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

11.18 When we commissioned this model from London Economics, we thought that it
was possible that Type 1 firms may be required to pay a few more proportional
settlements. As we explain in Part 4, our proposals clarify the dividing line
between “reckless” and “negligent” misrepresentations. By and large our
proposals follow the FOS written guidance, but it may be that the FOS allows
some cases of serious carelessness to be classified as “reckless”, which under
our proposals would be considered “negligent”. This means that in some cases
where Type 1 firms are currently avoiding the policy they will be required to apply
an exclusion or make a proportionate payment. 6
11.19 The most recent edition of Ombudsman News issued by the FOS, however,
suggests that there is little difference between our proposed definition of reckless
and negligent misrepresentations and the FOS practice. 7 It is possible that there
would be almost no cases where Type 1 firms were currently avoiding the policy
and would, as a result of our reforms, have to apply an exclusion or make a
proportionate payment.
11.20 However, this clarification arrived too late for us to alter our instructions to
London Economics. They have therefore estimated that the introduction of our
reforms to the definition of recklessness would lead to some additional costs for
Type 1 firms. They estimate these additional costs would translate into no more
than a 1-1.5% increase in premiums. 8 In return for this increase in premiums,
honest consumers will receive payments in some cases that would currently be
refused.
11.21 The effect on Type 2 firms would be more dramatic. The report assumes that
firms who currently ignore FOS guidance would find it much more difficult to
ignore clear legal rules set out in a new Insurance Contracts Act. London
Economics have calculated that these firms will need to increase their premiums
by 85 to 95%. If so, these firms would either have to rethink their business model
(and essentially become Type 1 firms) or go out of business.
6 For example, in a case where a consumer carelessly failed to mention back pain and later
developed unconnected breast cancer, the claims handler should ask what the firm would
have done if it had known about the back pain. If it would only have excluded back pain
from the policy, it should pay the cancer claim. If it would have charged double the
premium, it should pay half the claim.
7 Ombudsman News, (April/May 2007) Issue 61.
8 Appendix B, p 46 below.
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