Insurance: Truth or consequences
The Consumer Insurance (Disclosure and Representations) Act 2012 came in force on 6 April 2013. The Act deals primarily with the issue of what consumers must tell insurers before entering into an insurance contract, and removes both the principle of ‘utmost good faith’ and the duty of disclosure.
As a result of the changes there should be fewer disputes when claims are made, but there is a clear need for agents to explain the new rules to consumers, and a greater onus on the agent when acting to ensure the correct information about the consumer is given to the insurer.
It is now the “duty of the consumer to take reasonable care not to make a misrepresentation to the insurer”, with the relevant factors being the insurer’s explanatory material and publicity, how clear and specific the insurer’s questions were and whether the consumer had an agent.
The change means, in reality, that an applicant who is a consumer (someone entering into contracts unrelated to their business), need only answer the questions asked by the insurer, and it is up to the insurer to carefully frame the questions in the application form to get the information it needs. The previous position was that consumers were required to disclose all material information while acting in utmost good faith.
The Act prescribes the insurer’s actions where there has been misrepresentation, with the insurer’s remedy varying depending on whether the misrepresentation was honest and reasonable, careless, or deliberate or reckless; and whether having made a deliberate or reckless misrepresentation the agent acts for the consumer or the insurer. Previously the insurer would simply refuse the claim.
The Act codifies the Financial Ombudsman Service’s approach to disputes, but there was a one-year lead-in so that insurers had enough time to review their own application forms and processes.