Since 2006 the Law Commission of England and Wales and the Scottish Law Commission (together the Commissions) have been engaged in a joint project to reform the law of insurance contracts. Their intention is to draft a Bill to reform the following areas:
- Disclosure and misrepresentation in non-consumer insurance contracts;
- Damages for late payment of claims; and
- An insurer’s remedies for fraud.
The Commissions have recently produced initial draft clauses giving rise to their proposals for reform. They hope that a Bill will be introduced into the 2014-15 Parliamentary session via the special procedure for uncontroversial Bills. Should the proposals, which apply across all classes of business, be enacted, they will represent the most significant change to English insurance contract law in over 100 years.
We consider the proposals below.
A fair presentation of the risk?
This article explores some of key proposals made by the Commissions in respect of disclosure and misrepresentation in the business insurance context, looking at how they intend to alter the duty of good faith owed under the Marine Insurance Act 1906 (MIA) and the remedies for breach of that duty.
Duty of disclosure
Under the current law the onus rests heavily on the insured to disclose to its insurer every material circumstance which it knows or ought to know in the ordinary course of business and not to misrepresent material facts. The Commissions have proposed that whilst that core duty should remain intact, the law in this area should be updated to reflect developments in case law and commercial practice. The pre-contractual duty of disclosure and non-misrepresentation will remain as part of a “duty of fair presentation”. However the Commissions are keen to eradicate problems such as “data dumping” (a side effect of the insured being required to disclose every material fact) and what the Commissions perceive as “underwriting at the claims stage” (which they consider to be a side effect of there being no duty on insurers to ask questions when underwriting a risk).
Under the draft Bill, an insured is required to make to the insurer a fair presentation of the risk before a contract of insurance is entered into. That includes a duty upon the insured either to disclose every material circumstance which it knows or ought to know or, taking the information provided by the insured in the round, give the insurer sufficient information, in relation to those material circumstances, as would put a prudent insurer on notice that it needs to make further enquiries. Notably, the second half of this draft clause dilutes the duty of disclosure for the insured and effectively puts the insurer on risk to make further inquiries. Whilst the precise wording of this half of the clause is still subject to review, the policy position is settled: even where a material circumstance is not itself disclosed, the insured may have done enough to satisfy the duty of fair presentation if it has given the insurer sufficient “signposts”.
The issue of knowledge remains an important one. The Commissions have proposed that, where an insured is not an individual, it will be taken to “know” what is known by its senior management or those responsible for arranging its insurance. What an insured “ought to know” is anything that would have been revealed by a reasonable search of information available to it.
Remedies for breach of the duty of fair presentation
Under the MIA, no distinction is made between honest and dishonest or reckless mistakes and the remedy in all cases of breach is avoidance of the policy (with insurers keeping the premium in the event of fraud). Under the Commissions’ proposals, avoidance of the contract from inception will remain the remedy for deliberate or reckless breaches of duty. The Commissions propose, however, to introduce a system of proportionate remedies for all other breaches so that the insured and insurer are, essentially, put in the position that they would have been in had a fair presentation been made. Thus, if the insurer can show that in the event of a fair presentation it would not have written the risk at all, then it will still be entitled to avoid the policy. If, however, the evidence is that the insurer would have responded to a fair presentation by writing the risk but on different terms, then those terms will be applied from inception. Where the insurer shows that it would have written the contract at a higher premium had it received a fair presentation, then it may reduce proportionately the amount of any claims payment.
Insurers and brokers alike should keep a watchful eye on developments this year in order to monitor the ways in which their or their clients’ rights and duties might change, whether subtly or obviously, because remedies available under the MIA may no longer be available to them under the reforms.