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

10.19 We think this is a less attractive approach for three reasons. First, we share the
FSA’s hesitations about the effectiveness of warning notices. The more warnings
that are required, the less effective each becomes. The Davidson Review has
argued strongly that the disclosure obligations on intermediaries should be
reduced, not extended. 2 Secondly, we think that having to give customers a
warning of this kind would hurt the reputation of intermediaries. There is a risk
that consumers would infer that intermediaries are less than competent. Thirdly,
the obligations of the insurer would depend on what was or was not done by the
intermediary in the particular case. The insurer may be liable for an
intermediary’s actions without realising that it would be.
Market discipline
10.20 A final justification for imposing the risk of mistakes by the intermediary on the
insurer is that this is more likely than the current law to provide proper market
discipline. Put bluntly, intermediaries should be strongly encouraged not to make
mistakes, and those who regularly do so should not remain in business.
However, individual consumer insureds will deal with intermediaries only rarely,
and are in a poor position to influence or monitor the intermediary’s business
practices. Insurers, on the other hand, have many opportunities to monitor and
influence intermediaries. The intermediary is, after all, remunerated by
commission from the insurer. In 1981, insurers recognised this by voluntarily
agreeing to use their best endeavours to ensure that intermediaries complied with
the provisions of a code of practice. 3
PERVERSE INCENTIVES
10.21 A problem with the current law is that it may not do enough to encourage insurers
to control the actions of those selling its products.
10.22 Under the current law, where an intermediary is taken to act for the insured, the
intermediary’s fault is imputed to the insured. Where insurance is sold through a
fraudulent intermediary, the insurer may therefore avoid the policy. This means
that the insurer is insulated from the economic effects of the intermediary’s
actions. In the box below, we use hypothetical figures to illustrate this.
2 Davidson Review on the Implementation of EU Legislation, Final Report, November 2006,
at http://www.cabinetoffice.gov.uk/regulation/reviewing_regulation/davidson_review.
3 See ABI General Insurance Business Code of Practice, withdrawn January 2005.
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