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

It was felt that the likelihood that there was an initial non-fraudulent
misrepresentation is reduced considerably if the proposer has survived five
years. A reinsurer referred us to figures from the USA which measure the number
of successful claims against the number that one would predict from the actuarial
models. These show a higher than anticipated pay-out in Years 3 and 4 (leading
to suggestions that consumers have misdescribed the risk) but little effect in Year
6 onwards.
Our views
4.201 A cut-off period would not benefit fraudsters directly as it would not apply where
the misrepresentation was shown to be deliberate or reckless. It is possible that
some people may deliberately give false answers in the hope that they will live
five years, and that any inaccuracies will then be viewed as careless rather than
reckless. However, this would be a risky thing to do: they may die within five
years, and even if they live longer, their dishonesty may be discovered. The main
reason for taking out insurance is to reduce risks rather than increase them. We
do not think that consumers will be attracted to the idea of spending premiums on
an uncertain policy that may well fail to pay out when it is needed.
4.202 However, there would be some cost to the proposals. Insurers would not be
entitled to reduce payments or refuse on the ground that the consumer was
negligent. This means either that insurers will have to take more time and trouble
in assessing risk initially, or they will be forced to pay more in claims.
4.203 Our current view is that serious thought should be given to imposing a five-year
cut-off period in respect of life insurance. It would only apply to claims made after
a death. So in policies which involved both life cover and critical illness cover, the
cut-off period would apply only to claims made after death. For life insurance,
insurers would still be able to avoid for deliberate or reckless mistakes after five
years, but not for purely negligent ones. This would effectively institutionalise
current practice by which insurers do not conduct full investigations of past
medical records where the death has taken place more than five years later. It
would therefore not add greatly to costs, but would reassure consumers that
insurers will not take technical points by dragging through old records many years
after the events.
4.204 We ask whether in consumer life assurance the insurer should be
prevented from relying on a negligent misrepresentation after the policy
has been in force for five years.
RENEWALS
4.205 Our provisional proposals on misrepresentation and non-disclosure will apply to
renewals of policies as much as to new applications. If an insurer requires
information from the policyholder at renewal it will therefore need to ask a clear
question. Under our proposals there will be no residual duty of disclosure.
94 Matt Rann, reported in “No contest”, MoneyMarketing 16/11/06.
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