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

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C.56 At this stage, we are only concerned with the first issue: can the insurer show they would (probably) have done something differently? We return to the second issue below. C.57 In practice, the first issue rarely causes disputes. It is a fairly easy test for insurers to meet. In most cases, the insurer’s underwriters sent a letter stating that had they known the information, they would have acted differently. The FOS told us that ombudsmen then exercise their own judgement on whether the insurer has in fact been induced: they do not rely on complainants to undertake “the burden of challenging insurance experts on insurance practice”. C.58 There were a few cases in which the ombudsman did not accept that the insurer would have written the policy on different terms or not at all if they had known the information. For example: (1) In Case 102, the ombudsman found that the policyholders had acted recklessly in not telling the insurer that their son had been convicted of theft. They had not read page 2 of the renewal notice, which asked for such information. However, there were particular circumstances surrounding the conviction, and the policyholders had been insured with the insurer for more than 14 years, during which they had an excellent claims record. The ombudsman said the insurer had not discharged their burden of proof to show that they would not have entered into the contract on the same terms. (2) In Case 129, the applicant failed to mention that she had been referred to a specialist for a heart murmur, and had undergone an ECG test. She later developed cancer. The tests revealed no abnormality of the heart. On this basis, the ombudsman said that the information would not have affected the underwriter’s decision, and the insurer would still have issued the same policy on the same terms. C.59 However, most cases focused on the customer’s state of mind (discussed below) rather than the insurer’s. If a complainant were to challenge an insurer’s claim, they would need expert evidence. The FOS does not ask complainants to provide such evidence, and we did not find any cases in which the complainant had done so. This is hardly surprising, given the low levels of legal representation. The FOS regards legal representation as unnecessary and most policyholders were unrepresented. Among the 190 decisions, we found evidence that the applicant was legally represented in only 21 cases (11%). 8 STAGE 3: EVALUATING THE CUSTOMER’S STATE OF MIND The stated approach C.60 The FOS state that they categorise misrepresentations in four ways: deliberate, reckless, inadvertent and innocent. They define these categories as follows: 8 In three cases the applicant appeared to be represented by a (paid) non-lawyer such as a broker, and in one case by an unpaid adviser. 370
Deliberate Customers deliberately mislead the insurer if they dishonestly provide information they know to be untrue or incomplete. If the dishonesty is intended to deceive the insurer into giving them an advantage to which they are not entitled, then this is also a fraud and – strictly speaking – the insurance premium does not have to be returned. Reckless Customers also breach their duty of good faith if they mislead the insurer by recklessly giving answers without caring whether those answers are true or false. An example of recklessness might be where a customer signs a blank proposal form and leaves it to be filled out by someone else. The customer has signed a declaration that ‘the above answers are true to the best of my knowledge and belief’, but does not know what those answers will be. Inadvertent A customer may also have acted in good faith if their non-disclosure is made inadvertently. These are the most difficult cases to determine and involve distinguishing between behaviour that is merely careless and that which amounts to recklessness. Both are forms of negligence. Innocent Customers act in good faith if their non-disclosure is made innocently. This may happen because the question is unclear or ambiguous, or because the relevant information is not something that they should reasonably know. In these cases, the insurer will not be able to ‘avoid’ the contract and (subject to the policy terms and conditions) should pay the claim in full. 9 C.61 The FOS explain that deliberate misrepresentations are not necessarily fraudulent. Fraud involves a deception in which the policyholder attempts to gain a benefit to which they are not entitled. The applicant may deliberately withhold information because they are embarrassed about it, without thinking that it would have any affect on a claim. Thus a deliberate misrepresentation may be either fraudulent (when the insurer is entitled to keep the premium) or non-fraudulent, (when the premium must be returned). On this basis, it may be better to think of the FOS applying a five-fold classification: fraud, deliberate, reckless, inadvertent and innocent. 9 Ombudsman News 46. The FOS has now provided further guidance on these issues in Ombudsman News (April/May 2007) Issue 61. For discussion, see paras 4.72 to 4.74. 371
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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
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Tables & Figures Page Table 1: Illu
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Section 1 Introduction and Terms of
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Section 2 What are the primary chan
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Section 3 Economic incentives in in
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Section 4 Baseline analysis of insu
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Section 4 Baseline analysis of insu
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Page 373 and 374: APPENDIX C THE FOS APPROACH TO ISSU
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Page 399 and 400: Institute of Actuaries Healthcare C
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