The third and final consultation paper of the English and Scottish Law Commissions’ joint review of insurance contract law seeks to resolve the ambiguities in respect of a business insured’s pre-contractual duty of disclosure and, secondly, address criticisms of the law of warranties regarding materiality of risk and the perceived partiality towards insurers following a breach. The review seeks to achieve fairer, more proportionate remedies.
The business insured’s duty of disclosure
Following concerns that the extent of the duty for a business insured was ambiguous and poorly understood in practice, the proposals seek to include the best principles from existing case law and encourage a collaborative approach between insurers and policyholders to clarify the extent of an insured’s pre-contractual duty. They also seek to address concerns that the current consequences of a breach, namely avoidance of the contract by the insurer, could operate too harshly, particularly where an insured had not been dishonest.
The proposals provide that:
- The policyholder should volunteer essential information, so that a fair presentation of the risk is made. It should disclose:
- Any special circumstances which might lead to an increase in risk
- Any concerns about the risk which led to the insured seeking insurance in the first place
- Standard information that should be disclosed (usually known by a policyholder in that specific marketplace)
- The insurer must then reciprocate by asking further questions, shifting the burden back on to them. In the event that further enquiries would have revealed the information in question but where the insured has failed to disclose it, an insurer will not have a remedy for non-disclosure.
- Where certain information is not provided, a default system would put the insurer in the position it would have been in had the accurate information been provided, so long as the insured has acted honestly. The option for an insurer to avoid the contract would remain available where the policyholder had been dishonest, in which case the insurer could retain the premium.
The law of warranties
The Commissions’ proposals seek to address concerns that requiring strict compliance with a warranty that is immaterial to the risk is disproportionate in practice and unjust to the insured. Specifically, sections 33(3) and 34(2) of the Marine Insurance Act 1906 have proved to be problematic for the courts to apply, as they require “exact compliance” regardless of materiality and ignore those circumstances where a breach has been remedied.
The following proposals would apply to both businesses and consumers:
- Insurers must include warranties of past or present fact in the contract (essentially abolishing basis of contract clauses), so as to not trap insureds.
- A breach would only suspend the insurer’s liability (rather than discharge it) until the breach is remedied.
- Where a term is designed to reduce a particular risk, liability would only be suspended in relation to that specific risk if that term is breached. By way of example, a breach arising from the failure to install a working fire alarm (i.e. the specific risk) would not suspend liability for flood loss.
As the current law stands, a business insured’s duty of disclosure is vague and cumbersome in practice. The proposals clearly seek to distribute responsibility for the presentation of the risk to both policyholders and insurers and, in turn, provides fairer remedies to reflect that collaborative approach. The underlying spirit of fairness is also evident in the proposals ensuring that remedies in relation to breach of warranty are not disproportionate or immaterial to the breach.
If accepted, the proposals should encourage greater collaboration between insurers and policyholders and, in turn, offer fair, practical solutions to the ongoing criticisms of the current law.