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Draft Consumer Insurance Bill tackles outdated law

Consumers buying insurance will no longer have to second guess what information is relevant to the insurer if proposals to change the law come into effect. Instead, they will merely have to answer fully and accurately any questions the insurer asks.

This is the key provision in a draft Consumer Insurance Bill published this week by the Law Commissions of England and Scotland as part of their ongoing review of insurance contract law.

Under current law, a consumer buying insurance is under a duty to volunteer information that a hypothetical 'prudent' insurer would consider relevant, whether or not the actual insurer asked a question about it. Breach of the duty means the insurer can avoid the policy (and any claims under it) entirely. 

The Law Commissions have decided that this law, developed over a century ago for the shipping industry, no longer corresponds to the realities of a modern mass consumer insurance market.

"Most consumers are unaware that they are under a duty to volunteer information," they state in their joint report. "Even if they are aware of it, they usually have little idea of what an insurer might think relevant".

Although the effect of the law has been softened to some extent by industry statements, regulations and the 'fair and reasonable' test applied to consumer complaints by the Financial Ombudsman Service (FOS), the Law Commissions believe these differing approaches have resulted in inconsistency and confusion.

The draft Bill aims to make the law simpler and clearer for consumers and insurers alike. The duty to volunteer information would be abolished and replaced by the duty to take reasonable care to answer questions fully and accurately. If the consumer did volunteer information, however, he would have to take reasonable care to ensure that it was not misleading.

The new law would also replace the single remedy of avoidance for an inaccurate or misleading statement with a range of remedies depending on the consumer's degree of fault.

If the consumer acted honestly and reasonably, the insurer would have no remedy and would have to pay any claim in full. But if the consumer was dishonest or reckless (in that he knew the information was relevant to the insurer and that his answer was untrue, or did not care either way) the insurer would be able to avoid the contract and, in most cases, keep the premium.

If the consumer acted carelessly, the remedy would aim to put the insurer into the position it would have been in had it known the true facts.

So if the insurer would have charged a higher premium, the claim would be reduced proportionately. If it would have imposed a particular term, the claim would be treated as if the policy included that term. If it would have declined the risk altogether, however, the policy may be avoided, the premiums returned and the claim refused.

There is also a special provision for group insurance schemes, where a policy is taken out (usually by an employer) for the members of a group. Under the Bill, if an individual member makes a misrepresentation it would only affect that member and not the other members of the group.

Announcing the publication of the joint report on 15th December, David Hertzell of the Law Commission for England and Wales said, "Our reforms would improve consumer protection, increase consumer confidence and enhance the reputation of the insurance industry. They have the backing of consumer groups and the insurance industry."

Professor Hector MacQueen of the Scottish Law Commission added, "Although the majority of insurers already follow industry best practice, our recommendations will require the minority to follow suit as well. We think that the clarification of the rights and duties of insurer and insured alike will reduce the number of claims which are rejected unfairly."

Other proposals
The Bill includes a new statutory code to help identify whether an insurance broker or intermediary is acting for the consumer or the insurer when passing on pre-contract information to the insurer.

The question is significant because, if the intermediary is acting as the agent of the consumer and fails to tell the insurer something material or provides incorrect information, the consumer's cover may be affected by the intermediary's breach. Consumers, however, tend to assume the intermediary is working for the insurer and that the insurer bears the risk of the intermediary getting it wrong.

The new code sets out a range of factors to be considered, based largely on existing law, supplemented by FOS practice and industry understanding. It would only apply to intermediaries passing on information to the insurer at the pre-contract stage. It would not affect other aspects of the agency relationship, such as the collection of premiums, nor would it apply to business insurance.

Other provisions in the Bill include the abolition of 'basis of the contract' clauses, which transform statements made by the insured into warranties so that any breach will automatically terminate the insurance policy, even if the information is relatively unimportant and has no connection with the loss claimed.

Any proposals for the wider reform of the law on consumer insurance warranties, however, have been postponed and will be dealt with alongside the Commissions' business insurance reforms.

Next steps
The Law Commissions' recommendations closely follow proposals set out in their 2007 consultation paper, which received widespread support. But the draft Bill still has to be passed by Parliament before it can become law and this can take years if Parliamentary time is limited. 

Parliament is, however, currently testing a streamlined legislative process for transposing uncontroversial Law Commission proposals into law. The procedure is being used to introduce a new Third Party (Rights against Insurers) Bill, which had its second reading in the House of Lords on 9th December.

If the trial is a success, the new process could be used for other Law Commission draft Bills that are generally agreed to be uncontroversial. It is not yet known, however, whether the Consumer Insurance Bill would be a potential candidate.

If and when the Bill becomes law, the Commissions envisage a one-year lead-in for the changes to come into force. The report, however, encourages insurers to start taking the proposals into account now when reviewing their proposal forms, policy wordings and internal processes.

Next year the Law Commissions plan to publish a policy statement on pre-contract disclosure and misrepresentation in business insurance and two more issues papers on damages for late payment of insurance claims and on the insured's post-contract duty of utmost good faith.

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