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

Section 6 Case Study - Critical Illness Cover
This implies that for Type 1 firms, in addition to the 13,410 claims that are
currently paid, an additional 57 will be partially paid in future (we have
assumed a 50% proportionate remedy in the absence of other data). For Type
2 firms, an additional 98 will now be paid in full with a further 17 partially
paid (50% proportion).
6.2.2 Primary impact on Firms
There is clearly a differential effect depending on the type of firm involved.
For Type 1 firms, there is little effect given the fact that we have assumed that
they already generally mimic the decisions of the FOS. Overall, we estimate
that that the number of proportionate claims paid will increase by 57 – or
equivalent to approximately 29 ‘full’ claims. Prior to the proposed reforms,
Type 1 firms paid out 13,410 claims. This might be expected to increase by
0.22% following the introduction of the reforms. Based on an average payout
of £73,000, the total increase in the cost of claims is estimated to be £2.08
million 28.
For Type 2 firms, these proposals would be expected to have a significant
effect given the fact that we have assumed that these firms currently ignore
the decisions of the FOS. Overall, we estimate that that the number of
proportionate claims paid will increase by 17. In addition to this, Type 2 firms
are also estimated to pay an extra 98 full claims that they currently avoid.
Prior to the proposed reforms, Type 2 firms paid out 640 claims. This might
be expected to increase by 16.72% (to 747 claims) following the introduction
of the reforms. Based on an average full payout of £73,000, the total increase
in the cost of claims is estimated to be more than £7.77 million 29.
6.2.3 Retention of Premiums
The FOS states that where an insured acts fraudulently the premium may be
retained by the firm. In practice this does not appear to happen and most
firms do not appear to retain premiums in the case of deliberate or reckless
misrepresentation (although we would be grateful for information from
consultees on this point). The Law Commission asks whether insurance
companies should be permitted to retain the premiums paid by the insured in
the case of deliberate and reckless misrepresentation. Given that this does not
appear to be the practice at the moment, this will have an economic impact on
firms.
28 This is computed as follows: 57*(£36,500)= £2,080,500
29 This is computed as follows: 98*(£73,000)+17*(£36,500)=£7,774,500
London Economics
June 2007 47