The law on disclosure has long been controversial and there is a general consensus that it needs to be clarified. That seems to be the aim of the Law Commissions’ current, and much modified, proposals.
The duty of disclosure
- In place of the existing obligation to disclose “every material circumstance”, the insured is to make a fair presentation of the risk including unusual or special circumstances which increase the risk, particular concerns about the risk which led to the insurance being placed and the provision of “standard information” for different types of cover.
- The insurer is to be encouraged to ask questions about the risk by incorporating in statute the principle that an insurer who fails to make further enquiries when prompted to do so waives further disclosure by the insured.
- The requirement for the insurer to prove that the insurer was induced to write the policy by the non-disclosure or misrepresentation (introduced in Pan Atlantic) is also to be included in statute.
- The knowledge attributed to a corporate insured is to be limited to the “directing mind and will” (usually the directors) and those responsible for arranging insurance (ie, the risk or insurance department).
- In place of the existing obligation not to misrepresent material facts which distinguishes between representations of fact (which must be substantially correct) and representations of expectation and belief (which must be made in good faith), the same knowledge test will apply as above.
- The knowledge to be attributed to the insurer is to be clarified by excluding the proposer’s obligation to disclose matters a well-informed insurer ought to know about.
- New remedies for breach of these obligations are to be introduced in place of avoidance. Where the insured is dishonest, the insurer may still avoid. But for other conduct, the regime is to be proportionate. Where the insurer would have declined the risk, the policy may still be avoided and the premium returned. Where the insurer would have accepted the risk on different terms, the policy will be treated as including those terms. Where the insurer would have charged a larger premium, any payment will be reduced accordingly.
But freedom of contract and the duty of good faith survive.
- “Basis” clauses, by which the proposer warrants that the information in the proposal is correct, are to be abolished.
- A breach of warranty is to be treated as a suspensive condition whereas at present it discharges the insurer’s policy obligation to indemnify.
- Special rules will be introduced for various types of warranty intended to reduce risk. In particular, an insurer will not be able to rely on breach of a burglar alarm warranty to deny indemnity for a flood loss.
This all seems very sensible. Probably the most significant change is replacing the blunt instrument of avoidance with the proportionate remedy regime. However, these proposals are still at the consultative stage. There are loud voices advocating much more radical change including a “reasonable insured” test of materiality in place of the existing “prudent underwriter” test. The danger of more ambitious reform is that it may leave London a less competitive insurance market.
Insurers and others wishing to make submissions to the Law Commissions have until 25 September 2012 to do so.