Ireland's Consumer Insurance Contracts Act 2019

Out-Law Analysis | 06 Mar 2020 | 4:49 pm | 8 min. read

The Consumer Insurance Contracts Act 2019 could be a game-changing piece of legislation for insurers in Ireland.

Aspects of the Act are controversial, with provisions such as the removal of the requirement for an insurable interest in contracts of insurance and the introduction of the concept of fraudulent misrepresentation being adopted notwithstanding resistance from certain industry stakeholders and despite the fact that lawmakers in the UK have so far decided against adopting similar provisions.

Ultimately the legislation is aimed at increasing consumer protection, but there are risks that certain provisions will increase the cost of compliance for insurance companies in Ireland and that those costs will ultimately be borne by the insured.

While the Act was finalised late last year, it has yet to commence. That is expected to happen shortly, so it is incumbent on insurers to prepare to meet their new obligations during this period prior to commencement.

Scope of the legislation

The Consumer Insurance Contracts Act 2019 sets out requirements insurance firms in Ireland must meet when entering into contracts with 'consumers'.

There had been calls for the definition of 'consumer' to be limited to individuals acting wholly or mainly outside their trade, business, craft or profession. However, the definition of 'consumer' in the Act is linked to the definition of 'consumer' in the Financial Services and Pensions Ombudsman Act 2017. This means that businesses with an annual turnover of less than €3 million will also come within the definition of 'consumer' in the Act.

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It is difficult to determine at this stage whether the right balance has been struck between benefits to the consumer and additional costs to insurers which will likely be passed onto the consumer

The Act applies to life and non-life insurance contracts entered into, varied or renewed after the Act commences, although certain classes of non-life insurance are excluded.

The Act does not apply to reinsurance contracts. However, reinsurers will be concerned by changes in the Act which could potentially impact the claim profile going forward of books of business they have reinsured.

A minimum 14 day cooling-off period is introduced for consumers in respect of all contracts of insurance coming within scope.

Insurable interest

There are changes in the Act to the requirement that an insured must have an insurable interest in a contract of insurance. The approach adopted 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 as a matter of policy to avoid insurance contracts potentially becoming akin to gambling contracts. 

Under the terms of the 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 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.

Pre-contract obligations

The principle of utmost good faith, also known as uberrimae fides, in the pre-contractual stage has been set aside. The Act is attempting to ensure that the only pre-contract disclosure obligation on the consumer shall be to answer fully the questions posed to it by the insurer and to place the responsibility on the insurer to frame the questions in a way that all the information it requires to underwrite the risk is extracted through the questions. If the insurer fails to do this, it bears the risk and the potential liability which arises.

An insurer is only permitted to use the remedies available under the Act – being repudiation of liability or to limit the amount paid on foot of the contract of insurance – if it can show that the non-disclosure of material information was a cause of it entering the insurance contract and on the terms on which it ultimately did enter the contract. This appears to be seeking to address the scenario whereby an insurer could potentially repudiate liability under an insurance contract on grounds of non-disclosure of information which was unrelated to the loss event giving rise to the claim.

These changes protect consumers and potentially narrow some of the technical avenues for insurers to avoid paying claims.

Misrepresentation and claims

The Act 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.

Innocent misrepresentation by the consumer will not permit the insurer to avoid paying a claim.

There are a number of potential remedies available in the event of negligent misrepresentation which depend upon whether the insurer would have still entered the contract and whether the terms would have been different or not.

Where the responses to the pre-contract queries involve fraudulent misrepresentation, the insurer can avoid the contract of insurance and the payment of any claim.

There is a definition of 'fraudulent misrepresentation' but no definition of 'negligent misrepresentation' included in the Act. This would suggest that the common law principles of negligent misrepresentation will continue to apply in order to determine where the boundaries between it and an innocent representation or a fraudulent misrepresentation will be.

Insurers will now be drawn into attempting to determine at claim stage what is innocent versus negligent versus fraudulent misrepresentation in order to determine what remedies are available to it. If there has been a negligent misrepresentation, the insurer will also need to determine what action it would have taken had the negligent misrepresentation been made correctly to it.

This approach seems to create practical difficulties and onerous obligations for insurers. However, what is clear is that innocent misrepresentation will not allow a claim to be avoided and fraudulent misrepresentation is the only basis upon which a claim can definitely be avoided, although a negligent misrepresentation could potentially allow an insurer to avoid a claim.

A valid claim under a policy is not affected where a consumer makes a subsequent fraudulent claim under the same policy. An insurer may only refuse liability to the consumer under the contract in respect of claims made after the fraudulent claim.

There has been a lot of industry commentary that the concept of 'fraudulent misrepresentation' should have been reduced to 'deliberate or reckless misrepresentation', which was the approach adopted in equivalent UK legislation. The reason for this is that it is perceived that the threshold of 'fraudulent misrepresentation' is too high for insurers to meet and prove and suggests a threshold akin to a criminal threshold is required as opposed to a threshold of  conscious disregard of the need to provide accurate information which would be the threshold for 'deliberate or reckless misrepresentation'.

Changes in relation to 'insurance warranties'

The Act clarifies that any statement by a consumer with respect to the existence of a state of affairs or a statement of opinion shall be treated as a representation by the consumer and shall not be treated as an 'insurance warranty' as is commonly the case currently.

Warranties in insurance contracts are terms or conditions that permit a party to an insurance contract - usually the insurers - to repudiate the contract and refuse to meet the claim if the particular warranty is breached. The Act specifically cites "basis of contract" clauses and other comparable clauses purporting to convert a representation into an 'insurance warranty' as being invalid.

Disclosures at renewal time

The Act details the information to be provided by an insurer at renewal stage.

A consumer will not be required to provide any additional information to an insurer at renewal stage unless the insurer specifically requests the consumer to do so. However, the insurer will be under an obligation to ask the consumer questions at renewal stage if it is seeking any further or updated information from the consumer.

An insurer which has issued a contract of insurance prior to the commencement of the Act and then seeks to issue a renewal following the commencement of the Act should therefore consider providing an updated list of questions given the removal of the principle of utmost good faith and the clarification of the role of the consumer in answering the pre-contract questions under the Act.

The removal of the principle of utmost good faith

In addition to it no longer applying at the pre-contract stage, the principle of utmost good faith will also no longer apply following entry into the contract for all contracts coming within scope of the Act.

The Act includes limitations on "alteration of risk" clauses so that they should only apply in circumstances where the subject matter of the insurance contract has been altered to such a degree that the insurer can say that the new risk is something which on the true construction of the policy it did not agree to cover. While this provides clarity, it is a high standard for an insurer to meet.

Clampdown on technical avoidance of claims

Insurance contracts generally include a specified notification period within which a claim must be notified to an insurer after the policyholder becomes aware of a claim event having occurred in order for that claim to be considered valid. Where a consumer does not make a claim with a specified notification period and this does not prejudice the insurer, the insurer shall not be entitled to refuse liability under the claim on that ground alone. The result of this is that technical avoidance of claims by an insurer on grounds of non-notification will no longer be permitted unless an insurer can demonstrate prejudice which could mean an insurer will be required to pay more claims than it traditionally might have. 

Third parties and liability

The Act provides that where a person – being an individual, a partnership or a corporate body – is insured against a liability which may be incurred by that person to a third party – being a 'consumer' – the third party will be permitted to claim directly against the insurer in circumstances where the insured person has died, cannot be found, is insolvent or for any other reason it appears to a court to be just and equitable to do so. This is designed to prevent an insurer relying on the doctrine of privity of contract to prevent a third party enforcing such a claim. This could also mean more payments of claims which might traditionally have been resisted by insurers.

Subrogation rights

The Act introduces limits on subrogation rights for an insurer in family relationships, personal relationships and employment scenarios and also sets out how funds generated from the exercise of subrogation rights should be distributed between an insurer and the consumer so that the consumer is not prejudiced.

Conclusion

There are a number of fundamental changes introduced by the Act which will impact both insurers and consumers. Notwithstanding the positive objective of the Act to further protect consumers, it is difficult to determine at this stage whether the right balance has been struck between benefits to the consumer and additional costs to insurers which will likely be passed onto the consumer.

There will be particular focus on a number of changes and the practical impact of those changes following the commencement of the Act most notably, the removal of the requirement for there to be an insurable interest in a contract of insurance and the introduction of the concept of 'fraudulent misrepresentation'. This is particularly the case given there had been lobbying against the introduction of these two changes and the comparable UK legislation has not been amended in the same way.