Insurance law has been criticised over a number of years for not keeping pace with the times since it was codified in the Marine Insurance Act 1906.
Following the publication of a number of "Issues Papers", the Law Commission and the Scottish Law Commission (jointly the "Law Commissions") issued their joint consultation paper in July (the "Consultation Paper") which sets out a number of proposed reforms. These concentrate in particular on three areas of insurance law: (1) pre-contract misrepresentation and non-disclosure; (2) warranties and similar terms; and (3) the position of intermediaries (ie, brokers) who are wholly or partly responsible for pre-contract misrepresentations or non-disclosures.
Although the Consultation Paper is predominantly concerned with protecting consumers and small businesses, the Law Commissions believe their proposed remedies (the "default regime") should be the same in both reinsurance and insurance unless a good case is made for distinguishing them.
In relation to business insurance (including reinsurance), the Law Commissions propose to restrict the scope of the current duty of disclosure. In order to found an action under the business "default regime", a reinsurer would have to show that the reinsured knew, or a reasonable reinsured would have appreciated, that the non-disclosed fact was one that a reinsurer would want to know about.
As regards misrepresentation, it is proposed that a reinsurer would additionally have to show that the representation was one which a "reasonable person" in the circumstances would not have made. The introduction of the requirement of reasonableness would mean that a reinsured who has acted honestly and reasonably should not lose cover. The Law Commissions have suggested that the test of reasonableness should be applied flexibly and depend upon such matters as the type of market, whether the reinsured received professional advice, and the clarity of the questions asked by reinsurers.
Parties to non-consumer contracts, including reinsurance contracts, will be able to contract out of the default regime, subject to a number of "special controls" which may apply if one of the other parties is a small business and/or the contract is written on one of the parties’ standard terms.
There is some ambiguity about how the "default regime" would operate in the context of reinsurance using Lloyd’s standard wordings. For example, the Law Commissions’ proposals, when strictly translated into a reinsurance context, mean that special controls would apply to prevent reinsurers from contracting out of the default regime where this would defeat the reinsureds’ reasonable expectations of cover. However, it is not clear whether Lloyd’s wordings would be considered "standard terms" on the basis that, although they are standard wordings, they are often selected by both parties to the contract.
The "default regime" covering the use of warranties in business insurance (including reinsurance) provides that a breach of warranty would not defeat any claim if it can be shown that the event or circumstance constituting the breach did not contribute to the loss. A breach of warranty would entitle the reinsurer to terminate cover for the future, but would not automatically discharge the reinsurer from liability. It is proposed that reinsurers who contract out of the default regime would not be entitled to rely on a warranty, exception or definition of the risk if this would render the cover substantially different from that which the reinsured reasonably expected. The Law Commissions anticipate that this will depend upon how the contract was presented to the reinsured but this appears to be at odds with the fact that reinsurance contracts are often heavily negotiated between the parties.
The Law Commissions are seeking views on their proposals, including whether avoidance should be retained as a default remedy for negligent misrepresentations and non-disclosures or whether the remedy should be available only in relation to dishonest conduct. Responses have been invited before 16 November 2007. Although the full joint consultation paper (some 400 pages) setting out the Law Commissions’ proposals can be found at www.lawcom.gov.uk/docs/cp182_web.pdt, a helpful 19 page summary can be found at www.lawcom.gov.uk/docs/cp182_summary.pdf.