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

3.14 TCF is a valuable initiative which is influencing attitudes within the insurance
industry. However it is not a substitute for clear legal rights.
The Rules
3.15 The more detailed rules are contained in the Insurance Conduct of Business
Sourcebook (ICOB) and the Conduct of Business Sourcebook (COB). The ICOB
rules require insurers to warn the insured that it has a duty of disclosure. 6 Rule
7.3.6 also restricts the insurer’s right to reject a claim on the grounds of
misrepresentation or non-disclosure. 7 It states:
An insurer must not:
(1) unreasonably reject a claim made by a customer;
(2) except where there is evidence of fraud, refuse to meet a
claim made by a retail customer on the grounds:
(a) of non-disclosure of a fact material to the risk that the
retail customer who took out the policy could not reasonably be
expected to have disclosed;
(b) of misrepresentation of a fact material to the risk,
unless the misrepresentation is negligent;…
COB 8A.2.6 is in similar terms. Neither places any restriction on an insurer’s right
to avoid a policy for an innocent misrepresentation where no claim has arisen.
3.16 Unlike the SGIP, the FSA Rules do not specifically outlaw the use of basis of the
contract clauses. As we see in Part 7, however, they do curb an insurer’s use of
warranties generally. For general insurance, an insurer may only rely on a breach
of warranty if it was drawn to the consumer’s attention before the conclusion of
the contract, and the circumstances of the claim are connected with the breach. 8
The ABI has told us that the fact that the FSA Rules do not cover basis of the
contract clauses explicitly does not mean that their use would be condoned. If an
insurer attempted to rely on a basis of the contract clause in a consumer contract,
it would breach Principle 6 that insurers should treat customers fairly.
3.17 It should be noted that where there are breaches of the FSA Rules there are two
potentially significant consequences under the Financial Services and Markets
Act 2000. First an affected policyholder may bring a claim against a regulated
firm for breach of statutory duty. 9 Secondly, the FSA may take disciplinary action
against the firm and has the power, for example, to impose a fine. 10
6 Insurance Conduct of Business, Rule 4.3.2(3).
7 At the time of going to press, the FSA is intending to consult on changes to these rules.
We understand that the FSA is proposing changes to the wording, but that these will not
affect the substance of this requirement.
8 Insurance Conduct of Business, Rule 7.3.6.
9 Financial Services and Markets Act 2000, s 150.
10 Financial Services and Markets Act 2000, s 66.
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