As part of their joint review of insurance contract law, the English and Scottish Law Commissions have published their third and final Consultation Paper proposing reforms to business insurance law. The Consultation Paper builds on the Law Commissions’ original Consultation Paper on the law relating to non-disclosure, misrepresentation and warranties published in July 2007 and follows the passing into law of the Consumer Insurance (Disclosure and Representations) Act in March 2012. To read more on the Law Commissions’ original proposals for business insurance click here and on the reform of consumer insurance law click here.
The proposals now published by the Commissions (set out below) relate to the business insured’s duty of disclosure and the law of warranties.
The business insured’s duty of disclosure
Section 18 of the Marine Insurance Act 1906 places a duty on a prospective business insured to disclose “every material circumstance” which it knows or ought to know “in the ordinary course of business” to the insurer. The law does not require the insurer to ask questions of the prospective insured or to indicate what it wishes to know. The complex structure of large companies can make it difficult for some business insureds to establish what is known by whom and in the event that the insured fails to disclose material circumstances, the insurer may avoid the contract (an outcome which the Law Commission considers to be harsh).
- Disclosure should be a “reciprocal process” in which the insured should make a fair presentation of the risk, and the insurer should communicate what it wishes to know by way of appropriate questions. If the insurer receives information which ought to prompt it to make further enquiry, but it fails to do so, the insurer should not have a remedy for non-disclosure of a fact which those enquiries would have revealed.
- The Law Commissions feel that avoidance is too harsh a remedy and propose introducing fairer remedies in certain circumstances. They propose that avoidance only be appropriate where the insured has acted dishonestly (meaning “deliberate” or “reckless” behaviour).
- In the absence of dishonest conduct, the insurer should be put into the position it would have been in had full and accurate information been provided by the insured (e.g. where the insurer would have charged a higher premium, the claim should be proportionately reduced).
- Parties to a business insurance contract should be entitled to contract out of the remedies regime referred to above (though any term purporting to contract out would have to be written in clear and unambiguous language and drawn to the attention of the other party).
Sections 33 and 34 of the Marine Insurance Act 1906 are deemed by the Law Commissions to be unfair and unprincipled. Currently, a warranty must be complied with regardless of whether it is material to the risk. Breach of warranty discharges the insurer from all liability under the contract, not just liability for the type of risk in question.
- Abolish basis of the contract clauses so that warranties in contracts of insurance must be clearly identified as such.
- Breach of warranty would suspend the insurer’s liability rather than discharge it. The insurer’s liability under the contract would be restored once the breach is remedied.
- Introduce special rules for terms which are designed to reduce the risk of a particular type of loss, or the risk of loss at a particular time or in a particular place. Under the Commissions’ proposals, breach of such terms would suspend liability only in respect of that type of loss, or a loss at that time or in that place. For example, a breach of a warranty to install a burglar alarm would suspend liability for losses arising from a burglary but not those caused by flooding.
Although not as far reaching as the changes to the law governing consumer insurance contracts that will be introduced when the Consumer Insurance (Disclosure and Representations) Act comes into force next year, the Law Commissions’ proposals for business insurance would nevertheless represent the most significant change to the law relating to business insurance for over a hundred years. In the event that the proposals are adopted there will be major implications for the insurance market (both in respect of proposals forms and contract terms) and it is expected that those participating in the market will be keen to express their views. The Consultation is open until 26 September 2012.
The Law Commissions have included in the Consultation Paper comparisons with other jurisdictions and the point has been made that insurance contract law in a number of other jurisdictions has been reformed in recent years. The Law Commissions’ proposals are seen by some to be required to update the law to reflect the needs of the more complex insurance market that exists today. The UK insurance market has, however, continued to thrive under the current law and any reforms to insurance law in this jurisdiction should be carefully considered.
The Law Commissions intend that, once the present consultation has closed, a final report and draft Bill will be published and that the insurance law project will be completed by the end of 2013.