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

5.57 Insurance law is currently harsher on the misrepresentor than general contract
law. There is authority that section 2(2) should not be applied to insurance
contracts, because it is thought that the risk of avoidance exerts a discipline on
the market. 17 This may be true in cases of negligence, but we cannot see that
such discipline is needed when the insured has taken reasonable care. But,
again because of the draconian effect of avoidance in insurance, 18 and because
of the need for certainty, we would go further than leaving the right to rescind to
the discretion of the court. We believe that when there has been no negligence in
making a misrepresentation that induced a policy of insurance, the insurer should
have no right to refuse to pay the claim or avoid the policy unless they have
reserved that right in the policy.
5.58 We provisionally propose that if a business insured has made a
misrepresentation but the proposer honestly and reasonably believed what
it said to be true, the insurer should not be able to refuse to pay any claim
or to avoid the policy, unless the parties have agreed otherwise.
The burden of proof
5.59 We have already considered where the burden of proof should lie. We concluded
that the burden of proof should be on the same party as in cases of nondisclosure,
and that it should be on the insurer. This will be different to the rule in
contract law generally, but we think the difference is justified by the particular
nature of insurance contracts.
5.60 We provisionally propose that the burden of showing that the insured did
not have reasonable grounds for believing that what it said was true should
be on the insurer.
Materiality
5.61 We explained earlier that an insured who fails to disclose a fact or who makes a
misrepresentation may act honestly and reasonably in two ways. First, they may
reasonably not know the fact or may have reasonable grounds for believing that
what they said was true. That is the case we have just considered. Alternatively,
a party may know a fact but may decide not to disclose it because they think that
it is not something that the insurer would be concerned with. The same issue can
arise in cases of a positive statement which is incorrect. The proposer may know
that what they are saying is not literally true, but they may honestly and
reasonably think that the difference between what they are saying and the strict
truth is of no concern to the insurer. In both cases the issue is part of whether or
not the fact is “material”.
5.62 In Issues Paper 1, we stated that in order for an insurer to be entitled to a remedy
for non-disclosure, it would need to meet a two-part test. Broadly, we said that an
insurer would need to show:
(1) “inducement”, in that had it been aware of the true facts it would not have
entered into the contract on the same terms; and
17 See para 2.14 above.
18 See para 5.47 above.
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