Following the coming into force of the Consumer Insurance (Disclosure and Representations) Act earlier this month, attention is once again focused on the Law Commissions' proposals for reform of the law on a business insured's duty of disclosure and the law of warranties. Last month the English and Scottish Law Commissions published a summary of the responses received to their consultation paper published in June 2012. The proposals would, if implemented, represent a significant change to the law relating to business insurance and warranties and have major implications for the insurance market.
Market participants have now been given the opportunity to give their views on the proposals and the reaction has been largely positive with strong support for reform. 50 responses were received from a range of insurance market participants including insurers, insurance trade associations, lawyers, brokers, academics and policyholders. The responses are summarised below:
The business insured’s duty of disclosure
- 80% of the respondents were in favour of reform of sections 18-20 of the Marine Insurance Act 1906 to clarify the duty of disclosure in business insurance. The ABI said that the proposals appeared to offer greater clarity for insureds in respect of their duty to disclose and the impact of not disclosing material information. BIBA agreed saying that the changes were necessary to maintain London’s pre-eminence in the insurance world.
- 16% of the respondents saw no need for change on the basis that the law is well understood and causes few disputes. The UK insurance market is internationally competitive and business policyholders are sophisticated and professionally advised by brokers.
- 91% of the respondents agreed that the current onus upon the business insured to make disclosure should remain but insurers should be encouraged to become more active in guiding disclosure by insureds. Many of the respondents thought that the concepts of material circumstances and knowledge ought to be clarified thereby increasing certainty.
- The Commissions’ proposals with regard to proportionate remedies which reflect what the insurer would have done if the policyholder had fulfilled its duties of disclosure were strongly supported. The CII said that a range of remedies short of avoidance was the right approach to be taken. Some respondents disagreed on the basis that proportionate remedies would increase uncertainty and litigation. The remedies might also undermine a policyholder’s incentive to make proper disclosure.
- The respondents agreed that where the proposer has acted dishonestly in presenting the risk, the insurer should be entitled to avoid the policy and refuse all claims (and keep any premium paid).
- With respect to the possibility of contracting out of the remedies regime only 56% of the respondents supported this proposal. There was concern that allowing parties to contract out of proportionate remedies would undermine the reforms.
Law of Warranties
- 88% of the respondents to the consultation agreed that there was a need to reform the law of warranties as set out at sections 33 to 34 of the Marine Insurance Act
- 78% of the respondents supported the proposals to abolish basis of the contract clauses. The respondents who disagreed said that the abolition of these clauses would eliminate the “ability of insurers to rely on important information being provided”. Whilst the IUA had supported this proposal in the context of consumer insurance, it said that the same approach should not apply in the business context as there should be “no impediment” to using such a clause “if that is the desire of the commercial parties involved”.
- The majority of respondents supported the proposals regarding the suspension of liability during the period of breach (rather than insurers’ being discharged from liability).
- 81% of respondents agreed that breach of a term which was intended to reduce the risk of a particular type of loss should result in suspension of the insurer’s liability only in respect of that type of loss. Similarly, the majority agreed that where a term is included to reduce the risk of a loss at a particular time or in a particular location then, in the event of a breach of a term, liability should be suspended only in relation to losses at that time or at that location.
The proposals made by the Law Commissions with respect to business insurance have received a significant measure of support from those market participants who decided to participate in the consultation process. With the formal introduction into law earlier this month of the Consumer Insurance (Disclosure and Representations) Act 2012, the proposals move forward the potential broader agenda of wider insurance law reform. Should there be broad agreement on these proposals it is not impossible to conceive of a draft Bill being laid before Parliament in the relatively near future. However, there were some significant objections made to some aspects of the reforms and the process of consultation and reflection is likely to continue. If it is determined that such a draft Bill may be contentious (and if Parliament has limited availability), such a Bill may not be presented with a view to its passing in 2014.
Insurance Contract Law: Summary of Responses to Third Consultation Paper: The Business Insured’s Duty of Disclosure and the law of warranties published March 2013.