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

4.37 A policyholder who is honest but who did not take the degree of care and
attention required in the circumstances is negligent. For negligent
misrepresentations, the aim of the law should be to put the insurer back into the
position it would have been in had it known the true position. We have termed
this “a compensatory remedy” and we explain how it will work in practice.
4.38 Under the current law an insurer may avoid for misrepresentation only if the
misrepresentation was material, in the sense that it would influence the
judgement of a prudent insurer. 26 We do not think that it is necessary to retain
this test. As we explain below, in effect it will be superseded, since what will
normally matter will be whether in the circumstances the insured who did not give
the correct information was nonetheless acting reasonably. Effectively we are
replacing a test based on what is relevant to a hypothetical prudent underwriter
with a test based on what a reasonable insured in the circumstances should have
realised was relevant to this particular insurer.
BASIC REQUIREMENTS: MISREPRESENTATION AND INDUCEMENT
4.39 To found a claim for misrepresentation, an insurer will need to show that the
policyholder made a misrepresentation, which induced it to enter a contract on
the terms it did.
Misrepresentation
4.40 A misrepresentation will typically consist of an inaccurate answer to a question
the insurer has asked. As discussed above, consumers will not be required to
volunteer information in the absence of questions. However, if a consumer does
make a voluntary statement, this statement must also be made honestly and
carefully. A misrepresentation is any inaccurate statement made by the
prospective policyholder before a contract is entered into.
4.41 The common law also requires a party who has made a statement which at the
time was correct, but which ceases to be correct before the contract has been
entered, to inform the other party. If they do not, this is treated as a
misrepresentation. 27
4.42 It is worth emphasising that an answer may amount to a misrepresentation
although what is stated is literally accurate, if the answer is misleading because it
is incomplete. Suppose the proposer is asked whether they have ever suffered
from particular illnesses. If the proposer mentions some illnesses but not others,
or mentions that they have suffered from them at specified dates in the past but
fails to mention that they are currently under investigation for a suspected
recurrence, there is a misrepresentation.
26 See Marine Insurance Act 1906, s 20(2).
27 See paras 4.145 to 4.152 below.
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