This year, much attention has been focused on the incoming Jackson reforms. However, in April, the consumer insurance market experienced an equally seismic shift in the form of the Consumer Insurance (Disclosure and Representations) Act 2012 (the "Act").
The Act came into force on 6 April 2013 and modifies the pre-contract non-disclosure and misrepresentation provisions of the Marine Insurance Act 1906 as they relate to personal lines business. The Act modifies the duty of utmost good faith by abolishing the duty to volunteer material facts. Instead, the onus will be on underwriters (or their agents) to ask clear and specific questions, and the consumer has a statutory duty to take reasonable care not to make a misrepresentation. Insurers cannot "contract out" of the provisions or treat the consumer’s answers as warranties.
Under the Act, insurers can no longer avoid claims for honest or reasonable misrepresentations, which must be paid in full. Insurers have a compensatory remedy for "careless" misrepresentations based on what it would have done if the consumer had answered with reasonable care. Insurers can avoid the policy altogether (and retain premiums) if the misrepresentation was "deliberate or reckless". There is clearly scope for litigation over these classifications and the question of what insurers would have done but for a careless representation.
The Act applies only to "consumer insurance contracts". A consumer is "an individual who enters into the contract wholly or mainly for purposes unrelated to the individual’s trade, business or profession". This definition is likely to be the subject of dispute given the possible overlap between business and personal policies. The distinction is also slightly at odds with the approach of the Financial Ombudsman Service (FOS) in our recent experience. For instance, under the Act an individual who purchases Goods in Transit cover for his haulage business is not a consumer. Yet the same individual is very likely to be treated as a consumer if they complain to the FOS that their broker failed to explain onerous clauses.
The Act also contains guidance on whether (under the Act only) intermediaries are considered agents of the consumer or the insurer. Agents acting as an Appointed Representative of an insurer and brokers with binding authorities are likely to be deemed agents of the insurer. IFAs and impartial brokers are likely to be agents of the insured (although, to complicate matters, the intermediary is said to be capable of "changing hats" during the process). Intermediaries and their professional indemnity insurers will be wary of an increase in claims from both sides: from disgruntled consumers on whose behalf they have made misrepresentations and from insurers burdened with claims that would not be covered if the intermediary had asked the right questions.
Although it is said that the Act simply codifies existing market practice, the new provisions have certainly created fertile ground for consequential disputes. The Act is but the first new measure arising from the Law Commission’s ongoing review of insurance contracts, and we could yet see a further shift in the balance of power in favour of insureds. We therefore await the outcome of further consultations with interest, in particular the proposal for damages for late payment of claims and the possible application of similar changes to business insurance.