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

Applying a compensatory remedy in practice
5.100 Several insurance lawyers expressed concern about how the courts would
determine what an insurer would have done had it known the information. They
thought this would be a particular problem when the insurer would have charged
a higher premium, leading to a proportionate reduction of the claim. Unlike
consumer insurance, there are rarely rating tables to refer to. Instead it was
suggested that each side would bring experts to contradict what the other side
said:
Each side will have an expert each, which will say the opposite of the
other. It’s not as if they all have rating books and tariffs… In France, for
example, there are fixed tariffs.
What would actually happen at the box is that we would propose a
premium, and the broker would say, ‘Oh, that’s a bit steep. Charlie down
the road does it for half that.’ And they would end up with a number
without any science at all.
5.101 The problems are likely to be greater in relation to business insurance than they
would be for consumer insurance, but we do not see them as insuperable.
However unscientific the negotiations may be, they would be a more accurate
assessment of the loss involved than the current law, which permits avoidance
even though the insurer would have accepted the risk on only slightly different
terms. Of course the insurer may in fact agree to pay something, but the current
law allows unscrupulous insurers to wield a dominant weapon in negotiations.
Are strong incentives required to prevent negligent behaviour?
5.102 A more difficult question is whether in business insurance, where the average
insured is far more likely to be aware of what it should be doing, it is desirable to
create stronger incentives. This was the reason given for refusing to apply the
discretion to refuse rescission under the Misrepresentation Act 1967 section 2(2)
to contracts of insurance. If business insureds know that if they make a careless
mistake they will not recover anything under the policy, they have a stronger
incentive to be careful. Insureds may be willing to carry the small increase in
premiums necessary to cover the cost of innocent mistakes as one of the pooled
risks, but be unwilling to “pay for” any part of other insureds’ carelessness. A
business which knows that it is well-run and careful may wish to see this reflected
in a lower premium. We invite views on this issue.
Cases where another insurer would have accepted the risk
5.103 For consumers we also asked whether the courts should have an additional
discretion. We suggested this may apply where the insurer would have declined
the risk, but the policyholder’s fault is minor, and other insurers would have
accepted the risk at a higher premium. This may also apply where the
misrepresented fact is unrelated to the claim.
5.104 On balance, we think that such a discretion is more appropriate to consumers
than to businesses, but we would welcome advice on the issue.
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