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

Statements of Insurance Practice
7.13 The 1986 Statement of Long-Term Insurance Practice (SLIP) 6 provides:
Except where fraud is involved, an insurer will not reject a claim or
invalidate a policy on grounds of breach of a warranty unless the
circumstances of the claim are connected with the breach … 7
7.14 As we explained in Part 1, the Law Commission’s 1980 report criticised voluntary
statements of this type. 8 Insurers are not legally bound to abide by the
statements, and the provision leaves the insurer as sole judge of whether “fraud
is involved”. We agree with the 1980 report: far from being an argument against
reform, the statements are “evidence that the law is unsatisfactory and needs to
be changed”.
Financial Services Authority Rules
WARRANTIES: REQUIRING A CAUSAL CONNECTION BETWEEN THE BREACH AND
THE CLAIM
7.15 Insurance Conduct of Business Rule 7.3.6 states that insurers may not:
except where there is evidence of fraud, refuse to meet a claim made
by a retail customer on the grounds:
(c) in the case of a general insurance contract, of breach of warranty
or condition, unless the circumstances of the claim are connected
with the breach. 9
7.16 Conduct of Business Rule 8A.2.6, which applies to long-term insurance, is in
similar terms, except that it only applies to breaches of warranty and not to
conditions. It goes on to state that the warranty must be “material to the risk” and
must be “drawn to the attention of the policyholder before the conclusion of the
contract”.
7.17 The FSA rules replicate two of the difficulties identified with the ABI Statements.
First they only cover retail (that is, consumer) insurance, while warranties bear
most heavily against small and medium businesses. Secondly, they continue to
permit insurers to repudiate claims where they suspect but cannot prove fraud:
although the insurer must show some evidence of fraud, it is not clear that it has
to be conclusive evidence. We explained in Part 1 why we think that it would be
wrong to continue to permit an insurer to refuse to pay a claim on an irrelevant
technicality when the real reason is they suspect fraud but cannot prove it.
6 The 1977 Statement of Long-Term Insurance Practice (SLIP) did not specifically refer to
warranties at all, and merely said that “an insurer would not unreasonably reject a claim”.
7 SLIP 1986, Clause 3(b). The SGIP (now withdrawn) contained a similar provision.
8 See para 1.20 above.
9 At the time of going to press, the FSA is intending to consult on changes to these rules.
We understand that the FSA is proposing changes to the wording, but that these will not
affect the substance of this requirement.
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