Consumer insurance law must change, say Law Commissions

The Law Commissions' provisional proposals for change received widespread support, though the Commissions, which exist to recommend law reform when it is needed, stressed that they have not yet formulated their final recommendations on consumer insurance law reform.

There were more than 100 responses to the consultation, which covered pre-contract disclosure of information, warranties and the role of the broker in both consumer and business insurance.

The paper proposed that consumers should no longer be under a duty to volunteer information to insurers when applying for insurance. They would only be required to answer honestly and with reasonable care any questions asked.

It also proposed that instead of being entitled to avoid the contract altogether for an inaccurate or misleading statement, as under the current law, insurers would have a range of remedies depending on the degree of fault.

The proposals also aimed to bring the law more into line with current industry practice by severely restricting the occasions when insurers can avoid liability by relying on a consumer's breach of a warranty. Even in such cases, insurers would have to show the breach caused or contributed to the loss claimed under the policy.

Support for the consumer proposals was received from consumer groups, brokers, lawyers and insurers themselves. Of the 39 insurers and insurance organisations that responded, only four were opposed to reform.

"We are encouraged by the widespread support for reform, particularly from the insurance industry," said the Law Commissions in a joint statement. "The great majority of consultees agreed that there is an urgent need for clear, accessible legislation on consumers' duties to provide pre-contract information and insurers' remedies where information is not provided."

The Commissions will now prioritise the preparation of a final report and draft bill on pre-contract information in consumer insurance, to be published in the summer of 2009.

The law on warranties will be dealt with later, alongside any forthcoming business insurance law reforms. Proposals aimed at clarifying the role of the broker will also be revisited.

The Commissions had hoped to clarify the law on whether a broker or intermediary acts as agent of the insurer or the insured when he receives pre-contract information. The issue is important because it determines who bears the risk of the broker getting it wrong.

Their solution was to suggest the broker be treated as acting for the insurer unless clearly independent and acting on the insured's behalf. But the mixed responses received to the proposals – particularly what is meant by "independent" – means they will be looking into this area again.

A summary of responses to the proposals for business insurance will be published shortly. Further Issues Papers on post-contractual duties of good faith and on whether insurers should be liable to pay damages for the late payment of claims are planned for this autumn.