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

5.46 On the one hand, it seems right to say that if the insured is arguing that the
proposer should have known a particular fact, the insurer should have to prove it.
On the other hand, in cases of misrepresentation, the burden of disproving
negligence is on the misrepresentee: Misrepresentation Act 1967, s 2(1). 14 Under
that section a party who makes a misrepresentation is liable as if the
representation were fraudulent unless they prove that they had reasonable
grounds for believing, and did believe, that the fact represented was true.
5.47 In our view the burden of proof should be on the same party in both cases, or
there will be awkward questions about whether silence on a particular point was a
mere non-disclosure or amounted to a misrepresentation. We think the burden
should be on the insurer in both cases. In cases of misrepresentation, this would
be different to the rule for contracts in general but we think the difference is
justified. In most contracts, the remedy of avoidance is far less draconian than it
is in insurance. In the case of a misrepresentation about property sold, for
example, avoidance will mean the misrepresentee loses the benefit of the
contract but gets back the property. In insurance, however, avoidance after a
claim has arisen leaves the insured with only the premium, which is of little value.
Proof of negligence will not necessarily give the insurer the right to avoid (see the
discussion below) but it will be a pre-requisite to it. It seems fair to place the
burden of proof on the insurer.
5.48 We provisionally propose that the burden of proving that a business
insured should have known a particular fact should be on the insurer.
Representations the proposer honestly and reasonably believed to be true
Comparison to non-disclosure
5.49 Under section 20 of the 1906 Act the insurer may avoid the contract for any
misrepresentation of a material fact, even if the misrepresentation was made
honestly and without any lack of care. Innocence is no defence. It is to this that
we turn now.
5.50 In Part 4 we provisionally proposed that an insurer would not be able to reject a
claim on the basis of a misrepresentation if a consumer insured had acted
reasonably in all the circumstances. Thus if the proposer makes an inaccurate
statement, but has reasonable grounds to believe the statement was accurate,
the insurer should have no right to reject any claim or to avoid the policy. We
think the same rule should be the starting point in business insurance.
5.51 The reason for this proposal is simple. It would bring the law into line with good
market practice and with what we believe business insureds reasonably expect.
As we explained in Part 1, we think the normal expectation is that an insured who
was not at fault in giving incorrect or incomplete pre-contract information should
be entitled to claim on the policy. We are told that this is also accepted in the
insurance market as the attitude that a responsible insurer should take. In the
course of this review, insurers often told us that they would not reject claims for
honest and reasonable failures to disclose (though they sometimes said that
other, less scrupulous insurers would take the point). The law should uphold
good practice and reasonable expectations.
14 This Act does not apply in Scotland.
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