The Law Commission is proposing insurers should only receive a remedy for non-disclosure where the non-disclosure is ‘material' and the consumer acted fraudulently.
Its latest issues paper is calling for the introduction of a single set of rules on consumer’s rights and obligations in insurance contracts and follows reports dating back to 1957, which criticised insurance contract law as outdated and unduly harsh to policyholders.
Although consumers can refer disputes to the Financial Ombudsman Service (Fos), the Law Commission believes this should not be regarded as a substitute for law reform and it argues the present position has created a confusing patchwork of codes and rules.
The paper focuses on non-disclosure rules which currently require consumers to disclosure ‘all material facts’ when applying for an insurance policy, regardless of whether or not the insurer asks relevant questions or whether or not the non-disclosure was innocent, negligent or fraudulent.
The commission proposes insurers should only be entitled to a remedy for an insured’s non-disclosure or misrepresentation in so far as this is ‘material’, which means:
- The insurer must show it would not have entered into the same contract if it had known the true facts; and
- The consumer appreciated the fact in question would be relevant to the insurer in assessing the risk; or
- A ‘reasonable insured’ in the circumstances would have appreciated it would be relevant to the insurer.
In assessing what a reasonable insured would appreciate, the commission is proposing the courts should take into account the type of policy, the way the policy was advertised and sold, and the normal characteristics of consumers in the market.
The commission also proposes insurers should only be allowed to avoid policies where the insured acted fraudulently at the pre-contractual stage.
It defines acting fraudulently as:
- The insured knew the statement was untrue, or realised it might not be true and did not care; or
- Knew the statement was material to the insurer, or realised it might be material and did not care whether it was or not.
If the consumer had reasonable grounds for believing the truth of what they said, or was not negligent in other ways – such as in failing to answer a question – the commission says the insurer should have no remedy for misrepresentation or non-disclosure.
If the consumer had made a negligent misrepresentation, the court should apply a proportionate remedy by asking what the insurer would have done had it known the true facts. In particular:
- Where an insurer would have excluded a particular type of claim, the insurer should not be obliged to pay claims which would fall within the exclusion;
- Where an insurer would have declined the risk altogether, the claim may be refused; and
- Where an insurer would have charged more, the claim should be reduced proportionately to the under-payment of premium.
When it comes to asking consumers questions, the commission proposes insurers should ask clear questions about any matter which is material to them and, if they do not ask questions on a particular point, the insurer should be regarded as having waived its right to such information.
The commission intends to publish a consultation paper in the summer of 2007.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Emily Perryman on 020 7968 4554 or email [email protected].IFAonline
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