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

“Fairness” and reasonable expectations
1.40 It has often been said that the law is “unfair”. The 1980 Law Commission Report
stated that aspects of the 1906 Act were “unjust”, 23 while the 1997 NCC Report
said that large parts of that law were “heavily biased against the interests of
consumers”. 24 We think it is important to identify why the results reached by the
1906 Act are “unfair”. The answer is that they often defeat policyholders’
reasonable expectations.
1.41 Insurance is intended to be an effective risk-transfer mechanism, bringing peace
of mind to the purchaser. The insured exchanges the risk of a loss of an unknown
amount for the payment of a known premium. This process performs a valuable
function in enabling consumers and businesses to plan their financial affairs
prudently. If the insurer avoids a policy, the transfer of risk fails and the peace of
mind has proved to be illusory. Where the insured had a legitimate and
reasonable expectation of cover, that expectation should be respected. If not,
confidence in the market will be undermined.
Reasonable expectations in the consumer market
1.42 In the consumer market, it has long been accepted that the strict letter of the law
no longer corresponds to the expectations of the market. In particular, consumers
expect that if they act honestly, carefully and reasonably in filling in application
forms, they will obtain the cover they are paying for. This is clearly reflected in the
Statements of Practice, the FSA Rules and the FOS practice.
1.43 For example, under the Association of British Insurers’ Statement of General
Insurance Practice 1986, insurers undertook not to repudiate liability on grounds
of non-disclosure of a material fact which a policyholder could not reasonably be
expected to have disclosed. 25 This has now been incorporated into FSA Rules. 26
To the extent that the law still permits an insurer to avoid on this ground, it fails to
match good market practice or to meet the insured’s reasonable expectations.
Reasonable expectations in business insurance
1.44 The law also fails to match accepted standards in the business market. For
example, we were told that good market practice is to avoid a policy for
misrepresentation only where there has been some element of dishonesty in the
proposal. Yet the law allows insurers to avoid for mistakes that were made
honestly and reasonably.
1.45 It may be argued that business customers should adjust their expectations to
correspond with the law. However, many business insureds are not experts in
insurance. They do not understand the law or the effect of the policy offered. The
current rules on non-disclosure, misrepresentation and warranties bear
particularly harshly on them. As the Law Commission said in 1980:
23
Insurance Law Non-Disclosure and Breach of Warranty (1980) Law Com No 104, para
6.9.
24 See Appendix A para A.44 below.
25 ABI Statement of General Insurance Practice 1986, “claims” para b(i).
26
ICOB Rule 7.3.6 and COB Rule 8A.2.6. The rules are discussed at para 4.101 below.
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