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

5.52 For business insurance, this would only be a default rule. If the parties wish, they
should be free to agree that the insurer should have the right to reject claims or
avoid the policy because of any failure to disclose or any incorrect statement.
However, such agreements must not take the insured by surprise. Below we
propose controls where the parties contract on the insurer’s standard terms of
business. A standard term that adds to the default rules should not be permitted if
it would make the cover substantially different from what the insured reasonably
expected. 15
5.53 We think that in practice, most insureds would be happy to pay a small additional
premium for the added protection of knowing that so long as they act reasonably
their insurance claims would be paid. They may agree to a cheaper but less
reliable policy if they wish, but this must be done explicitly.
5.54 The change would bring the law of misrepresentation into line with the law on
non-disclosure where, as we have seen, the insured is only under a duty to
disclose what it knew or ought to have known. Suppose that an employer is
genuinely and reasonably unaware that a junior employee has a criminal
conviction. The employer is not under a duty to volunteer information about the
criminal conviction. However, if the insurer asks if any employees have criminal
convictions, and the insured says they do not, the insurer may avoid the policy,
however reasonable the mistake. In our view, if the parties wish to make the
insurance dependent on particular circumstances about which the proposer was
reasonably ignorant, this should be done explicitly within the contract. 16 It should
not be an unexpected result of the general law.
Comparison with general contract law
5.55 It has been put to us that insurers should at least have the same rights as other
contracting parties. Under general principles of contract law, a contracting party
has the right to rescind a contract that they have entered on the basis of an
innocent misrepresentation. Therefore, it is argued, the same should apply to
insurance contracts.
5.56 English law already recognises that where the effect of rescission would be
disproportionately harsh on the misrepresentor, there should be a discretion to
prevent rescission. Section 2(2) of the Misrepresentation Act 1967 states that for
non-fraudulent misrepresentations, the court or arbitrator may declare the
contract subsisting and award damages in lieu of rescission, if it is of the opinion
that
it would be equitable to do so, having regard to the nature of the
misrepresentation and the loss that would be caused by it if the contract
were upheld, as well as to the loss that rescission would cause to the
other party.
15 See paras 5.146 and 5.147 below.
16 As we explain later, it may be done through a clause establishing different remedies for
misrepresentation or through a warrant of past or current fact.
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