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

4.154 Few of the legal systems that we have looked at allow the insurer a right to avoid
the contract and refuse to pay claims that have arisen in every case of negligent
misrepresentation by a consumer policyholder. In most European systems the
standard approach is to require the insurer to pay a proportion of the claim. 78 The
insurer may also have the right to cancel the contract for the future, possibly after
a short period of notice. 79
4.155 We have noted that the FOS also applies compensatory remedies for
inadvertence. The provisional proposals we make here are designed to bring the
law into line with existing FOS practice.
4.156 We do not see a need to define negligent conduct. Misrepresentations will be
treated as negligent if they are not deliberate or reckless (according to our
definition) but were made without reasonable care.
A compensatory remedy
4.157 Where a non-disclosure or misrepresentation is negligent, the law should aim to
place the insurer in the position it would have been had it known the true facts,
but no better. This means that the court should ask what terms the insurer would
have offered had the misrepresentation or non-disclosure not occurred. If a claim
has already arisen:
(1) It may be that it would be excluded under the terms that would have been
agreed, or in an extreme case it may be that a policy would not have
been offered at all. In such a case the insurer should not have to meet
the claim. 80
(2) If the insurer would have demanded an increase in premium and a claim
has arisen, proportionality should be applied. In other words, if the
misrepresentation or non-disclosure led to the consumer only paying
50% of the correct premium, the insurer should only have to pay 50% of
the claim.
4.158 This is effectively the approach adopted by the Australian ICA 1984, section
28(3). The section provides that in cases of negligent misrepresentation,
78 Norway, Insurance Contracts Act 1989,s 4-2; Sweden, Insurance Contracts Act 2005
Chapter 4 s 2 para 2. For France and Germany, see N 62 above. Under the current
approach of the European Restatement Group, in cases of negligent misrepresentation the
outcome would depend on what the insurer would have done if it had been given the
correct information. If it would not have insured the risk at all, nothing would be payable. If
it would have insured it at a higher premium or on different terms, the claim would be
payable proportionately or in accordance with the terms the insurer would have agreed to.
However, only claims that were causally connected to the misrepresentation would be
affected: see further below, para 4.173.
79 For example, Norway, Insurance Contracts Act 1989, s 4-3, Sweden, Insurance Contracts
Act 2005, Chapter 3 s 7. (14 days notice); France, Code des Assurances, Art L 113-9 (10
days notice). The European Restatement Group draft would also permit termination for the
future.
80 Some respondents to the Issues Paper pointed out that the insurer might have both
applied an exception or excess and have increased the premium. That is obviously correct
but it causes no special difficulty. If the claim falls within the exception or excess, it need
not be paid. If it does not, a proportion of the claim should be paid under (2).
105