Reform of Insurance Contract Law

 

Insurance law has long been criticised for its archaic rules, seeming lack of clarity and potential to cause unfairness to policyholders - previous reports recommending reform go back as far as 1957. In January 2006 the Law Commission (a non-political independent body, set up to keep the law of England and Wales under review and to recommend reform where needed) published a Scoping Paper, inviting feedback on the areas of insurance law which should be included in its review. Subsequently a joint paper was published with the Scottish Law Commission and the two Commissions have since developed their thinking by issuing a series of three papers:

- Misrepresentation and non-disclosure (published Sept 2006)
- Warranties (published Nov 2006)
- Intermediaries and pre-contract information (published March 2007)

These papers were only intended to share the Commissions' initial thinking with interested parties. They have now published a full consultation paper on insurance contract law (17 July 2007). The closing date for written responses, by email or post, is 16 November 2007. A number of the Commissions' original proposals have been modified in the new consultation paper.

At present the real remedy for an aggrieved policyholder who is an individual or owner of a small business (defined as a turnover of less than a million) is to refer a dispute to the Financial Ombudsman Service, who can go beyond the strict ambit of the law by exercising a statutory "fair and reasonable" discretion when making a ruling. The Commissions' view is that this is too piecemeal an approach and that reform is needed to protect all policyholders, from individuals through to large businesses who do not, at present, even enjoy the protection of the ombudsman.

The two biggest issues are the unfairness and uncertainty caused by the doctrine of non-disclosure and the law pertaining to breach of warranty. A putative policy-holder is obliged to disclose all "material facts" to the insurer, even if the insurer has failed to ask relevant questions. This can lead not only to negligent or fraudulent non-disclosure but, most pertinently, to innocent misrepresentation. An applicant can therefore act honestly and reasonably and yet still be a perpetrator of misrepresentation, with the outcome that the insurer may be entitled to set aside the policy from the outset and refuse to meet a subsequent claim. If there is a breach of warranty, this can be sufficient for the insurer to treat its liability as ending at that time. This means the insurer can legitimately refuse to pay out, even if there is no causal link between the breach and the loss that has occurred.

Disputes which arise from either of the two issues outlined above often involve allegations about what an intermediary said or did during the sales process. The third paper therefore looks at the status of intermediaries, the completion of proposal forms by intermediaries (and their status as agents) and s. 19 Marine Insurance Act 1906, which imposes an independent duty of disclosure on an agent to insure. The paper also looks at whether the same principles should apply to the consumer market as to the business market.

The Commissions are also considering the successes, failures and general impact of the Australian new Insurance Contracts Act which was introduced in 1984 and which reformed many of the issues currently under review in the United Kingdom.
For full details of the papers discussed above please visit:
www.lawcom.gov.uk/insurance_contract.htm