What has happened?
In 2006, the Law Commission was asked by the government to recommend changes that might be required to the principles of insurance law, given that the main legislation is the Marine Insurance Act 1906. The Law Commission has produced a number of consultation papers, and obtained responses from interested parties. The first amending legislation, in the form of the Consumer Insurance (Disclosure and Representations) Bill has been introduced into Parliament. The Bill is unlikely to be contentious, as it has support from both insurers and consumer organisations.
What are the key points?
- The Bill only applies to a “Consumer Insurance Contract” which exists when an individual (not a company) enters into an insurance contract for purposes unrelated to that individual’s trade, business or occupation.
- Clause 2 of the Bill in effect abolishes the concept of non-disclosure. The existing principles relating to non-disclosure and misrepresentation are replaced with statutory duty on the part of the consumer to take reasonable care not to make a misrepresentation to the insurer. On the basis that silence is not a misrepresentation, omissions which are no more than that will no longer be relevant. There is express provision that a failure by a consumer (on request by the insurer) to confirm information previously provided can constitute a misrepresentation.
- Whether or not the consumer has taken reasonable care is to be determined in light of all the relevant circumstances, and the standard of care required is that of the “reasonable consumer”. In other words, it is an objective standard, but will take into account any specific characteristics of the actual consumer which are or ought to be known to the insurer. The man on the Clapham omnibus may be making a comeback.
- If there is a misrepresentation, then the burden of proof is on the insurer to show he would not have entered into the policy at all, or would only have done so on different terms. It is the actual insurer who must establish that, not by reference to any objective or external standard, although presumably the actual insurer’s views would have to be qualified as being reasonable.
- If a misrepresentation is shown, then the consequences depend on whether it was deliberate, reckless, or careless. A representation is deliberate or reckless if the consumer knew it was untrue, or did not care, or knew that the information would have been relevant to the insurer. Any other representation is deemed to be careless, and the burden of proof is on the insurer to show that it is deliberate or reckless.
- If the misrepresentation was deemed to be deliberate or reckless, then the normal remedies of avoidance and retention of the premium will apply.
- If the misrepresentation was only careless, then the remedy is dependent upon what the insurer would have done if the misrepresentation had not been made.
- If the insurer would not have entered into the contract under any circumstances, then he may avoid the policy, but must return the premium. If the contract would have been on different terms, then it is treated as being entered into on those different terms. If the terms would have been the same, but the premium would have been different, then there is a pro rata reduction in the claim payable.
How will this affect me?
In the consumer insurance market, this may lead to longer and more detailed proposal forms, so that insurers can satisfy the Court that there was an actual misrepresentation, rather than merely a failure to disclose information. Although it remains for the Insurer to prove that he would have acted differently if the position were stated correctly, the test is one for the individual insurer, and the need for expert evidence as to prudent underwriting and materiality is likely to diminish. The question of exactly what the Insurer would have done differently raises a whole new field of enquiry. To date, all an insurer has needed to establish is that they would have assessed the risk differently. Much debate can be expected as to whether the terms, conditions or premiums would have been different, and evidence as to underwriting in other transactions and corporate guidelines is likely to become more relevant.
Insurers will need to make distinctions in their processes and procedures between consumer and commercial insurance. Whilst this may already occur in practice, there will now be a statutory differentiation.
Reinsurers may well find that opportunities to assert that claims do not fall within the underlying policy of insurance will be reduced. The ability to escape from the consequence of a follow the settlements wording is likely to be reduced. The exercise of a claims control clause will need to be with these new considerations in mind.
What are the next steps?
The Bill will now be the subject of consideration in both Houses of Parliament. Consumer market insurers will look to their proposal forms, policies and procedures, to ensure that they are compliant with changes which have been well heralded over the last few years, to meet the recognition that the current strict legal position has not been satisfactory so far as modern consumer expectations are concerned.
This is the first legislation arising from the Law Commission’s reports on insurance issues, and has a wider political significance than those relating to purely commercial insurance. The immediate impact on and the changes to the commercial insurance market are likely to be relatively limited. However if the differing approaches of the Courts and the Ombudsman to consumer insurance disputes can be reconciled, this will lead to improved market consistency and regulatory harmony. If the changes operates smoothly, will insurers consider extending these principles to commercial insurance?