The Law Commissions have been conducting a joint review of insurance contract law since 2006. The review seeks to determine and implement recommendations for improving and modernising insurance law.
The Consumer Insurance (Disclosure and Representations) Act 2012, which received Royal Assent in March 2012, is the first implementation of the law review’s recommendations. The Act deals with non-disclosure and misrepresentation issues arising in consumer insurance contracts. It is expected to come into force in March 2013.
The current consultation paper looks at the duty of disclosure in the context of business policyholders. It also discusses the law on warranties and its effect on insurance contracts. The consultation will run until 26 September 2012 and Lloyd’s Market Association is developing a response, through its Law Reform Committee.
Duty of disclosure
English and Scottish law put business policyholders under a duty to disclose all ‘material circumstances’ to an insurer before concluding a contract. It is the responsibility of the policyholder to determine which information would be of relevance. The Law Commissions propose to retain this duty.
However, they consider that other aspects of law on non-disclosure are confusing and potentially unfair. For example, the consultation paper considers uncertainty around what constitutes a ‘material circumstance’. It suggests that the insurance industry, in co-operation with business policyholders, should develop guidance and protocols detailing what a standard presentation of risk should be.
The consultation paper considers that law on business policyholders’ ‘knowledge’ also presents a problem and should be clarified. It proposes that the definition of knowledge includes information available to the ‘directing mind and will of the organisation’ and to the individuals responsible for arranging insurance cover. Insureds would be under a duty to make reasonable enquiries, which could reveal relevant information, prior to placing insurance.
Insurance brokers would be required to disclose all information received or held while they act for the policyholder. This would apply to all brokers in the chain. The paper also seeks to clarify what constitutes the knowledge of insurer and what does not need to be disclosed as it is deemed to be within insurer’s knowledge. Importantly, if presentation of risk prompts questions, the onus would be on the insurer to make further enquiries.
The most fundamental change proposed by the Law Commissions is the proposal to introduce a system of proportionate remedies. It is considered that the current position is overly harsh and offers excessive protection to insurers. The proposal is based on a number of scenarios:
- If the insurer would not have entered into a contract, it would be entitled to avoid the contract, but must return the premium;
- If the insurer would have included additional terms and conditions, the contract would be treated as if it contained such terms and conditions;
- If the insurer would have charged a higher premium, the amount of the claim would be reduced proportionately.
Parties to the insurance contract would be permitted to contract out of the above default positions, provided this is done in clear and unambiguous terms brought to the attention of the other party.
Additionally, where the policyholder behaved dishonestly, the insurer should be entitled to avoid the contract, refuse all claims and keep the premium paid.
Law on warranties
The Law Commissions consider that the law on warranties is overly harsh. Insurers may avoid paying a claim if a policyholder fails to comply exactly with a warranty, even though it has no bearing on the risk. Remedying the breach does not necessarily restore the cover. ‘Basis of the contract’ clauses are also considered confusing, while consequences of non-compliance can be ‘draconian’.
The consultation paper makes the following proposals:
To abolish basis of the contract clauses. It would still be possible to include warranties in insurance contracts but statements on proposal forms must not be converted into warranties.
To treat warranties as suspensive conditions. Insurer would be liable to pay a claim if the breach of warranty was remedied before the loss occurred.
To introduce rules that would apply to terms which have the purpose of reducing particular risks. In other words, a breach would suspend liability only in relation to the particular type of loss envisaged by the warranty.
The parties to the contract would be entitled to contract out of the default position, provided this is done in clear and unambiguous terms brought to the attention of the other party.
The deadline for comments on the consultation paper is 26 September 2012. The Law Commissions plan to publish a final report and a draft Bill in 2013. The final report will cover the issues of duty of disclosure in business insurance and warranties, as well as damages for late payment, insurers’ remedies for fraudulent claims, insurable interest and policies and premiums in marine insurance.