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

(2) Similar protections would apply where an insured made an inaccurate
representation of a relevant fact, but did so honestly and reasonably in all
the circumstances.
Distinguishing between dishonest and negligent conduct?
5.18 We consider whether the law should distinguish between dishonest and negligent
misrepresentations. In Part 4 we argued that an insurer’s right to avoid a policy in
all circumstances over-compensates the insurer for the loss it has suffered. It
entitles the insurer to refuse all claims under the contract, not just those
additional claims affected by the insurer’s lack of knowledge. We argued that this
is appropriate where an insured has behaved dishonestly, but not where the
insured has behaved negligently. For negligent misrepresentations, we thought
the remedy should depend on what the insurer would have done had it known the
full facts. If it would have charged a higher premium, it should pay a proportion of
the claim. If it would have included an exception, it should be entitled to refuse
claims falling within the exception. An insurer would only have the right to avoid
the entire policy if it would not have accepted the risk at all.
5.19 We think there are good arguments for applying the same principles to business
insurance. However, it has been suggested that problems would occur in
practice. Some insurance lawyers said it would be too difficult to prove
dishonesty, and too difficult to show what an insurer would have done had it
known the information. It was also said that policyholders should be under a
strong incentive to act carefully as well as honestly. We discuss these arguments,
and leave it as an open question: should the default rules continue to allow
insurers to avoid a policy for all cases of negligent non-disclosure or
misrepresentation, or should a compensatory remedy be applied?
Contracting out
5.20 As we have already stressed, the rules we have set out should be merely default
rules. The parties should be free to reach an agreement that an insurer may
avoid a policy as a result of a failure to pass on pre-contract information, even if
the failure was honest and reasonable, or only negligent.
5.21 However, this must be done in a clear and transparent way. We argue that
insurers should not be able to use a “basis of the contract” clause on a proposal
form to convert all the answers given into warranties. If insurers are to use
warranties of past or present facts, the facts must be specified in the policy or
accompanying documents. As we explain in more detail in Part 8, we also think
that if a policy merely states that a fact is warranted, this should be interpreted as
giving the insurer the right to refuse only those claims that have some causal
connection with the loss. If the insurer wishes to avoid all claims under the policy
for a breach of warranty, the contract must specify this explicitly.
5.22 Where the parties contract on the insurer’s standard terms, special controls
would apply to terms which expanded the default regime to give insurers
additional rights to refuse claims on the basis of the insured’s failure to provide
accurate pre-contract information. Such terms would be permitted only if enough
was done to bring them to the insured’s attention. The insurer would not be
entitled to rely on such a term if it would defeat the insured’s reasonable
expectations.
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