft Bill on Consumer Insurance Law: Pre-Contract Disclosure and Misrepresentation. It applies only to consumer insurance contracts, ie. contracts of insurance bought by individuals for purposes wholly or mainly unrelated to their trade, business or profession. It also only deals with the issue of what a consumer must tell an insurer before entering into or varying an insurance contract.

The draft Bill abolishes the duty currently imposed on consumers to volunteer material facts and replaces it with a duty to take reasonable care to answer the insurer’s questions fully and accurately. Where a consumer does make a mistake on an application form, the insurer is entitled to avoid the policy entirely, as if it never existed, only in certain circumstances dependant on the consumer’s state of mind.

The draft Bill distinguishes between mistakes which are "reasonable", "careless" or "deliberate or reckless":

  • Where a misrepresentation is honest and reasonable, the insurer must pay the claim. The applicant is expected to exercise the standard of care of a reasonable consumer, bearing in mind a range of factors, such as the type of policy and the clarity of the question. The test does not take into account the individual’s own subjective circumstances (such as knowledge of English), unless these were, or ought to have been, known by the insurer.
  • Where a misrepresentation is careless, the insurer has a compensatory remedy. This is based on what the insurer would have done had the consumer taken care to answer the question accurately and completely. For example, if the insurer would have added an exclusion, the insurer need not pay claims which fall within the exclusion but must pay all other claims. If the insurer would have charged more, it must pay a proportion of the claim.
  • Where the misrepresentation is deliberate or reckless, the insurer may avoid the policy. The insurer would also be entitled to retain the premium, unless there was a good reason why the premium should be returned.

For a misrepresentation to be considered "deliberate or reckless", the insurer must show on the balance of probabilities that the consumer knew the following:

  • that the statement was untrue or misleading, or did not care whether it was or not; and
  • that the matter was relevant to the insurer, or did not care whether it was or not.

However, if a reasonable person would have known that the statement was untrue, the burden of proof would be on the consumer to show that he or she had less than normal knowledge. Similarly, if the question was clear, it would be up to the consumer to show why he or she did not think the matter was relevant.

In addition, the draft Bill:

(1) abolishes the much criticised "basis of the contract" clauses, whereby all answers in a proposal form are given warranty status;

(2) makes special provisions for group schemes, where one party (typically an employer) arranges insurance to benefit members of the group (typically employees);

(3) deals with situations where one consumer takes out insurance on the life of another;

(4) provides a structure to decide for whom an intermediary acts when passing information from a consumer to the insurer; and

(5) prevents insurers from contracting out of the new rules to the detriment of the consumer.

There is wide consensus that consumer insurance law is in urgent need of reform and so it is likely that the draft Bill will be passed in time. However, in light of the impending General Election next year, it is unlikely that anything further will happen until Autumn 2010.