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

A discretion to prevent avoidance in harsh cases
4.177 In general, we think that a compensatory remedy will be fair between the parties.
However, it may operate harshly in some cases where an insurer shows it would
have declined the risk and the whole policy is effectively avoided.
4.178 One problem is where the individual insurer would have declined the risk but
others would have accepted it for only a small increase in premium. Another is
where the insurer would have declined the risk, but for reasons that have nothing
to do with the claim in hand. Suppose, for example, a consumer negligently failed
to recognise subsidence cracks, and the subsidence was so serious that the
insurer would not have accepted the subsidence risk. It seems perfectly
reasonable to permit the insurer to refuse a subsidence claim. But it may seem
harsh to permit the insurer to refuse to pay for fire damage that was not
connected with the subsidence in any way.
4.179 The position may seem even more unfair if the action was negligent only on a
strictly objective test, rather than one that takes account of the insured’s
particular circumstances. Earlier we gave the example of a recently bereaved
widow who left house maintenance to her husband. Although an objectively
reasonable consumer should have recognised the effect of the crack over the
door, in her subjective circumstances, it was reasonable for her not to notice
them. However, under the rules we have outlined, the insurer may refuse the fire
claim if it could show it would have declined the risk altogether had it known the
true facts.
4.180 We would welcome views about whether the courts or the FOS should have a
discretion to mitigate the harsh effects of avoidance in some cases. Such a
discretion could be used where the policyholder’s negligence was minor, and
where the insurer has not suffered substantive prejudice (or where any prejudice
that it has suffered could be adequately compensated by a reduction in the
claim).
4.181 We note that the Australian Law Reform Commission recommended such a
discretion even for fraud. They thought that in some circumstances avoidance
could be seriously disproportionate to the harm suffered by the insurer. They
therefore recommended that courts should have a discretion not to avoid, but
instead to adjust the rights of the parties, having regard to all relevant facts,
including the need to deter fraudulent behaviour. This recommendation was
implemented in the Insurance Contract Law Act 1984. 87
4.182 In our view, however, this is excessively lenient towards dishonest behaviour. It is
our intention that a discretion to prevent avoidance in appropriate circumstances
should apply only where the misrepresentation is negligent.
87
Insurance Contract Law Act 1984, s 31; see Rob Merkin’s, Reforming Insurance Law: Is
There a Case for Reverse Transportation?
http://www.lawcom.gov.uk/docs/merkin_report.pdf.
110