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

Controlling the use of standard terms to defeat reasonable expectations
5.133 As we explained earlier, problems arise when businesses that are not insurance
experts contract on an insurer’s standard terms. They may fail to understand the
terms and their implications; and even if they do understand them, they may lack
the ability to alter them. These controls would not apply to the generality of
contracts negotiated in the Lloyd’s market, where a broker usually puts forward
terms on behalf of the insured. In those circumstances, it would be up to the
broker to negotiate terms that best reflect its client’s interests. However, they
would apply where a business buys an off-the-shelf product, on terms which the
insurer has already devised.
5.134 Here we propose controls on terms by which an insurer attempts to alter the
default regime in its favour. In Part 8 we propose controls on other contractual
terms which defeat an insured’s reasonable expectations. The proposal we are
making here is more limited. It only applies to terms that give insurers greater
rights to refuse claims on the basis of the insured’s failure to provide accurate
pre-contract information than the default regime would allow. 29
5.135 The controls would not try to address the case in which the proposer understands
the term but lacks the bargaining power to obtain a more favourable term. It
would address only the question of what the proposer reasonably expected. 30
5.136 There would be three limbs to the test:
(1) Did the insured contract on the insurer’s written standard terms of
business?
(2) Does one of the standard terms purport to give the insurer greater rights
than the default regime to refuse claims on the basis of the insured’s
failure to provide accurate pre-contract information?
(3) If so, does the term defeat the insured’s reasonable expectations?
“Written standard terms of business”
5.137 We have borrowed the concept of “written standard terms of business” from the
Unfair Contract Terms Act 1977 (UCTA). We discuss the Act in Part 8, and set
out sections 3 and 17. 31 These provisions apply not only to consumers but also
where one party contracts on the other’s “written standard terms of business”.
29
In some ways the provision is similar to section 3 of the Misrepresentation Act 1967, which
states that
If a contract contains a term which would exclude or restrict--
(a) any liability to which a party to a contract may be subject by reason of any
misrepresentation made by him before the contract was made; or
(b) any remedy available to another party to the contract by reason of such a
misrepresentation,
that term shall be of no effect except in so far as it satisfies the requirement of
reasonableness.
However, s 3 applies to negotiated terms, which our proposal does not.
30
See para 5.145 below.
31 See paras 8.59 and 8.60.
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