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

PART 3
PRE-CONTRACT INFORMATION AND
CONSUMERS: ASSESSING THE CURRENT
POSITION
THE CURRENT LAW
3.1 Under current law, an insurer that has been given incorrect information by the
proposer has the right to avoid the contract for misrepresentation. 1 The insurer
needs to show that the information induced it to enter the contract and that it
would have influenced the judgement of a prudent insurer in assessing the risk.
Except where the incorrect statement was one of opinion rather than of fact, it
does not matter that the insured was honest, or even that they had reasonable
grounds for believing that what they said was correct.
3.2 The law also allows insurers to add to these remedies. If the insurer obtained a
warranty that the information was correct, it is discharged from liability even if the
information was not material and did not influence the insurer’s decision. An
insurer may do this either by adding a specific warranty to the contract, or by
using a “basis of the contract” clause on the proposal form. Again, honesty or
lack of negligence on the part of the proposer is irrelevant.
3.3 Even if the insurer has not sought information from the insured, the latter is
bound to disclose any material fact of which it is aware, or in the case of a
business that it ought to know in the ordinary course of business. If the insurer
would not have entered the policy on the same terms had it had the information, it
may avoid the policy.
3.4 We have seen that the strict legal rights of consumers have been supplemented
by three measures - the Statements of Practice issued by the Association of
British Insurers (ABI), regulation by the Financial Services Authority (FSA) and
the dispute resolution service of the Financial Ombudsman Service (FOS). Here
we examine these measures and ask if they are an adequate substitute for law
reform. Since the FSA Rules apply only to consumer insurance, and the FOS
scheme applies only to consumers and some small businesses, we consider
consumer insurance in this Part and Part 4. We then turn to business insurance
in Part 5.
THE ABI STATEMENTS OF PRACTICE
3.5 The Statement of General Insurance Practice (SGIP) and the Statement of Long-
Term Insurance Practice (SLIP) addressed the problem of non-disclosure in three
ways: 2
1 See Part 2, paras 2.12 to 2.33.
2 See para 1.20 above. The text of both SGIP and SLIP, and a more detailed description of
their requirements, can be found in Appendices B and C of our first Issues Paper, available
on our website. See
http://www.lawcom.gov.uk/docs/insurance_contact_law_issues_paper_1.pdf
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