On 15 December 2009, the English and Scottish Law Commissions published their draft Bill on what consumers must tell an insurer before taking out insurance and the consequences of misrepresentation.
Duty to volunteer
A fundamental feature is the proposed abolition of the duty on consumers to volunteer information which a ‘prudent insurer’ would consider relevant. This would be replaced by a duty on consumers “… to take reasonable care not to make a misrepresentation to the insurer” (clause 2(2)). Insurers will need to ask questions at the application stage on what they want to know, which is the approach already endorsed by the Financial Ombudsman Service. Consumers will be required to answer insurers’ questions honestly and take reasonable care the answers are accurate and complete.
When reasonable care has not been taken, the insurer must then ask whether it would not have entered into the policy contract at all, or on those terms. This reflects the law on ‘inducement’ from Pan Atlantic v Pine Top .
The draft Bill also introduces proportionate claims outcomes for misrepresentation by a consumer before the insurance policy is entered into or varied, so that:
- If a consumer has acted ‘carelessly’, the insurer has a compensatory remedy based on what it would have done had it known the information.
- If a consumer has acted ‘deliberately or recklessly’, the insurer may still avoid the policy and refuse all claims.
‘Deliberate or reckless’ misrepresentation is defined in the draft Bill as meaning that the consumer:
- Knew it was untrue or misleading, or did not care whether or not it was untrue or misleading, and
- Knew that the matter to which the misrepresentation related was relevant to the insurer, or did not care whether or not it was relevant to the insurer (clause 5(2)).
Careless misrepresentations are those that are not deliberate or reckless. Where the misrepresentation is careless and the insurer would have applied different terms, or a higher premium, or both, either side can terminate future cover on reasonable notice if the insurance is non-life.
How to categorise a misrepresentation will remain one of the challenges in practice. In the explanatory notes to the draft Bill, the Law Commission explains that a person is careless when they make a statement which they genuinely believe to be true but have not taken sufficient care to check the facts. It would be more serious if the person made a statement without care and regard for its truth or falsity, as this would come within the ‘reckless’ category, where avoidance is permitted.
When could these sweeping changes start to apply? The draft Bill needs to be debated by Parliament: hopefully, the impending election will not prove a distraction, given the work put in to get this far in the reform process. Once Parliament has approved the draft Bill, another year will need to pass before the Act comes into force. It would then apply to policies incepted or variations agreed after it came into force.