The Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA) came into force in April 2013. CIDRA has changed the landscape – it impacts on any insurer or broker dealing with consumer/personal insurance. The principles behind it are also likely to impact on those dealing with commercial policies in the future. 

The principles behind the new law are as follows: 

  • CIDRA only applies to consumer insurance contracts.
  • There is a fundamental shift away from the policy holder’s duty of full disclosure (ie, the duty of utmost good faith). That duty is replaced with a duty to take “reasonable care” not to make a misrepresentation to the insurer.
  • Where previously complaints from consumers have been decided by the Financial Ombudsman Service (FOS), it would use the principles behind CIDRA anyway to ensure fair outcomes for consumers. CIDRA therefore gives a statutory footing for the FOS approach.
  • Basis clauses abolished.

Practical effect of CIDRA?

The onus is now on insurers to ensure that all material information is obtained through questions put to the proposer – put simply, if you don’t ask, you don’t get. Therefore, the adequateness of the procedures used by insurers to obtain information will need to be assessed in light of this shift. 

In circumstances where a broker is acting as agent for insurers, the broker will also need to ensure it obtains all the necessary material information, and carry out a similar assessment of its procedures to obtain this information.

How will CIDRA bite?

When there is misrepresentation, what will happen? The first step will be to consider whether the insured has breached its duty to take “reasonable care” not to make a misrepresentation. What amounts to “reasonable care” will depend on the relevant circumstances. This seems to be an area which is ripe for debate. 

Where there has been a breach of that duty, insurers will have “proportionate” remedies, dependent on whether the misrepresentation was deliberate/reckless or careless.

  • If it was deliberate, the insurer can still avoid the contract. Dishonesty is always classed as deliberate.
  • If it was “careless” (defined as anything that is not deliberate or reckless), the remedy depends on what the insurer would have done had there been no misrepresentation. For example:
    • If the insurer would not have entered the insurance contact had it known the true position, then it can still avoid the policy.
    • If the insurer would have applied different terms to the policy, then those different terms will apply.
    • If the insurer would have rated the risk differently/increased the premium, then the claim payment can be reduced proportionately.

Is any of this relevance to those dealing with commercial insurances?

The duty of utmost faith and disclosure of material facts remains at this time for commercial contracts. However, those dealing with commercial contracts should be aware that the intention of the English and Scottish Law Commissions appears to be to introduce similar principles (and remedies) to such contracts. The current timetable aims to produce a draft business insurance bill at the end of this year. 

In short, change is coming for you too.