Still on the theme of the reform of life insurance law, I would like to bring us right up to date with a look at the consultation paper issued on July 17. Thanks go to my colleague Barbara Gardener for her research and substantial contribution to what follows.
The consultation paper is the first of a number to be issued dealing with particular areas of insurance contract law which are under review. One of the areas highlighted for review is insurable interest but the consultation paper does not deal with this matter so we will have to wait a bit longer for this, although maybe not too long as the Law Commissions have said that they intend to consider insurable interest in their next consultation paper.
The consultation paper of July 17 deals with the broad issues of misrepresentation, non-disclosure and breach of warranty by the insured. These were identified as the areas presenting particular problems and being in urgent need of reform.
Pre-contract information from the insured
Anyone applying for an insurance policy is obliged to disclose all material facts, regardless of whether or not the insurer asks any specific questions. If there is non-disclosure of a material fact, the insurer may set aside the policy and refuse to meet any claim. Under current law, this will be the case regardless of whether the non-disclosure was innocent, negligent or fraudulent.
The Law Commissions recognise that the current law can operate “as a trap” and allow claims to be rejected even where policyholders have acted honestly and reasonably. Individual policyholders have recourse to the Financial Ombudsman but this is not considered to be satisfactory. Furthermore, the ombudsman’s services are not available to medium and large businesses with a turnover of at least £1m.
The Law Commissions propose a different set of rules depending on whether the insured is a private individual, referred to as a consumer, or a business.
For consumers, the Law Commissions propose to replace the duty to volunteer information under the general duty to disclose with a requirement to answer questions carefully and honestly. If a consumer answers questions or gives other information honestly and takes reasonable care, he should be protected. If the consumer acts deliberately or recklessly in giving incorrect answers or provides incorrect information, the insurer will be entitled to avoid the policy and refuse all claims under it.
The consultation paper further proposes a different set of rules where the consumer acts negligently. In such cases, the Law Commissions say the law should aim to put the insurer in the position in which it would have been had it been aware of the full facts. For example, if the insurer would have charged more, the claim should be reduced proportionately to the underpayment of premiums.
For businesses, the Law Commissions propose that businesses should continue to have a duty to volunteer information but the duty should be limited to facts that a reasonable insured in the circumstances would realise the insurer wanted to know.
Pre-contract information and intermediaries
It is not always clear for whom the intermediary is acting and the insured often bears the consequences of any mistakes or wrongdoing by the intermediary. The Law Commissions propose to make it clear that tied agents who sell the products of a limited range of insurers should be treated as acting for the insurer while an intermediary who is clearly independent will be treated as acting for the insured.
Another issue that the consultation document deals with is that of warranties as to the future. Under current law, where an insured gives a warranty about future actions, any breach will discharge the insurer from all further liability, even in respect of claims which have no connection with the breach. The Law Commissions propose that, first, any warranty should be set out in writing, and, second, a breach of warranty should not automatically discharge the insurer from liability. Instead, the insurer should pay a claim where the insured can prove that, on the balance of probabilities, the event constituting the breach did not contribute to the loss.
Life insurance – specific issues
As far as life insurance business is concerned, the consultation covers in more detail the issues of misrepresentations by the life assured in applications for life-of-another policies and joint-life policies.
With a life-of-another policy, the issue is whether the proposer should be bound by statements made by the life assured. Currently, in most cases where a lifeof-another application is made, the proposer would sign the form to confirm that the answers given by the life assured “form the basis of the contract”. This converts all the answers provided by the life assured into warranties. This will mean that even an innocent and reasonable mistake by the life assured would amount to a breach of warranty and, as such, could prevent the policyholder from recovering under the policy, whether or not it was material to the risk.
The Law Commissions think this goes too far and they provisionally propose to abolish the “basis of the contract” clauses in consumer contracts. Instead, any statements of past or current fact would be treated as representations, meaning that innocent or immaterial misstatements would not automatically lead to avoidance of a claim by the life office.
If the life assured acted deliberately or recklessly, the life office could avoid the policy. If they acted negligently, the life office would have a proportionate remedy. However, if the life assured acted innocently and made a mistake in giving a wrong answer to a question, this would amount to an innocent misrepresentation and the life office would be required to pay the claim.
It would be for the life office to show that the life assured or the proposer, or both, behaved deliberately recklessly or negligently.
Somewhat different rules are intended to apply to business contracts.
Responses to the consultation paper are requested by November 16.