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

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Section 2 What are the primary changes to be introduced? 2 What are the primary changes to be introduced? In order to demonstrate our proposed model we attempt to illustrate how it assesses the Law Commission’s proposed reforms in one area, namely its proposals to reform the law relating to pre-contractual information given by the consumer to the insurer. We do not demonstrate the model using the effect of the reforms proposed for the business or commercial insurance markets or those relating to warranties of future conduct. We provide a summary below on what the Law Commission’s proposed reforms are to pre-contractual information provided by the consumer. We then demonstrate our model and illustrate where we will need further information from consultees in order to present a more accurate assessment of the effects of reform. 2.1 The current law and the approach taken by the Financial Ombudsman Service At present, there is a wide divergence between the strict law and the guidance set out by the Financial Ombudsman Service (FOS). Consumers have a right to take a case to the FOS if their claim is turned down by their insurer. The FOS will examine the case and has the power to impose a settlement of an amount up to £100,000 on the insurer if it decides that the insurer behaved wrongly in turning down the claim. We shall explain both the strict law and the FOS guidance below. The strict law gives insurers the right to avoid 2 policies where the policyholder has made any inaccurate statement of fact, even if the statement was made honestly and reasonably. Insurers may also avoid a policy where the policyholder has not volunteered “material” information even if the consumer was not asked a question about that information. Material information is said to be information that would have influenced the judgment of a prudent insurer. By contrast, the FOS does not require consumers to volunteer information, but only to answer the questions asked. Where the consumer has given an inaccurate answer that induced the insurer to enter the contract, the ombudsman will ask whether the misrepresentation was: • Innocent; • Inadvertent; or • Deliberate or reckless. 2 Avoiding a policy means that the contract is treated as if it never existed and the insurer can refuse to pay the consumer’s claim but must return any premiums paid to it under that contract. London Economics June 2007 5
Section 2 What are the primary changes to be introduced? Where the misrepresentation is innocent, the FOS will require the insurer to pay the claim. Where it is deliberate or reckless, the insurer is entitled to refuse to pay the claim. For inadvertent misrepresentations, the FOS asks what the insurer would have done had it known the truth and will apply a compensatory remedy. In particular: • Where an insurer would have excluded a particular type of claim the insurer should not be obliged to pay claims that would fall within the exclusion; • Where an insurer would have imposed a warranty or excess, the policy would be rewritten to include the warranty or excess; • Where an insurer would have declined the risk altogether, the policy may be avoided, the premiums returned and the claim refused; • Where an insurer would have charged more, the claim should be reduced proportionately to the under-payment of premium. London Economics June 2007 6
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The Law Commission Consultation Pap
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THE LAW COMMISSION THE SCOTTISH LAW
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v Paragraph Page Innocent misrepres
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vii Paragraph Page Marine Insurance
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OUTLINE 1.1 This Consultation Paper
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• At present, consumers have a du
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• Any warranty should be set out
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PART 1 INTRODUCTION OUTLINE OF THE
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1.11 The 1906 Act therefore imposes
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(1) The insurer may use warranties
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1.17 When in 1980 the English Law C
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1.28 For most consumers with disput
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“Fairness” and reasonable expec
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1.50 The parties should be free to
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“Moral hazard” and the need for
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1.71 We think that consumers would
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1.80 We ask what the appropriate re
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(2) Appendix B is a report commissi
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Although the issues arise under a p
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Thus if, when a claim is made, the
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2.21 In both jurisdictions the vict
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(2) Before an insurer may avoid a c
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Subject to the provisions of this s
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Despite some contrary suggestions,
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Held covered in case of any breach
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(2) The warranty is relevant to onl
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2.61 Classification of the term is
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2.68 Such clauses elevate the answe
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These are often referred to as “c
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2.82 We accept that an exception to
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(d) readily available to any person
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2.101 If the term were not sufficie
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2.111 The law on warranties is simi
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(1) Each proposal form was required
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3.14 TCF is a valuable initiative w
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THE FINANCIAL OMBUDSMAN SERVICE 3.2
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Research project 3.32 When we start
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Case study: clear questions should
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3.43 These examples look only at th
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Warranties of fact 3.50 We did not
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(9) The FOS has more experience tha
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3.63 There might of course be some
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The risk of legal challenge 3.72 We
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(3) BOTH HONESTLY AND CAREFULLY (OR
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4.10 Some consultees have asked how
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4.18 The FOS’s requirement that t
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General questions 4.21 As we have s
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4.32 We provisionally propose that
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4.43 We would also point out that a
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Criminal fraud 4.55 First, some ins
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4.62 We stress this point, because
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4.70 The issue is further confused
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Relevance 4.80 Secondly, our defini
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4.92 However, we are not sure that
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Different ways in which policyholde
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Judging what is “reasonable” fo
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4.121 We ask whether the legislatio
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...the reasonable expectation of th
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4.142 The proposer should take care
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4.154 Few of the legal systems that
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4.162 We accept the first argument
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No reinsurance 4.173 It may occasio
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Effect on future cover 4.183 The fo
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Reactions 4.195 This question excit
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4.206 In Part 3 we identified one p
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Our proposals 4.228 Therefore we pr
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5.5 We have therefore sought soluti
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(2) Similar protections would apply
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(1) The duty of disclosure has beco
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Thus if a business insured ought to
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5.46 On the one hand, it seems righ
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5.57 Insurance law is currently har
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5.67 This is the same rule that we
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5.76 We were told, for example, abo
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5.86 We have already set out our pr
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Proving that an action was delibera
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Cancelling for the future 5.105 We
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(1) The law could allow statements
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5.124 Is one approach better than t
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Controlling the use of standard ter
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However, the provenance of the term
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Reinsurance 5.153 Our starting poin
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5.163 It is important to bear in mi
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5.170 The same issues arise here. A
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PART 6 GROUP INSURANCE, CO-INSURANC
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6.9 There may, however, be cases wh
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6.18 We were told that whatever the
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6.31 There is one question on which
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(1) Where a member has made a delib
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The FOS approach 6.48 In our survey
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6.59 In Part 4 we provisionally pro
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6.73 In business contracts, we prop
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(3) The policy may contain exceptio
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Statements of Insurance Practice 7.
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TREATING CUSTOMERS FAIRLY 7.22 In P
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7.31 Case 14 concerned a critical i
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7.40 Insurers have told us that the
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7.50 Large businesses are more able
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Civil law jurisdictions 7.61 The no
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PART 8 WARRANTIES AS TO THE FUTURE
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8.24 Although our general policy is
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8.33 It may be helpful to illustrat
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8.41 We have considered whether the
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8.51 For business insurance it is a
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8.62 These provisions require the c
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(1) The protection only applies to
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…subject to any express provision
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8.92 This means that neither the in
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Waiver and affirmation 8.101 The ch
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8.107 Scots law has not developed a
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The implied marine warranties 8.116
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Implied voyage conditions 8.127 The
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PART 9 PRE-CONTRACT INFORMATION AND
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9.6 The issue is far from new. Repo
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THE CURRENT LAW Introduction 9.16 R
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The broker as agent for the insured
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There must be every day thousands o
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(1) on the basis of a fair analysis
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9.47 The problem is particularly ac
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Transcribing information to screen
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9.61 However, the case law suggests
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However, it is not obvious that thi
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Section 19(b) 9.77 We have not rece
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It seems to me, both from a reading
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CONSUMERS - THE CURRENT POSITION In
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9.101 For these types of activity,
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(3) whether the firm has or will pr
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9.118 This was the view taken by a
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Unfortunately, the firm has contemp
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PART 10 PRE-CONTRACT INFORMATION AN
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10.9 Some intermediaries fall outsi
Page 267 and 268: 10.19 We think this is a less attra
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Page 273 and 274: Marine Insurance Act 1906, section
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Page 279 and 280: Cases brought to the Financial Ombu
Page 281 and 282: 11.18 When we commissioned this mod
Page 283 and 284: The overall effect 11.27 The model
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Page 287 and 288: 12.9 Do consultees agree that the d
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Page 291 and 292: Contracting out of the default regi
Page 293 and 294: Consumer insurance: “joint lives,
Page 295 and 296: 12.68 If the voyage conditions are
Page 297 and 298: ASSESSING THE COSTS AND BENEFITS OF
Page 299 and 300: THE STATEMENTS OF PRACTICE 1977 A.4
Page 301 and 302: Voluntary measures unsatisfactory A
Page 303 and 304: In such circumstances, it was also
Page 305 and 306: A.39 In 1984 the DTI put forward a
Page 307 and 308: GENERAL INSURANCE STANDARDS COUNCIL
Page 309 and 310: A.63 This report is of particular i
Page 311 and 312: In order to allow flexibility and t
Page 313 and 314: A proposed model for assessing the
Page 315 and 316: Tables & Figures Page Table 1: Illu
Page 317: Section 1 Introduction and Terms of
Page 321 and 322: Section 3 Economic incentives in in
Page 329 and 330: Section 4 Baseline analysis of insu
Page 345 and 346: Section 5 Identification of the pot
Page 353 and 354: Section 6 Case Study - Critical Ill
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Section 6 Case Study - Critical Ill
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Annex 1 References Cockburn, B. (20
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APPENDIX C THE FOS APPROACH TO ISSU
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Table 2: Consumer cases: main infor
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Table 4: Consumer cases: time of no
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C.27 The FOS has explained that in
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Have you any physical defect or inf
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The FOS approach to unclear questio
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Deliberate Customers deliberately m
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C.65 A further complication of the
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I cannot accept that the complainan
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(2) W failed to disclose an eating
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C.89 One problem with relying on om
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When does the FOS apply the consume
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The overall success rate C.107 The
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Institute of Actuaries Healthcare C
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