As many of you will be aware, the English and Scottish Law Commissions have put their heads together in an attempt to try and find a pragmatic solution to combat the growing gulf between, on the one hand court decisions, which are decided purely on the law (for consumers, small and large businesses and insurers), and, on the other, the Financial Ombudsman Service, which, as well as taking into account the law, can also (for both consumers and small businesses): (i) enforce the conduct of business rules issued by the Financial Services Authority, (ii) rely upon the ABI Statements of Practice, and critically (iii) has a statutory “fair and reasonable” discretion, which it has used to develop an alternative set of principles to the law.
This gulf has led the Commission to consider ways in which insurance contract law could and should be reformed to make it more transparent to consumers and businesses alike. So far, it has focussed on Nondisclosure/ Misrepresentation (Issues Paper 1 published in September 2006), Warranties (Issues Paper 2 published in November 2006) and Intermediaries and Pre-Contract Information (Issues Paper 3 published in March 2007). Further topics may, however, be considered in the future.
The Issues Papers do not represent the views of the Commission; rather they are designed to spark discussion between interested parties. The Commission hopes to publish a first consultation paper this summer, and its final report in 2010. Ultimately, the aim is to create a new statute, which, perhaps rather ambitiously, would combine the interests of consumers, small and large businesses and insurers. Set out below is a summary of the key proposals being considered by the Law Commission.
Non-disclosure and misrepresentation - The Commission’s proposals
The Commission’s main proposals are that:
(i) the “prudent underwriter” test should be replaced by a “reasonable insured” test (that is, a fact would only be material if a reasonable insured would also have appreciated that fact to be material to that underwriter); and
(ii) there would be no right to avoid where the insured had reasonable grounds for believing the truth of what they said or was not negligent in other ways. Originally, this proposal related only to consumer cases but now the Commission wishes to extend it to business insureds too.
The Commission is also considering whether a proportionate remedy for negligent misrepresentations made by business insureds may be appropriate. This would seek to put the parties in the position they would have been in had the underwriter known the correct state of affairs (ie if the insurer would have written the risk with a higher premium, then any damages payable would be reduced by the proportion that the premium actually paid bears to the premium that should have been charged). In addition to reducing the damages payable, the proportionate remedy can also operate to allow underwriters to refuse to pay a claim where they can show that they would not have written that risk or would have excluded the type of loss that occurred.
Warranties - The Commission’s proposal
The Commission proposes that if insurers wish to rely on warranties at the claim stage, they can only do so if they bring the warranties to the attention of the consumer and business insured, in writing, at the beginning of the contract. In consumer insurance, the Commission goes further stating that an insurer may only refuse a claim on the grounds that the insured has failed to carry out a specific task (for instance fitting a fire alarm) if it has taken sufficient steps to bring the requirement to the insured’s attention.
There are basically two types of warranty, namely warranties relating to future conduct and warranties relating to past and existing fact. The Commission proposes to limit insurers’ rights to reject claims where the breach of warranty has no causal link to the loss suffered. Where it has a partial causal link, they propose that insurers should pay that part of the loss which is not related to the breach of warranty. The other possibility for warranties of past or existing fact is that warranties could take effect as representations (and therefore be subject to the new rules on misrepresentations)
Intermediaries and precontract information - The Commission’s proposals
The Commission has suggested that in relation to consumer insurance, for the purposes of receiving pre-contract information, an intermediary should be considered to be acting for insurers unless genuinely searching the market on a consumer’s behalf. This suggestion is particularly relevant to tied brokers and those dealing only with a limited range of insurers.
In addition, the Commission has proposed that an intermediary who would normally be regarded as acting for an insurer will remain the insurer’s agent when completing the proposal form. Further, it has suggested that a consumer’s signature on an erroneous proposal form should not be regarded as conclusive evidence of their dishonesty or lack of care in the way that the proposal form was completed.
Finally, the Commission has raised several points with regard to s19(a) Marine Insurance Act 1906, which requires an intermediary to disclose every material fact known to him or which ought to be known to him in the ordinary course of business. First, it has suggested that information given in confidence by a third party should be excepted from the scope of the duty.
Second, it has suggested that if there is a breach of duty here, the remedy should lie in damages against the intermediary, rather than in avoidance against the insured, in both consumer and business insurance.
As can be seen, the Commission’s proposals are radical and if adopted will have serious consequences for insurers. A further update will be provided once the formal consultation paper has been published this summer.