Introducing a non-contestability period into life insurance contracts is unlikely to result in consumers taking less care over disclosing information, says a Court of Appeal judge.
The comments follow concerns raised by providers and advisers proposals from the Law Commission suggesting insurers should prove non-disclosure within three years of a consumer taking out a policy will result in consumers lying or taking less care during the application process.
But Lord Justice Roger Toulson disagrees and says the proposals do not present the risk of people taking less care in disclosing information during the application stage.
Speaking to law firm Reynolds Porter Chamberlain (RPC), he states: “I don’t consider this to be a risk, because taking the example of innocent non-disclosure clauses, I have not seen evidence that insureds do not take care in completing proposal forms.”
Toulson believes insurers would generally prefer the duty of disclosure to be tougher because where they suspect a false claim but cannot prove it they will have grounds not to pay the claim.
He states: “This is not a sound basis for the law to operate and the proposed test would be more balanced.”
Toulson also supports the proposal to modify the test of materiality for non-disclosure from the current “prudent underwriter test” to the test of whether a reasonable insured in the circumstances would understand a fact to be material to the underwriter in question.
He believes the present test is unsatisfactory because consumers may not appreciate what is material to the underwriter and the reasonable insured test is therefore fairer and more straightforward.
He adds: “Although it will never be possible to remove an element of opinion from the test of materiality, the proposed test is towards the objective end of the spectrum. It takes into account the type of policy, the way it was advertised and sold, and the normal consumers in the market, and is not subjectively dependent upon a particular insured.”
Toulson points out insurers can still retain control by asking specific questions on the application form, which would counteract any reduction in the general duty of disclosure.
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 7034 2680 or email [email protected].IFAonline
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