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

The FSA Rules are useful but unlikely to achieve full individual protection
3.18 The FSA Rules are an important step forward. They reinforce the principle
established by the Statements of Practice that insurers should not reject a
consumer claim for a misrepresentation, where the misrepresentation was both
honest and reasonable. Furthermore, as we explain in Part 7, the provisions on
warranties, when combined with the requirements of the Unfair Terms in
Consumer Contracts Regulations 1999, go a long way to protect insureds from
warranties and exceptions of which they are unaware. Unlike the Statements of
Practice, the rules are not voluntary. If an insurer systematically ignores them,
disciplinary action may be taken.
3.19 However, the FSA Rules are not an adequate cure for defects in the law. First, it
is not the task of the FSA to monitor individual cases. Relatively few consumers
will complain to the FSA about individual matters of misrepresentation or nondisclosure,
and serious disciplinary action is unlikely in what appear to be one-off
cases. In principle a breach of the FSA Rules may lead to the insurer being liable
for breach of statutory duty, 11 but we doubt the practical efficacy of this remedy
save when a very large sum is at stake. Those who can pursue the matter
through the FOS are best advised to do so; those who cannot may well drop the
matter.
3.20 Secondly, in some respects the FSA Rules do not go as far as the Statements of
Practice. They are also considerably less demanding than the FOS would be,
should the dispute reach it. For example, ICOB merely requires that the
consumer be warned about the duty to disclose. 12 As we shall see later, the FOS
disregards the duty of disclosure in the cases it considers: it takes the view that if
the insurer wants a piece of information, it should ask for it. 13 Another example is
that the FSA Rules permit the insurer to avoid the policy if the consumer’s
misrepresentation was careless, whereas if a case were brought to the FOS, it
would order payment of a proportionate part of the claim. 14 The gaps between the
law, FSA Rules and FOS practice add considerably to the confusion in this area:
they increase the risk that insurers will make mistakes.
3.21 We explained in Part 1 that we do not consider the FSA Rules, or the more high
level "Principles for Businesses" 15 which may possibly replace these detailed
rules, to be an adequate substitute for law reform. What we do think is that they
show the need to bring the law more closely into line with good practice and
regulatory requirements.
11 Financial Services and Markets Act 2000, s 150.
12 Insurance Conduct of Business, Rule 4.3.2.
13 See para 3.36 below.
14 See para 3.45 below.
15 See para 1.31 above.
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