Out-Law Guide 16 min. read
01 Aug 2015, 12:01 pm
This note is based on the law of England and Wales
The Consumer Insurance (Disclosure and Representations) Act targets the most problematic area for most people buying cover – what information they must give the insurer when applying for insurance and the insurer's remedies if they get it wrong.
The Act, which was given Royal Assent on 8th March 2012 and acme into force in April 2013, closely follows recommendations made by the Law Commissions of England and Scotland in a joint report published in December 2009.
Its provisions are relatively uncontroversial and reflect what is generally already accepted to be industry good practice and the approach taken by the Financial Ombudsman Service (FOS).
The Act only covers consumer insurance, which it defines as insurance bought by individuals "wholly or mainly for purposes unrelated to their trade, business or profession". This wording is intended to be broad enough to include "mixed-use" contracts, which cover both private and business use, as long as the main purpose of the contract is for private use.
Under this definition, private motor vehicle cover that included a limited amount of business use would be treated as consumer insurance, whereas a policy insuring a taxi but which covered occasional private use would not.
This differs from the FSA's approach, which treats a customer acting in the capacity of both a consumer and a commercial customer as a commercial customer (ICOBS 2.1.3G).
The Law Commissions have for some time been considering whether very small businesses ("micro-businesses") should be given the same protections as consumers when they provide information to insurers. Their conclusions are due to be published in a consultation paper later in 2012.
Under section 2 of the Act, it is the duty of the consumer to take reasonable care not to make a misrepresentation to the insurer before the contract is entered into or varied. In the case of a variation, the duty would apply only to information relating to the variation.
This modifies the consumer's duty of utmost good faith by removing the obligation to disclose all material facts. The consumer would no longer be required to volunteer information but only to respond honestly and with reasonable care to questions asked.
The Act does not define what constitutes a misrepresentation. Under the common law, it is a representation that is either inaccurate or misleadingly incomplete. In some circumstances, an omission can amount to a misrepresentation. But if an applicant clearly refuses to answer a question and the insurer nevertheless accepts the proposal, the Law Commissions suggest that the omission would not be a misrepresentation.
The Act, however, makes it clear that a failure by the consumer to comply with a request to confirm or amend particulars previously provided is capable of being a misrepresentation. This often happens at renewal. A renewed contract is, of course, a new contract, so the consumer would be under a duty to take reasonable care not to make a misrepresentation. It would be a question of fact whether or not the failure to respond was reasonable.
The duty no longer applies once the contract has been entered into or the variation is made. If, before that point, the consumer realises that a statement he has made is untrue, he should take reasonable care to correct it. But, once the contract is made, the duty ceases and any further requirement to provide information would have to be based on an express term in the policy, such as a change of circumstances clause.
Whether or not a consumer has taken reasonable care will depend on all the relevant circumstances (section 3). The Act gives as examples the type of insurance and its target market, the insurer's explanatory material and publicity, how clear and specific the insurer's questions were and whether the consumer used a broker or intermediary.
Insurers would still be able to ask general or open-ended questions, but the clarity and scope of the question would be taken into account in assessing whether or not the consumer's response was reasonable. Where possible, it would be better to keep questions as specific as possible, rather than run the risk of an inaccurate answer being found to be a reasonable one.
The standard of care is objective - that of a reasonable consumer - but this is subject to two provisos. If the insurer was, or ought to have been, aware of any particular characteristics or circumstances of the actual consumer, these are to be taken into account. And a misrepresentation made dishonestly will always be taken to show a lack of reasonable care.
On the question of the insured's individual circumstances, the Law Commissions stated: "We intend this test to focus in a practical way on the understanding of the relevant staff at the time the reply is received. We do not intend that the insurer should be deemed to know information held by other departments, which is not available to the staff at the time".
The ABI asked the Law Commissions to clarify what would happen if, for instance, a consumer with a poor knowledge of English is helped through the process of applying for house insurance and later applies for car insurance with the same insurer over the internet.
In response, the Law Commissions' final report acknowledged that internet sales are an automated process. "We do not think there should be any obligation on an insurer to check previous records in these circumstances".
The burden of showing that the consumer has acted unreasonably lies with the insurer. This does not mean the insurer has to prove what the consumer actually knew, only what a reasonable person in the circumstances would have known.
If a statement is shown to be untrue or misleading, little additional evidence would normally be required to show the response was unreasonable, provided the questions asked were sufficiently clear. The court or the FOS would then decide how a reasonable person would have responded.
If the consumer makes a misrepresentation in breach of the section 2 duty, the insurer has a remedy if it can show that, without the misrepresentation, it would not have entered into the contract (or agreed to the variation) at all, or would have done so only on different terms (section 4).
This is termed a "qualifying misrepresentation". Only two categories of qualifying misrepresentation are defined: "deliberate or reckless" and "careless" (section 5).
A qualifying misrepresentation is deliberate or reckless if the consumer knew it was untrue or misleading (or did not care either way) and knew (or did not care) that the matter to which it related was relevant to the insurer. The burden of proving a misrepresentation is deliberate or careless lies with the insurer.
A careless qualifying misrepresentation is simply defined as a qualifying misrepresentation that is not deliberate or reckless. The Law Commissions chose the term "careless" rather than "negligent" to emphasise that this is a new standalone category that is not intended to draw on the existing law of negligence.
There is of course a third category of misrepresentation – where the consumer has acted reasonably. But this is not a qualifying misrepresentation and the insurer has no remedy for it.
Section 4 retains the concept of inducement from current law, so cases such as Pan Atlantic v Pine Top  will still be applied. The insurer must be able to show that, without the misrepresentation, it would not have entered into the contract or would have done so only on different terms. The insurer's underwriting guidelines and/or evidence from an underwriter will be relevant here.
The concept of materiality, however, has been dropped. Instead of asking whether the misrepresentation would have influenced the judgment of a hypothetical "prudent insurer", the insurer must show (1) that it was induced by the misrepresentation and (2) that a reasonable consumer would not have made it.
Section 5 also contains two presumptions: that the consumer had the knowledge of a reasonable consumer, and that he knew that a matter about which the insurer asked "a clear and specific question" was relevant to the insurer. It will be for the consumer to show that he had less knowledge than would normally be expected or that he did not realise the issue was relevant despite the clear question.
Insurers' remedies are set out in schedule 1 to the Act.
If the qualifying misrepresentation was deliberate or reckless, the insurer may avoid the contract, refuse to pay claims and retain premiums "except to the extent (if any) that it would be unfair to the consumer to retain them".
This balances the aim of deterring wrongdoing with the need for some flexibility in those cases where retaining the premium might operate too harshly - such as in life insurance policies that include an investment element, or joint policies where only one of the policyholders has acted dishonestly.
For careless qualifying misrepresentations, the schedule sets out proportionate remedies based on what the insurer would have done had there been no breach of the consumer's duty.
If the insurer would not have entered into the contract on any terms, it can avoid the policy and refuse all past and future claims, but it must return the premium.
If the insurer would have imposed different terms (other than relating to premium), it may choose to treat the contract as if those terms applied. If, for instance, it would have included a particular exclusion and the claim falls within that exclusion, the insurer will not be obliged to pay the claim. And where the insurer would have charged a higher premium, any claim under the policy can be reduced proportionately.
Assuming the insurer does not have grounds to avoid the contract altogether, a careless qualifying misrepresentation will also affect the future treatment of the policy.
In non-life insurance, the insurer can choose to treat the contract as subsisting and give the consumer notice of the amended terms. The consumer can then choose to accept those terms or terminate the contract on reasonable notice. Alternatively, the insurer has the option of terminating future cover on reasonable notice.
Where the contract is wholly or mainly life insurance, however, the insurer will not have the option of termination. The contract will continue on amended terms and the insurer must give the consumer notice of these. If the insurer would have charged more, it may ask the consumer to pay additional premium, or it may prefer to reduce any future claims proportionately. The consumer can then choose whether to accept the revised terms or terminate the cover.
If the contract is terminated by either party, the consumer will be entitled to a refund of future premiums. Claims arising in the period up to the termination will not be affected.
In their final report and draft Bill, the Law Commissions set out in Appendix B some examples of how compensatory remedies might be applied in complex situations, such as double insurance, contributions between insurers and where the insurer has subrogation rights against sums recovered by the insured.
If a qualifying misrepresentation is made in connection with a variation to the contract and the variation can be treated separately from the rest of the contract, the remedies set out above will apply only to the variation. If not, the remedies will apply to the whole contract (Part 2 of schedule 1).
In appendix B to their report, the Law Commissions gave the example of a consumer paying a set amount for an additional amount of cover, such as a sum to extend a mileage warranty or to reduce the excess. In such cases, the variation could usually be treated separately. If the consumer made a qualifying misrepresentation when arranging the variation, the remedies would apply only to that variation.
But if the variation goes to the price of the overall policy it may not be able to be separated out. If, say, the consumer made a qualifying misrepresentation when agreeing to additional warranties about locks and fire alarms in his home insurance in return for a reduction in premium, the variation would affect the overall price of the cover and so any remedies will apply to the policy as a whole.
Section 6 of the Act bans "basis of the contract" clauses in consumer insurance. These automatically transform statements made by the consumer into warranties, discharging the insurer from liability if the consumer makes a misrepresentation, whether or not it was material or induced the insurer to enter the contract.
The abolition brings the law into line with recognised good practice. It would still be possible for an insurer to include specific warranties in the policy and there is nothing to stop these dealing with the same sort of issues as were covered in the proposal form. But the provision means they would have to be clearly set out in the wording.
The Act does not address the wider issue of warranties, which the Law Commissions concluded were not a major problem in consumer insurance. So, although their consultation paper suggested limits on the sort of specific warranties consumers could be asked to provide, and proposed a requirement for a causal connection between the breach and the loss, these proposals will be considered later alongside warranties in business insurance.
Special rules would apply where the insurance is a group scheme. Such schemes are commonly set up by an employer to provide life and health insurance for its employees. The policyholder is the employer but the employees, who are entitled to receive the benefits, are not party to the insurance contract.
Section 7, however, has been drafted widely to include any type of insurance that provides cover to a person who is not a party to the insurance contract.
Provided the cover would have been consumer insurance had it been taken out directly by the individual, and provided the individual provided information directly or indirectly to the insurer before the contract was entered into (or varied or extended), qualifying misrepresentations will be treated in the same way as if there were a direct consumer insurance contract between the individual member and the insurer. Only that individual would be affected.
The policy as a whole, however, would remain a business insurance policy, subject to business insurance law. So the policyholder (the employer in many cases) would be under a positive duty to disclose and not misrepresent all material facts.
There are also special rules for life insurance taken out by a consumer on the life of another. It is common in such situations for the insurer to ask the person whose life is being insured about their health.
Under section 8, the information provided by that person will be treated as if provided by the person taking out the cover. So if the life insured makes a deliberate or careless qualifying misrepresentation, the insurer can apply the appropriate remedies, even if the actual policyholder was not at fault.
Where a question arises about the state of mind, or circumstances, or characteristics of the person providing the information, it will be decided with reference to that person, not the policyholder.
The clause does not cover information provided by the policyholder, which would fall within the normal provisions of the Act.
Schedule 2 sets out a code for determining whether an insurance broker or intermediary (referred to throughout as an "agent") acts for the insurer or the consumer for the purposes of passing on pre-contract information and entering into the contract.
The code is based largely on the existing law, supplemented by FOS practice and industry understanding. But the rules would not apply to other areas of agency, such as collecting premium, or to business insurance.
Schedule 2 identifies three circumstances where an intermediary will be taken to be acting for the insurer: when the agent is the insurer's Appointed Representative (or Introducer Appointed Representative); when the agent has been given express authority by the insurer to collect pre-contract information from the consumer; and where the agent has express authority to enter into the contract on the insurer's behalf.
Express authority will usually be given in the terms of business agreement (TOBA) between the insurer and the intermediary.
In all other cases, it will be presumed that the agent acts for the consumer unless, in light of all the relevant circumstances, it appears the agent is acting for the insurer.
The code sets out a non-exhaustive list of circumstances that may be relevant. Factors tending to suggest the agent acts for the consumer include where the agent undertakes to give impartial advice or to conduct a fair analysis of the market, or where the consumer pays the agent a fee.
Circumstances suggesting the agent acts for the insurer include where the agent is "tied" or "multi-tied" so that it can only offer the products of a single insurer or a limited number of insurers. Branding and white labelling arrangements, where the insurer allows the agent to brand its services with the insurer's name, or conversely where the insurance product is branded with the agent's name, also point to an agency relationship; or where the insurer asks the agent to solicit the consumer's custom.
The explanatory notes, however, make it clear that these factors will not necessarily determine the issue and that other circumstances may be relevant. There is also a provision enabling the Treasury to amend the list of factors if it appears outdated.
If an agent is found to have been acting for the consumer, the normal consequences of agency apply. So if the agent makes a deliberate or reckless misrepresentation, the consumer will be responsible and the insurer may avoid the policy, even if the consumer is not at fault.
If the agent acts for the insurer, the insurer will be bound by its actions. If the agent exceeds its express authority, the insurer will have to abide by the contract unless the consumer had reason to suspect the agent was overstepping its authority.
Although not specifically mentioned in the Act, the Law Commissions' final report discussed the role of aggregator (or price comparison) websites and their status as agents.
In many cases, aggregators do little more than put consumers in touch with insurers, after which the consumer will provide information directly to the insurer. This limited role gives no opportunity for the aggregator, as intermediary, to get involved in making any misrepresentations.
But in other cases, the consumer completes a form on the website and this information is transferred electronically to the insurer. The form may make various "default" assumptions to obtain the lowest quote (for instance, that the applicant has no motoring convictions) which may result in a misrepresentation.
There is no case law on the agency role of aggregator websites. Such sites often assert they are not acting as agent of either party, but the Law Commissions did not think this was likely to be the true position in law:
"Where the aggregator transmits the information electronically to the insurer's website, we believe that the insurer must have given the aggregator express authority to do this," the final report commented. "The aggregator will therefore be acting as the agent of the insurer in relation to the passing on of the pre-contract information. Where an error occurs in the transmission process, we consider that the insurer should take responsibility for it".
More difficult issues arise in connection with the collection of information. If, for instance, the consumer provides incorrect information on the website's form (perhaps because he is unaware of the assumptions the aggregator has made), the court or FOS would have to apply the statutory code in the Act to decide whether the website was acting as the agent of the consumer or the insurer at that time.
If the insurer gave the website express authority to collect information in this way, then under the code, there would be an agency relationship between them.
But in the absence of express authority, the court would look at all the circumstances. Unless a close relationship is shown between the aggregator and the insurer, it would be presumed that the agent was acting for the consumer in collecting the information.
Section 10 prevents insurers from imposing contractual terms in the policy (or in any other contract) that put the consumer in a worse position in respect of pre-contract disclosure and representations than under the Act. Such terms will have no effect.
This includes terms about the law that applies to the contract if, in the absence of such a clause, the applicable law would be the law of England and Wales or the law of Scotland.
Under the Financial Services and Markets Act 2000 (Law Applicable to Contracts of Insurance) Regulations 2001, for instance, default rules apply to EEA risks if the parties to the insurance contract have not made a choice of law. These vary according to whether the policy is for general or long-term insurance. If, as a result of applying the regulations, the applicable law is that of another country, section 10 would have no application.
Section 10 would also have no effect on contract terms that do not relate to pre-contract disclosure and misrepresentation, such as claims notification clauses or clauses requiring the insured to notify changes in their health between agreement and the inception of cover. Such terms, however, must still meet the fairness test under the Unfair Terms in Consumer Contracts Regulations.
There is also an exception for agreements to settle consumer insurance claims. The Act is not intended to prevent valid settlements, even if the consumer settles on terms less favourable than a court would have awarded.
In their final report, the Law Commissions concluded their proposals would only have a limited impact on those insurers who already observe good industry practice. "Essentially, the draft Act codifies what the FOS already does," the report stated.
It remains to be seen whether the Act will result in additional claims payments to consumers. For life and protection insurance, the Law Commissions estimated this increase would be in the region of £4.4 million, which is likely to translate into a premium rate rise of about 0.08%. For general insurance, they predicted increased claims payments of between £5 million and £20 million, which would increase premiums by between 0.025% and 0.1%
"We think that consumers will be happy to pay the small additional premiums for the increased piece of mind that they will be treated fairly and that valid claims will be paid".