The English and Scottish Law Commissions have revealed a range of opinions in the insurance industry about far-reaching proposed reforms to the law on misrepresentation, non-disclosure and breach of warranty in a business insurance context. Brokers and insurance buyers were especially supportive of many of the proposals. However, some insurers’ groups doubted the need for change, and feared that insurers could be put to a commercial disadvantage.
This variety of opinions was revealed on 13 October 2008 when the Law Commission published a summary of responses to its Consultation Paper, published on 17 July 2007, proposing major reforms to insurance contract law. While the push for reform attracted broad support from the business insurance sector, objections were raised to many detailed points of the proposed reforms. The response summary dealt only with business insurance law. The Commission’s Consultation Paper had proposed introducing separate legal regimes for consumers buying insurance, on the one hand, and for businesses on the other. In contrast to the consumer position, the Law Commission’s business insurance proposals, for the most part, formed a default regime, meaning that the parties’ freedom to contract out was preserved. Some groups believed that small businesses, (almost 70% of all UK businesses), needed similar protections to consumers.
Non-disclosure and Misrepresentation
Most consultees agreed that a duty of disclosure should continue to apply to business insurance. However, the Commission’s proposal that the test for materiality of information be assessed according to the standard of the reasonable insured rather than a prudent insurer, divided the respondents. Some thought that the new test, under which the business would have to disclose to the insurer only what it reasonably thought was material, would be flexible and adaptive both to large, sophisticated insurance buyers, at one end of the spectrum, and small businesses on the other. Those who disagreed were concerned that the test was too uncertain and would constantly change according to which business was purchasing the insurance.
Equally, some groups had reservations about the proposal to give businesses greater leeway if pre-contractual information was incomplete or incorrect, where the insured was both honest and careful. Transferring the risk of businesses making misrepresentations that they honestly and reasonably believed to be true to insurers was felt by some to be unfair, although the majority of respondents felt that paying claims in these circumstances was good market practice in any event.
More divisive was the Commission’s proposal on the remedies for non-disclosure and misrepresentation when businesses had been negligent (as opposed to dishonest). Seeking to replace avoidance of the policy as the remedy for a business’ negligence, the Commission proposed proportionate remedies, whereby a court would ask what policy terms the insurer would have agreed to had it been aware of the true position. Many consultees, including some insurers, agreed that avoidance was too radical a remedy for mere negligence, rather than dishonesty. Others argued that avoidance helped to incentivise reasonable conduct, and many pointed to practical problems with applying a proportionate remedy.
Warranties (Both as to Past and Present Fact and as to Future Conduct)
The Commission proposed forbidding basis of contract clauses which make every statement of fact by a business into a warranty, breach of which can result in automatic discharge of liability under the policy. The majority of consultees agreed with this. The Commission also proposed that an insurer should not be able to rely on a breach of warranty to avoid paying a claim unless the breach was causally connected to the loss. Many insurers supported this proposal as introducing greater certainty to the law, although an alternative view was that some warranties were so important that breach should automatically lead to the cover ending.
As for the remedies for breach of warranty, there was general approval of a move away from the strict remedy of termination of cover towards falling in line with general contractual principles so that only a material breach of warranty would give the insurer an election to terminate cover. There was majority support for the proposal that, after termination, the business should not be liable for all the premium due under the policy, but rather for a pro-rated premium to reflect the actual length of cover.
The Default Regime and Contracting Out
An area provoking mixed feedback was whether business parties should be allowed the freedom to contract out of the regime and how the test proposed for assessing the validity of a contracting out provision would work in practice. The Law Commission proposed that special controls should apply if the insured contracted on the insurer’s set of standard terms of business, where one or more of those terms purported to give the insurer greater rights than the default regime. An insurer would not be able to rely on such a term, if it was not properly brought to the attention of the insured, such that it did not conform to the insured’s “reasonable expectations”. Respondents’ concerns included whether a bright line could properly be drawn between standard and non-standard term contracts and that the concept of “reasonable expectations” introduced an additional area for potential disputes.
A majority of respondents disagreed with the Commission’s proposal that an intermediary who dealt with only a limited number of insurers and did not search the wider market on the business’s behalf should automatically be deemed an agent of the insurer. It was noted that this proposal did not take account of brokers operating in specialist markets where there might be only a limited number of potential insurers. Feedback was mixed on the proposal that an action for damages should lie against a broker who had breached his independent duty of disclosure under section 19 of the Marine Insurance Act 1906. Similarly, there was no clear consensus on whether the duty to disclose should apply to all brokers in the chain, not just the placing broker.
Although there was strong support for the Commission’s general proposition that the reforms to business insurance law should also apply to reinsurance law, some put forward a case for excluding reinsurance from the reforms, because both parties were highly sophisticated and relied on skilled reinsurance brokers.
What Lies Ahead?
The Law Commission has emphasised that it has yet to formulate its recommendations for reform with respect to business insurance. While there appears to be general support for business law reform, there are clearly divergent views on key issues such as remedies, the test of materiality, and freedom of contract. Another Issues paper should therefore be anticipated from the Law Commission in an attempt to achieve a better consensus of views across the market. Further work will also be needed in connection with the role of intermediaries for disclosure purposes.