We have previously reported on the English and Scottish Law Commissions' (the Commissions) review of English insurance contract law. The review was launched in 2006 and since then has proposed reforms across diverse areas of insurance contract law.
The Commissions, in their most recent consultation, discuss and make proposals for reform on the subject of the 'Business Insured's Duty of Disclosure and the Law of Warranties'. The consultation covers non-disclosure and misrepresentation in business insurance, and the law of warranties as it relates to both businesses and consumers. Their suggestions for reform are proposed as a "default regime" for business insurance, so policyholders and their insurers can, by express contract terms, opt out of the statutory position.
Insured's Duty of Disclosure
The Commissions currently propose to retain the insured's duty to disclose material circumstances which would be relevant to a reasonable insurer. But this duty would be clarified by statutory definition of a 'material circumstance', which would be one 'required to provide a fair presentation of the risk'. There would also be industry guidance and protocols available to indicate to an insured what sort of circumstances would be relevant to a fair presentation of the risk.
As regards remedies, the Commissions propose that the insurer should only be entitled to avoid the policy where the insured's breach was dishonest. If it was merely innocent or negligent the insurer's remedy would be proportionate to the breach. This would be determined having regard to the approach the underwriter would have adopted towards the risk had he been aware of the undisclosed or misrepresented material circumstance.
In addition, the Commissions intend to codify both the doctrine of waiver (denying a remedy to an insurer for non-disclosure of a fact which would have been revealed by enquiries that a reasonably careful insurer would have made, following the insured's disclosure), and the well-established inducement test, by which the insurer must show that but for the breach, it would not have entered into the contract at all, or it would have done so on different terms.
The Commissions propose to abolish "basis of the contract" clauses in business insurance, as they have already done in consumer insurance. Further, in both business and consumer insurance, the Commissions propose that warranties be treated as suspensive conditions, thereby allowing a breach to be remedied. Where the breach is remedied before the loss occurs, the insurer will be liable to pay the claim. The Commissions also propose that, where the insured is in breach of any term designed to reduce the risk of a particular type of loss, the insurer's liability would only be suspended in respect of that type of loss (for example, where the insured fails to comply with an obligation to fit a functioning burglar alarm, the insurer's liability is only suspended in respect of losses arising from theft, and not, for example, fire).
Further details and analysis of the Commissions' latest proposals will be included in our September 2012 edition of Insurance and Reinsurance Review.
The Commissions have requested responses to the Paper by 26 September 2012. To view the Summary Paper, please click here.