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

4.188 We provisionally propose that where a consumer proposer has made a
negligent misrepresentation, the insurer should be entitled to cancel the
policy on that ground only where it would have declined the risk. (This
proposal would not affect any contractual right to cancel upon notice.)
4.189 We provisionally reject the proposal that a consumer who has acted
negligently should be entitled to enforce any claim unrelated to the risk.
NEGLIGENT MISREPRESENTATIONS IN LIFE POLICIES: SHOULD THE
LAW IMPOSE A CUT-OFF PERIOD?
4.190 A particular problem arises in long-term insurance business where many years
may elapse between filling in the proposal form and making the claim. In life
policies, in particular, it becomes extremely difficult for the insurer, the
beneficiaries or the deceased’s personal representatives to assess the
reasonableness of a statement made many years earlier by someone who has
now died. Assessments of innocence and negligence in such circumstances may
seem unreal and unfair.
4.191 Many jurisdictions deal with this issue by imposing a cut-off period for defences
other than fraud. In essence, the insurer is prevented from relying on any
misrepresentation at the application stage once the policy has been in force for a
set period – usually between two and five years. The attraction of such a
provision is that insurers are encouraged to find out all they need to know as
early as possible.
4.192 In Issues Paper 1 we quoted the New Zealand Insurance Law Reform Act 1977.
Section 4 states that life insurers may not avoid for a misrepresentation unless
the statement was substantially incorrect; material; and
was made either:
(i) fraudulently; or
(ii) within the period of 3 years immediately preceding the
date on which the policy is sought to be avoided or the
date of the death of the life insured, whichever is the
earlier.
4.193 Similar rules apply in Australia, 89 and also in many US jurisdictions, where the
period is typically two years. A general cut-off applicable to insurance of all types
has been proposed in Germany, though there the period is five years. 90
4.194 The Issues Paper asked whether in consumer life insurance, the insurer should
be prevented from relying on any non-fraudulent misrepresentation after the
policy has been in force for three years.
89 Insurance Contracts Act 1984, s 29(3) and (4).
90 Draft bill of December 2006 Versicherungsvertragsgesetz (VVG) § 21(3). In the case of
fraudulent failure to disclose there would be a 10-year cut-off.
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