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

Section 5 Identification of the potential impact of the reforms
Current approach of firms
to non disclosure (inputs)
Insurance companies that
replicate Financial
Ombudsman Decisions
(more reputable firms or
Type 1 firms)
Table 15: Possible economic impact of proposed reforms to non-disclosure and misrepresentation
Current Law and proposed changes (process) that applies to
both Type 1 and Type 2 firms
The strict legal rules state that an insurer can avoid the policy
(refuse to pay a claim) for all types of misrepresentation and for
non-disclosure.
The FOS does not allow firms to avoid the policy for nondisclosure
(that is, when a consumer does not volunteer
information, despite the fact that it has not been asked for it). It
takes the view that a firm should ask about information that is
material to it. Where an inaccurate answer is given to a
question, the FOS divides those misrepresentations into three
types:
Innocent
Inadvertent
Deliberate/ Reckless
Where a consumer makes an innocent misrepresentation, the
FOS will order the insurer to pay the claim. Where a consumer
makes a deliberate or reckless misrepresentation, the FOS will
allow the insurer not to pay the claim. Where a consumer makes
what it calls an inadvertent misrepresentation, the FOS applies a
proportionate remedy. The Law Commission proposes that the
law should be reformed to follow FOS guidance.
London Economics
June 2007 33
Impact on firms operating in
retail market (outputs)
1. Clearer rules, easier to
find and understand
2. Fewer cases being taken
to the FOS.
3. There may be a few more
cases where the consumer
has made a negligent
misrepresentation being
resolved using a
proportionate remedy
4. Less likely to be undercut
by Type 2 firms
5. Retention of premiums
paid that relate to
deliberate or reckless
misrepresentation
Economic costs and benefits
for firms operating in retail
market (outcomes)
1. Reduction in training costs
for claims handlers and
administration costs. The
FOS does not publish its
cases so many insurance
companies have to spend
much time trying to work
out what its rules are.
2. A few more negligent
claims cases
3. Marginal increase in
number of payouts
4. Marginal increase in
premiums (mitigated by
retention of some
premiums)
5.Possible increase in
demand for policies
(assuming cross price
elasticity with Type 2
firms is positive)