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

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Section 6 Case Study - Critical Illness Cover 6.2.9 Behavioural Change As mentioned in section 5 of this report, the change in the likely levels of profitability – especially for Type 2 firms – may result in a change in commercial behaviour. It is likely that all Type 2 firms will see some erosion of profits and this may result in some of these firms exiting the market place altogether. In addition, it is also probable that some Type 2 firms will react to the proposals by offering reduced insurance services – for example, the policies sold will cover fewer identified illnesses. However, it is also the case that some organisations will adapt and change into Type 1 firms. It is impossible to predict the extent of these possible changes in the insurance market so we have not attempted to quantify the effect as part of this analysis. The consultation exercise may be able to provide us with some information on the likely behavioural changes of different types of firm resulting from these proposals. 6.2.10 Dispute Resolution Following the introduction of these proposals, there is likely to be a reduction in the number of complaints being filed with the Financial Ombudsman Service. This might be expected to result from the clarity and transparency of the new legislation and the reduced need to resort to the Ombudsman. CRA (2006) estimated the cost to the Ombudsman of administration of a complaint is approximately £360 per claim. This saving is from the perspective of the FOS. We have also assumed that bringing or defending a complaint brought to the FOS is costly for all the parties involved. We have assumed that the costs associated with settling a complaint in front of the FOS amounts to 5% of the average CIC payout (£73,000), which corresponds to £3,650. This brings the total saving per case avoided to £4,010. Assuming that there are approximately 390 complaints in the critical insurance market relating to non-disclosure or misrepresentation per annum 40 reaching the Financial Ombudsman and there is a 25% reduction in the number of complaints, this corresponds to a cost saving of £390,975 per annum. Views on this assumption and estimate would be welcomed. 40 See Table 10 London Economics June 2007 53
Section 6 Case Study - Critical Illness Cover 6.2.11 Benefits of Regulation Some of this additional cost may be passed onto consumers without any corresponding reduction in the number of policies purchased. In fact, the recent CRA (2006) work assessed the willingness of consumer to pay for additional regulation and found that more than two-thirds of consumers were prepared to pay £5.00 per annum for additional regulation in the insurance market. The increase in premiums calculated in this section corresponds to £3.04 per policy for customers of Type 1 firms and over £200 per policy per annum for Type 2 consumers 41. Therefore, we have assumed that the increased policy cost results in a benefit to society from enhanced regulation and confidence in the insurance market. This benefit equates to £0.987 million 42 for customers of Type 1 firms (zero for customers of Type2 firms). This total benefit equals £0.987 million per annum. 6.3 Summary Estimates Bringing together all these estimates of the costs and benefits to firms, consumers and society, for the particular costs and benefits that we are able to estimate, the aggregate impact on Type 1 firms is estimated to be between £0.0 million and £0.241 million per annum better off, while Type 2 firms are estimated to be between £0.0 million and £0.016 million per annum better off depending on the extent of recurrent administration costs (for those firms remaining in business). These calculations assume that both Type 1 and Type 2 firms are able to offset the increased costs of claims and administration against an increased premium charged to customers. In practice, we have estimated that Type 1 firms will need to increase their premiums by £3.04 per policy. Type 2 firms, however, would need to increase their premiums by £212.03 per policy. It is unlikely that any customer would pay this increase and therefore, it is likely that Type 2 firms will go out of business or else turn into Type 1 firms. Given the fact that Type 1 firms represent approximately 93% of the market, the impact in individual firms is likely to be relatively small. There is likely to be a one-off cost associated with administration and familiarisation with the proposed legal framework. These have been estimated to be £2.329 million for Type 1 firms and £0.416 million for Type 2 firms. 41 This estimate includes the greater likelihood of claims being paid and recurrent administration fees 42 For Type 1 firms, this is calculated as follows. The increase in the average cost of the policy for Type 1 firms stands at 2.54. From CRA research, we have assumed that 68% of individuals would be prepared to pay up to £5.00 per annum for improved regulation and transparency. We therefore apportion all of the increase in premium as a benefit of regulation for 68% of consumers of Type 1 firms. In summary 3.04*(0.68)* 476,145=£987,635. London Economics June 2007 54
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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
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10.19 We think this is a less attra
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10.25 Insurers may find it more dif
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Completion of proposal forms: the N
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Marine Insurance Act 1906, section
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10.56 The great majority of busines
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10.70 We welcome views on whether p
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Cases brought to the Financial Ombu
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11.18 When we commissioned this mod
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The overall effect 11.27 The model
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11.39 Unlike our other proposals, t
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12.9 Do consultees agree that the d
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12.22 We provisionally reject the p
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Contracting out of the default regi
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Consumer insurance: “joint lives,
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12.68 If the voyage conditions are
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ASSESSING THE COSTS AND BENEFITS OF
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THE STATEMENTS OF PRACTICE 1977 A.4
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Voluntary measures unsatisfactory A
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In such circumstances, it was also
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A.39 In 1984 the DTI put forward a
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GENERAL INSURANCE STANDARDS COUNCIL
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A.63 This report is of particular i
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In order to allow flexibility and t
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A proposed model for assessing the
Page 315 and 316: Tables & Figures Page Table 1: Illu
Page 317 and 318: Section 1 Introduction and Terms of
Page 319 and 320: Section 2 What are the primary chan
Page 321 and 322: Section 3 Economic incentives in in
Page 329 and 330: Section 4 Baseline analysis of insu
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Page 353 and 354: Section 6 Case Study - Critical Ill
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Page 371 and 372: Annex 1 References Cockburn, B. (20
Page 373 and 374: APPENDIX C THE FOS APPROACH TO ISSU
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Page 397 and 398: The overall success rate C.107 The
Page 399 and 400: Institute of Actuaries Healthcare C
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