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

Section 2 What are the primary changes to be introduced?
2.2 The Law Commission’s Proposed Reforms
The Law Commission is proposing three main changes.
First, it is proposing that the law should be reformed to follow the FOS
guidance. This would make it easier for insurers to know what the rules were,
and would improve compliance with the FOS requirements. This will mean
in effect that, as with the FOS rules, the consumer’s duty to volunteer
information would be abolished. Insurers should ask questions about any
matter that is material to them. Where an inaccurate answer is given to a
question, the remedy available to the insurer will depend on to what extent
the consumer was at fault in giving that answer.
Secondly, it is proposing to clarify aspects of the FOS definitions that
presently create confusion. In particular, the FOS’s dividing line between
“reckless” and “inadvertent” misrepresentations is unclear. The Law
Commission definitions, by contrast, clearly state that recklessness should be
reserved for misrepresentations that are essentially dishonest. Careless
misrepresentations would be termed “negligent” and treated in the same way
as the FOS currently treats “inadvertent” misrepresentations (i.e. a
proportionate remedy is applied). This means that it is possible that a few
cases which are presently considered “reckless” by the FOS may in future be
classified as “negligent”: the insurer would not necessarily be able to avoid all
claims under the policy but may be required to apply an exclusion or make a
proportional payment. The main effects would therefore be:
• Greater clarity;
• Greater compliance with FOS guidance;
• A few cases that are presently classified by the FOS as “reckless”
misrepresentations may in future be classified as “negligent”
misrepresentations and result in proportionate payment.
Thirdly, it asks whether, where a misrepresentation is deliberate or reckless,
the insurer should be entitled to refuse to pay the claim and retain any
premiums that have been paid to it under the policy. The FOS states that
where an insured acts fraudulently the insurer may retain the premiums.
However the Law Commission found that insurers tended to return
premiums to consumers when they refused to pay the claim for deliberate
and reckless misrepresentation. If the Law Commission receives a positive
response to its question about whether premiums should be retained and this
becomes law, it may have an economic effect.
London Economics
June 2007 7