Misrepresentation, Non-Disclosure and Breach ... - Law Commission

Inhibitions about alleging fraud
4.57 Secondly, insurers (and we suspect, the FOS) seem reluctant to label a proposer
as fraudulent. Even if they think that a policyholder lied about their health, they do
not think it appropriate to write to a recently bereaved family alleging fraud. There
are strong social inhibitions about saying that a recently deceased father or
mother had acted fraudulently in failing to mention their smoking or a cancer test.
Insurers seem to do so only in very clear cases, where it is absolutely clear that
the proposer had tried to deceive them.
The way the FOS uses the word fraud
4.58 The FOS lists explicitly four types of conduct at the pre-contract stage: deliberate,
reckless, inadvertent and innocent. If the proposer made a deliberate or reckless
proposal, the insurer may avoid the policy. However, the FOS then appears to
draw a distinction. If the misrepresentation was deliberate or reckless, the insurer
should return the premium. If, however, the insured acted fraudulently, the insurer
may keep the premium. This amounts to a fifth category. The FOS guidance
explains that fraud occurs “where the dishonesty is intended to deceive the
insurer into giving them an advantage to which they are not entitled”. 39 Again, this
may have led some people to misunderstand our approach.
4.59 To meet these problems, it may be helpful to speak of deliberate or reckless
misrepresentation rather than of fraud. Below we explain what we mean, first by
deliberate misrepresentations and then by reckless misrepresentations.
Deliberate misrepresentation should give a right to avoidance
4.60 We do not think that avoidance should require the insurer to show that the
proposer had a criminal intention. Nor should it require proof beyond reasonable
doubt. We think that a proposer who knew that what they said was untrue, and
knew that it was relevant to the insurer’s decision, cannot expect to enforce the
policy. The insurer should be entitled to avoid it and, we suggest, retain the
premium. To avoid any further confusion, we refer to this case as one of
“deliberate misrepresentation” rather than of “fraud”.
4.61 We should point out that our proposal requires more than that the proposer made
a statement that they knew to be false. They must also have believed that the
inaccuracy or omission is of something that is, or at least might be, relevant to the
insurer. This seems to be a necessary element of fraud in current English (though
not Scots) law. The English cases indicate that making a false statement
amounts to the tort of deceit only if you intend the other party to act on it, or
realise that they may do so. 40 If the proposer genuinely believes the inaccuracy is
irrelevant to the insurer there would then be no fraud.
39
(June 2005) Issue 46.
40 For example, Tackey v McBain [1912] AC 186, PC; see J Cartwright, Misrepresentation,
Mistake and Non-disclosure (2 nd ed, 2007), para 5.19; compare Chitty on Contracts (29 th
ed, 2004) para 6-029, which argues that it may suffice that it was obvious that the claimant
might rely on the statement.
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