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

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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. 56
THE FINANCIAL OMBUDSMAN SERVICE 3.22 Very few consumer insurance disputes are considered by the courts. Instead, most complainants opt to use the service offered by the FOS. The FOS is a statutory body set up under the Financial Services and Markets Act 2000. 16 It replaced eight existing dispute-resolution mechanisms including the Insurance Ombudsman Bureau and the Personal Investment Authority Ombudsman. For each of the last three years, the FOS has received around 1,000 complaints a year relating to issues of non-disclosure and misrepresentation in insurance contracts. 17 These represent only a small proportion of the 14,270 insurance cases received by FOS in 2005-6. However, they raise some particularly difficult and sensitive issues. 3.23 The FOS seeks wherever possible to settle complaints by mediation. Should this prove impracticable, the case will be investigated and a view reached by an adjudicator. If either party remains dissatisfied, an appeal may be made to an ombudsman. An ombudsman has the power to make an award against an insurer of up to £100,000, which becomes binding on the insurer if accepted by the complainant. It may also instruct an insurer to take specified steps, so long as the costs do not exceed the £100,000 limit. 3.24 Compulsory jurisdiction complaints are determined “by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case”. 18 As explained earlier, this means that the FOS is not bound by the strict law. It has effectively developed its own jurisprudence on the issue, which in practical terms is more important than the legal rules. The FOS approach to issues of non-disclosure and misrepresentation 3.25 The FOS applies SLIP and takes note of SGIP. It also applies the FSA Rules. However, to meet its obligation to reach fair and reasonable decisions, the FOS has found it necessary to go significantly further than these measures. 3.26 The FOS approach to misrepresentation and non-disclosure is explained in a series of case studies and guidance notes in Ombudsman News. 19 In 2005 the FOS indicated that in cases where misrepresentation or non-disclosure is alleged, it asks two questions: (1) When the customer sought insurance, did the insurer ask a clear question about the matter which is now under dispute? 16 Financial Services and Markets Act 2000, Part 16 and Schedule 17. Rules relating to the FOS can be found in the DISP Sourcebook (FSA Handbook). 17 The FOS provided figures indicating that between April 2005 and March 2006, it received 1,007 cases classified as non-disclosure, compared to 1,051 in 2004/05 and 967 in 2003/04. 18 Financial Services and Markets Act 2000, s 228(2). 19 See, in particular, Ombudsman News, Issue 27 (April 2003); Issue 46 (June 2005); and Issue 61 (May 2007). 57
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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
Page 19 and 20: (1) The insurer may use warranties
Page 21 and 22: 1.17 When in 1980 the English Law C
Page 23 and 24: 1.28 For most consumers with disput
Page 25 and 26: “Fairness” and reasonable expec
Page 27 and 28: 1.50 The parties should be free to
Page 29 and 30: “Moral hazard” and the need for
Page 31 and 32: 1.71 We think that consumers would
Page 33 and 34: 1.80 We ask what the appropriate re
Page 35 and 36: (2) Appendix B is a report commissi
Page 37 and 38: Although the issues arise under a p
Page 39 and 40: Thus if, when a claim is made, the
Page 41 and 42: 2.21 In both jurisdictions the vict
Page 43 and 44: (2) Before an insurer may avoid a c
Page 45 and 46: Subject to the provisions of this s
Page 47 and 48: Despite some contrary suggestions,
Page 49 and 50: Held covered in case of any breach
Page 51 and 52: (2) The warranty is relevant to onl
Page 53 and 54: 2.61 Classification of the term is
Page 55 and 56: 2.68 Such clauses elevate the answe
Page 57 and 58: These are often referred to as “c
Page 59 and 60: 2.82 We accept that an exception to
Page 61 and 62: (d) readily available to any person
Page 63 and 64: 2.101 If the term were not sufficie
Page 65 and 66: 2.111 The law on warranties is simi
Page 67 and 68: (1) Each proposal form was required
Page 69: 3.14 TCF is a valuable initiative w
Page 73 and 74: Research project 3.32 When we start
Page 75 and 76: Case study: clear questions should
Page 77 and 78: 3.43 These examples look only at th
Page 79 and 80: Warranties of fact 3.50 We did not
Page 81 and 82: (9) The FOS has more experience tha
Page 83 and 84: 3.63 There might of course be some
Page 85 and 86: The risk of legal challenge 3.72 We
Page 87 and 88: (3) BOTH HONESTLY AND CAREFULLY (OR
Page 89 and 90: 4.10 Some consultees have asked how
Page 91 and 92: 4.18 The FOS’s requirement that t
Page 93 and 94: General questions 4.21 As we have s
Page 95 and 96: 4.32 We provisionally propose that
Page 97 and 98: 4.43 We would also point out that a
Page 99 and 100: Criminal fraud 4.55 First, some ins
Page 101 and 102: 4.62 We stress this point, because
Page 103 and 104: 4.70 The issue is further confused
Page 105 and 106: Relevance 4.80 Secondly, our defini
Page 107 and 108: 4.92 However, we are not sure that
Page 109 and 110: Different ways in which policyholde
Page 111 and 112: Judging what is “reasonable” fo
Page 113 and 114: 4.121 We ask whether the legislatio
Page 115 and 116: ...the reasonable expectation of th
Page 117 and 118: 4.142 The proposer should take care
Page 119 and 120: 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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4.218 We provisionally propose that
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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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8.12 We provisionally propose that
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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 5 Identification of the pot
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Section 6 Case Study - Critical Ill
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Annex 1 References Cockburn, B. (20
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APPENDIX C THE FOS APPROACH TO ISSU
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Table 2: Consumer cases: main infor
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Table 4: Consumer cases: time of no
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C.27 The FOS has explained that in
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Have you any physical defect or inf
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The FOS approach to unclear questio
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Deliberate Customers deliberately m
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C.65 A further complication of the
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I cannot accept that the complainan
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(2) W failed to disclose an eating
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C.89 One problem with relying on om
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When does the FOS apply the consume
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The overall success rate C.107 The
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Institute of Actuaries Healthcare C
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