Consumer insurance contracts law: recent Irish legislation diverges from UK position

Out-Law Analysis | 19 Mar 2020 | 3:00 pm | 7 min. read

The Consumer Insurance Contracts Act 2019 has been recently enacted in Ireland but yet to be commenced. The approach of the Irish legislature in the 2019 Act differs from the current approach in the UK in relation to two important concepts: 'fraudulent misrepresentation' and insurable interest.

The Irish approach on these points also runs contrary to the pre-enactment lobbying of some notable industry stakeholders. It remains to be seen whether the approach of the Irish legislature correctly balances the interests of insurers and consumers on these matters. However, when looking at the amendments made in Ireland, it is instructive to compare the approach taken in the UK and to understand the UK rationale for its approach.  

The removal of the requirement for an insurable interest in contracts of insurance in Ireland under the 2019 Act is an area of divergence from UK law and requires understanding by insurers before the Consumer Insurance Contracts Act 2019 takes effect. While the 2019 Act has been enacted as law it has yet to be formally commenced.

The introduction of the concept of 'fraudulent misrepresentation' is another area where the 2019 Act has diverged from the position in the UK, where no such concept applies in the context of insurance law.

Divergence on the approach regarding 'insurable interest'

The Consumer Insurance Contracts Act 2019 appears to set aside years of case law about the requirement for there to be an insurable interest in a valid contract of insurance. This was previously required, amongst other reasons, as a matter of policy to avoid insurance contracts potentially becoming akin to gambling contracts. 

Under the terms of the 2019 Act, a claim under an otherwise valid contract of insurance may no longer be rejected on the basis of a consumer not having a valid interest in the subject matter of the contract at the time the contract was entered or at the time of the loss. A policyholder will still be required to demonstrate loss in order to make a valid claim. The 2019 Act does acknowledge that a consumer may be required to have an interest in the subject matter of a contract of insurance where that insurance contract is a contract of indemnity.

This approach is different to in the UK where reform has long been considered but remains unlikely to be implemented in the short term.

The Law Commission of England and Wales and the Scottish Law Commission first consulted on policy proposals in an issues paper in 2008 where it was acknowledged that the current law is out of touch with reality. That paper highlighted scope to expand the categories for those said to have an insurable interest, including co-habitants and those dependent upon their parents/guardians/grandparents during the course of their adult lives. The Law Commissions also suggested life insurance being permissible where the life at stake consented to the insurance, as an alternative to the principle of insurable interest.

Following stakeholder feedback, the consent of life at stake proposal was abandoned and the Law Commissions updated their proposals in a 2011 consultation paper and in a further issues paper published in March 2015.

In April 2016, a short consultation exercise was conducted on a draft Bill designed to give effect to the Law Commissions' proposals. Although most consultees agreed with the overall direction of the proposals, concerns were expressed over some of the details, and in particular their interaction with current market practice. The Law Commissions stated that it was also clear from those responses that there was little demand for reform in the area of non-life insurance.

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Naoise Harnett

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At a time when the Irish legislature have removed the requirement for an insurable interest in contracts of insurance, the respective Law Commissions in England and Wales and Scotland are seeking to expand the categories of persons who will be deemed to have an insurable interest 

In summer 2018, the Law Commissions published an updated draft Bill on insurable interest and accompanying notes, confined to life and life-related insurances and taking into account stakeholder comments.

The draft Bill:

  • expands the application of insurable interest to those with "reasonable prospect" of economic loss; to cohabitants, children and grandchildren; and
  • provides confirmation in law that pension trustees and other administrators of group schemes have an insurable interest in the lives of members of the group.

Submissions for responses to the draft bill were closed in September 2018. According to its website, the Law Commission of England and Wales is still analysing responses on the draft Bill and will produce a report with recommendations in due course.

As there remains little demand for reform and as the legislative agenda is taken up with other priorities, it is unlikely that we will see reform of insurance interest in the UK in the near future. However, what is clear is that at a time when the Irish legislature have removed the requirement for an insurable interest in contracts of insurance, the respective Law Commissions in England and Wales and Scotland are seeking to expand the categories of persons who will be deemed to have an insurable interest. This is in sharp contrast to the Irish approach.

Fraudulent misrepresentation vs deliberate or reckless misrepresentation

The Consumer Insurance Contracts Act 2019 sets out the remedies available for innocent misrepresentation, negligent misrepresentation and fraudulent misrepresentation in respect of answers provided by the consumer to an insurer in the pre-contract questions. Fraudulent misrepresentation is the only basis upon which insurers can definitely avoid a claim. A negligent misrepresentation only means that an insurer may avoid the insurance contract under the 2019 Act.

Introducing the concept of 'fraudulent misrepresentation' into Irish insurance law is controversial as it goes against what certain industry stakeholders had argued was appropriate and marks a difference to the approach taken in the UK. Insurers in Ireland have claimed that the threshold of 'fraudulent misrepresentation' is too high for insurers to meet and prove and is akin to a criminal threshold of proof. Rather, it had been suggested that a standard of deliberate or reckless misrepresentation should suffice in Ireland to allow an insurer avoid an insurance contract. This approach would be consistent with the UK position.

There is no equivalent concept of fraudulent misrepresentation in the insurance context in UK law. UK law on misrepresentation in the insurance context is governed by two separate pieces of legislation in the UK. This stems from previous reform of the old concept of 'utmost good faith', which governed insurers’ remedies for any misrepresentation or failure to disclose any matter.

The provisions which apply in relation to consumer insurance policies are now governed by the Consumer Insurance (Disclosure & Remedies) Act 2012 (CIDRA), whereas the Insurance Act 2015 governs provisions that apply in the context of non-consumer insurance policies. The positions in relation to each are slightly different.

CIDRA provides that remedies are available only for qualifying breaches of the duty to not make a misrepresentation so that the insurer has no remedy for an innocent or reasonable misrepresentation.

A qualifying misrepresentation must have induced the insurer to enter into the contract or to vary it or to have entered into it on different terms to the terms it would have required were it not for the misrepresentation and that misrepresentation must have been either deliberate or reckless, or careless.

If deliberate or reckless, the insurers' remedy is to avoid the contract, refuse any claim and retain the premium unless that would be unfair on the consumer.

If careless, the insurer can avoid the contract and reject any claims if but for the misrepresentation it would not have entered the contract at all.  Otherwise, if the insurer would have entered the contract but on different terms, for example for a higher premium, the contract is to be treated as if it were entered on those terms. The insurer may also terminate the contract.

The UK's Insurance Act 2015 applies to non-consumer policies. It introduced a new duty of fair presentation which wraps up the two fundamental elements of the duty of utmost good faith. Before a contract of insurance is entered into, the policyholder must make to the insurer a fair presentation of the risk. The disclosure must be of every material circumstance which the policyholder knows or ought to know and the policyholder must undertake a reasonable 'reasonable search' for material information. This will define what the insured 'ought to know' for the purposes of the duty and includes active and constructive knowledge, as well as matters they suspected or which they would have had knowledge of but for deliberately refraining from confirming them or enquiring about them. 

Importantly, the Insurance Act 2015 did change the remedies available for breach of the duty of fair presentation and distinguishes between whether the breach was deliberate or reckless, or not. The Insurance Act 2015 also stipulates that, in order to qualify for any remedies, the insurer must show that, but for the breach, the insurer would either not have entered into the policy or done so on different terms.

If the breach was deliberate or reckless, the insurer can avoid the contract, refuse all claims and does not need to refund any of the premium. 

However, if the breach of the duty of fair presentation was neither deliberate nor reckless, the insurer’s remedies are different. If they wouldn’t have entered into the contract at all in those circumstances then the insurer may avoid the contract and refuse any claims, but the premium is refundable. If the insurer would have entered the contract but on different terms, then the insurer can treat the contract as if it had been entered into on those terms from the start – and the contract remains valid. 

There is therefore no equivalent concept of fraudulent misrepresentation in the insurance context in UK law in respect of both consumer and non-consumer insurance contracts.

The standard adopted in the UK which may permit an insurer to avoid a contract is deliberate or reckless misrepresentation. The concept of fraudulent misrepresentation in Ireland is a higher threshold which an insurer will be required to meet to be in a position to argue that it can avoid an insurance contract, than that required in the UK. The result of this would appear to be that an Irish insurer will not be able to avoid certain insurance contracts that its UK counterparts may be able to avoid. This will be the case in circumstances where an Irish insurer can demonstrate deliberate or reckless misrepresentation by a policyholder but not to the level of fraudulent misrepresentation. 

There has been no case law on the scope of the concept of fair presentation to date. However, in a recent case on the application of CIDRA, the requirement for the insurer to demonstrate a deliberate or reckless misrepresentation and that the misrepresentation had induced the insurer to enter into the contract on different terms was relatively easily satisfied.