Much to the surprise of many who had been following the progress of insurance contract law reform in the UK, the Consumer Insurance (Disclosure and Representations) Bill had its first reading in the House of Lords on 16 May. This first stage is a formality which signals the start of the Bill's journey through the House of Lords. The second reading opens the general debate on all aspects of the Bill, which will begin its passage through Parliament in the Lords before reaching the House of Commons.The date for the second reading is yet to be scheduled. Many had thought it unlikely that the Bill would get parliamentary time and another opportunity to reform insurance law for consumers would be lost.
The Law Commissions of England and Wales and of Scotland began their review of insurance contract law in 2006. Calls for reform of the law on misrepresentation and non-disclosure in insurance contracts are not new. A law reform committee first recommended reform in 1957, followed by further calls in a 1980 report. Indeed, the 1980 English Law Commission report described reform to the law of insurance contracts as “too long delayed”.
There has been widespread support for reform in the area of consumer contracts as the existing law can have harsh consequences on a public largely oblivious of their legal obligations. Insurers, brokers, consumer groups, lawyers and the Financial Ombudsman Service (FOS) have all recommended legislative reform to clarify these obligations. For many years industry practice guidelines and the FOS’s approach to resolving complaints have been out of sync with the strict letter of the law; resulting in two alternative approaches in law and in regulatory and market practice.
The current law, set out in the Marine Insurance Act 1906 (MIA) requires prospective insureds to volunteer information about the risk they are seeking insurance for. Section 18 of MIA requires insureds to disclose those “material circumstances which would influence the judgement of a prudent insurer in fixing the premium, or determining whether he will take the risk”. Failure to do so can allow the insurer to avoid the contract. At present there is no obligation in law for the insurer to ask questions in relation to those facts he wishes to know. Thus a consumer must ask themselves what information a professional underwriter would wish to know. Very few consumers are even aware of this duty; and, if they are, do not have the means to know what information they are required to volunteer to the insurer. The current law does not take into account what a reasonable consumer might think relevant to disclose.
The 1906 law was drafted in an age when insurance contracts were almost invariably conducted through brokers who had capacity to advise their customer of their obligations towards the insurer. This is no longer the case. Consumers currently buy a significant proportion of insurance policies through aggregator websites or directly though the insurer - a fundamental shift in the nature of pre-contractual negotiations.
MIA further imposes a duty upon insureds not to misrepresent the information which they do tell the insurer (section 20 of MIA). Any misrepresentation will allow the insurer to avoid the contract. The law will recognise a distinction between a misrepresentation of a fact and an honestly held expectation or belief which then proves to be untrue. Nevertheless, the resulting consequences of an inadvertent misrepresentation (as with a non-disclosure) can be severe where an apparently minor mistake invalidates an insured’s claim.