Waiving goodbye

The Law Commission last month released its first "issues paper" setting out tentative proposals for the reform of non-disclosure and misrepresentation as part of its review of insurance contract law.

The intention is to give a fairer deal to policyholders, a wish that is not limited to those representing them. How, then, is it proposed that this should be done?

The headline proposal is the abolition of the duty of disclosure in consumer cases linked to the requirement that insurers should ask clear questions about any matter that is material to them. Consumers would be required to answer accurately only the questions they are asked.

If insurers do not ask, they would be regarded as having waived their right to such information. While general questions would still be permitted, the court would inquire whether a reasonable consumer would understand that the questioner was asking about the particular information in issue.

This proposal would bring the law into line with best practice and Financial Ombudsman Service (FOS) guidance.

It also acknowledges the reality of current sales methods, for example by telephone or over the internet, where it can be difficult for a policyholder to disclose additional facts even if they are minded to do so.

Higher premiums
In practice, it is likely to result in longer and more carefully-crafted questions, or perhaps even higher premiums to cover the increased risk borne by insurers. For brokers, this should simplify the proposal stage, the key issue being to advise on the full scope of the question being asked, although the retention of general questions does not remove completely the need to make more general inquiries.

The concept of the "reasonable consumer" then filters down into the rest of the proposals. If an incorrect answer is given, it is proposed that the prudent underwriter test should be replaced by one that focuses on the point of view of the person on whom the duty falls.

Several formulations of a "reasonable insured" test have been made in the past 50 years, both here and abroad. The test now suggested is that the insurer must show:

• Inducement, in that had it known the true facts it would not have entered into the contract on the same terms or at all

• That the proposer appreciated that the fact in question would have that significance or a reasonable insured in the circumstances would have appreciated its significance.

In assessing what a reasonable insured would appreciate, the courts should take into account the type of policy, the way it was advertised and sold and the normal characteristics of consumers in the market.

Special cases
A further question is posed by the Law Commission as to whether the test should also take into account any particular characteristics or circumstances affecting the insured, so far as these were known to the insurer.

One implication of such a proposal is that there would be less need for expert underwriting evidence. Rather, judges would draw on their own understanding of how a reasonable consumer would regard the matter.

If assessment were to include particular characteristics, it would be of assistance for insurers to be informed of any relevant personal details, for example if the insured's first language was not English or if they had recently suffered a bereavement. As far as remedies are concerned, it is again proposed that they should follow the distinctions drawn by the FOS, as to whether the misrepresentation is fraudulent, negligent or innocent.

Only where the misrepresentation is fraudulent would insurers would be allowed to avoid the policy. Where innocent, the insurer would have no remedy.

The middle ground is the most difficult and it is suggested that the court should apply a proportionate remedy by asking what the insurer would have done had it known the true facts.

If it would have declined the risk or added an exclusion which would have applied, the insurer would not be obliged to pay. If a higher premium would have been charged, the claim would be reduced proportionately.

It is also suggested that "basis of the contract" clauses should be ineffective as their purpose is anything but clear to the consumer.

Revised test
The requirement for the insured to appreciate materiality has also been incorporated into the revised test for fraudulent misrepresentation, so that it is necessary to show that the insured:

• Knew that the statement was untrue (or realised that it might be and did not care)

• Knew that the statement was material to the insurer (or realised that it might be and did not care).

This provides the insured with greater scope for some recovery, although this may be affected by the level of explanation provided by any brokers involved at the time of completing the proposal form as to the relevance of each of the questions.

The Law Commission highlighted in the original scoping paper back in January this year that it will also review the role of intermediaries. In particular, it raised the criticism cited in Roberts v Plaisted (1989) that: "To the person unacquainted with the insurance industry it may seem a remarkable state of the law that someone who […] presents proposal forms and suggested policies on their behalf should not be the safe recipient of full disclosure."

The Law Commission went on to refer to the then insurance ombudsman's decision, in appropriate cases, to hold insurers responsible for the defaults of intermediaries. It is still unclear how this will be dealt with by the Law Commission.

A second issues paper on warranties is expected next month and the first of two consultation papers is anticipated next summer. Further issues papers are expected in 2007, with a second consultation paper in 2008. A final report and draft bill is suggested for 2010. IT

Richard Evans is a partner and head of policy coverage unit at Beachcroft