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

5.88 In Part 4 we argued that avoidance in every case of negligence overcompensates
the insurer for the loss it has suffered. It entitles insurers to refuse
all claims under the contract, not just those additional claims that it would not
have accepted had it known the truth. The insurer may simply have imposed an
exception or charged a small additional premium, yet it is able to refuse claims
that were within the contemplation of both parties at the time the contract was
entered. We thought that such a measure of over-compensation is only
appropriate where an insured has behaved dishonestly. Where the insured has
behaved negligently, the law should ask what the insurer would have done had it
known the full facts.
5.89 Many people accepted the logic behind this proposal. However, respondents put
forward three main arguments against changing the remedies for negligent
conduct in business insurance:
(1) It would be difficult to prove that an insured acted dishonestly.
(2) It would be difficult to show what an insurer would have done if it had
known the true position; our proposals would lead to both insurers and
insureds spending large sums on expert witnesses, who simply
contradicted each other.
(3) There should be strong incentives to encourage insureds to act carefully.
5.90 We look at each of these arguments in turn, starting with what we mean by acting
“deliberately or recklessly”, without the required degree of honesty, and how this
might be proved.
Acting without the required degree of honesty
5.91 We think that there is no case for restricting the insurer’s right to avoid the policy
(and therefore to refuse to pay any claim) where a business insured was not
acting honestly when it failed to provide information or gave inaccurate
information. As in consumer insurance, by acting without honesty we mean acting
deliberately or recklessly, as in the definition of fraud at common law.
Defining “deliberate or reckless” conduct
5.92 In Part 4, we stated that a misrepresentation should be taken to be deliberate or
reckless where the proposer made it both
(1) knowing it to be untrue (or being reckless as to whether it was true or
not); and
(2) knowing it to be relevant to the insurer (or being reckless as to whether it
was relevant or not).
5.93 We explained that it would not be necessary to show that the insured intended to
cause a loss, or otherwise acted in a way that would amount to criminal or near
criminal behaviour.
5.94 We think the same rule should apply in the business context.
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