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

7.7 There is a further problem. The insured may simply not realise that the policy
imposes a warranty obligation on them. The same is true of exceptions and other
kinds of term that may be employed to produce similar effects. If the policy has
not been individually negotiated and the warranty or exception is one of many
standard terms, the insured may not know it is there until it is too late. It may be
argued that this is the insured’s fault for not reading the policy. Of course there is
truth in this, but the law has long recognised that parties often do not read
contract documents for understandable and excusable reasons. Insurance
policies are usually long and complicated. Although in recent years there have
been significant improvements in the clarity of policy documents, the average
consumer would probably not be able to understand many of the terms without a
good deal of trouble and a great deal of time. Many business insureds are in a
similar position: there just isn’t enough time.
7.8 As we see below, in consumer insurance there are controls to prevent insurers
from hiding important terms in the small print, most notably the Unfair Terms in
Consumer Contracts Regulations 1999 and FSA rules. However, there are no
similar protections for businesses. In other sectors, businesses can rely on the
protections against standard term contracts provided by sections 3 and 17 of the
Unfair Contract Terms Act 1977, but insurance contracts are excluded from much
of the 1977 Act.
Unfair Terms in Consumer Contracts Regulations 1999
7.9 The 1993 Directive and the Unfair Terms in Consumer Contracts Regulations
(UTCCR) 1999 protect consumer insureds against unfair terms. We explained
their effect in Part 2.
7.10 A consumer may be aware of the existence of a warranty but unaware of its
implications. For example, a consumer may realise that the insurer requires
certain locks, but not realise that a failure to install these locks discharges the
insurer from liability for flooding. We have argued that such a term is unlikely to
be considered a core term within the meaning of the regulations. This means that
a court may review whether the term is fair. We think a term may well be unfair if
it gives the insurer the right to treat itself as discharged for a breach that was
immaterial, or for a breach that was not causally connected to the loss that
occurred.
7.11 We have shown that the regulations can also be used to challenge exclusions
and descriptions of the risk if they were not in plain language and were not made
obvious to the policyholder. The regulations exempt from review terms that are
part of the “definition of the main subject matter” and are “in plain, intelligible
language”. However, we have argued that a term cannot be part of the main
subject matter of the contract if it undermines what the consumer reasonably
expected. In other words, the insurer should take reasonable steps to ensure the
consumer is aware of warranties, descriptions of the risk and exclusions. Simply
including the terms in the contract documents is not enough.
Consumer insurance: Statements of Practice, FSA rules and the FOS
7.12 For consumers the legal position has been modified in practice by the Statements
of Insurance Practice, the Financial Services Authority (FSA) Rules and the
Financial Ombudsman Service (FOS). The current position is as follows.
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