Consumer bill first step to overhaul of insurance law

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Summary: The UK'S Consumer Insurance (Disclosure and Representations) Bill has now been introduced into parliament, reports Jonathan Sacher & Anthony Lennox, partners in the insurance group at Berwin Leighton Paisner LLP.

The bill is the first proposed legislative change resulting from the Law Commission's ongoing review of insurance law. It is likely to be unopposed and will effect substantial changes to the rules on misrepresentation and non-disclosure for consumer insurance.

The bill only applies to consumer insurance, where the policy is purchased by an individual for purposes unrelated to his trade business occupation. The existing duties of misrepresentation and non-disclosure are replaced by a statutory duty owed by the consumer to take reasonable care not to make a misrepresentation to the insurer. A mere omission is not a misrepresentation.  Whether reasonable care has been taken in a particular case is determined by reference to the standard expected of a reasonable consumer. This is assessed on an objective basis, taking into account any specific characteristics of the individual insured of which the insurers are, or ought to have been aware.

If there is, in fact, a misrepresentation, it is for the insurer to show it would not have entered into the policy at all, or if it would still have written the policy, it would only have done so on different terms. This is determined by reference to the actual insurer, not the prudent, hypothetical insurer. If the misrepresentation is deliberate or reckless, the insurer can avoid the policy and retain the premium. If the misrepresentation was merely careless, the question is: what change would have been made to the policy terms? If the insurer can show it would not have entered the policy at all, the policy is deemed void and premium has to be returned.  If the insurer would have issued the policy on different terms, then there can be an adjustment of those terms, which may affect a particular claim.

The consequence where a different (and higher) premium would have been charged is implemented by a pro rata reduction in the claim. The opportunities for speculative evidence on this point and the exercise of judicial discretion as to what would have happened in a particular case are likely to be wide.

“Basis of contract” clauses, which convert the answers in a proposal form into a warranty, are also abolished. And while there is no certainty these proposals will be extended to commercial insurance, it is possible experience of these reforms in the consumer arena may help to achieve further consensus for the reform of commercial insurance.

“The bill has been well received by both consumer groups and insurers,” lawyers from Thomas Egger have noted. “Indeed, many insurers have been acting in accordance with the proposed bill as a matter of good practice. “Those insurers that do not adopt this practice should move towards adopting it now so as to ensure they are ready, as it seems highly likely, given its popularity, the bill will be enacted in due course,” they said.

Stephen Netherway, a partner at CMS Cameron McKenna, added: “The significant change for insurers and intermediaries will be consumer insureds will no longer be under a duty to volunteer information to insurers when applying for insurance cover. “They will only need to answer any questions asked honestly and with due care.”

Richard Evans, head of the policy coverage unit at Beachcroft said: “The commission must be commended for adopting such changes after comprehensive consultation with both the insurance industry and consumer organisations. “It has produced legislation that will increase customer confidence and bring the law in line with current practice. “As far as consumers are concerned. insurance law has now moved on from the 1906 Marine Insurance Act and entered the 21st century,” he added.

Published in Insurance Day , 27 May 2011

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