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

4.49 We ask whether the rules on what constitutes a misrepresentation and on
inducement should be stated expressly in any new Insurance Contracts
Act.
DELIBERATE AND RECKLESS MISREPRESENTATIONS: ACTING WITHOUT
HONESTY
4.50 Where an insured has induced the contract by a misrepresentation that was not
honest, it is right that a penalty should be imposed, even if it results in overcompensating
the insurer for the loss they have suffered. As Lord Steyn stated in
Smith New Court Securities Ltd v Citibank, 31 a generous measure of damages is
appropriate where the misrepresentor has behaved in a morally reprehensible
way. This shows society’s disapproval of the behaviour and discourages
wrongdoing. Similarly, where a policyholder is morally blameworthy, the insurer
should be permitted to avoid the contract from the start. This is true even if, had
the insurer been given the correct information, it might still have accepted the risk
with only a slight increase in premium.
4.51 Below we also ask whether insurers should be entitled to keep the premium in
these circumstances. 32
The confusion over fraud
4.52 In our first Issues Paper, we said that if the proposer has made a dishonest or
reckless misrepresentation, the insurer should always be entitled to avoid the
contract. We described this behaviour as fraudulent. We set out the common law
definition of fraud in civil cases, as given in Derry v Peek: 33 the representor must
either know that the statement is false or have “no care whether it is true or
false”. If the insured also knew that the statement was material to the insurer (or
realised that it might be material and did not care whether it was or not), we said
that the insured had behaved fraudulently.
4.53 The case where the consumer knows the statement to be false is often referred
to as deliberate fraud, while simply not caring is typically referred to as
recklessness. According to Derry v Peek, both are fraudulent.
4.54 The responses we received did not necessarily disagree with the definition we
put forward, but there was widespread concern over our use of the word “fraud”.
This was for three reasons: fraud is often associated with a criminal offence;
there are social inhibitions against alleging fraud; and the FOS uses the word in a
particular way. We explore each below. The result was that respondents thought
that we were limiting the insurer’s right to avoid much more severely than was our
intention.
31
[1997] AC 254, 280.
32 See paras 4.95 and 4.98.
33 Derry v Peek (1889) LR 14 App Cas 337.The concept of fraud in Scots law has a different
history from that in English law, but as regards fraudulent misrepresentation inducing a
contract, the test for proving fraud set out by Lord Herschell in Derry v Peek has been
adopted in Scots Law. See Boyd & Forrest v Glasgow & South Western Railway Co 1912
SC (HL) 93 ; Robinson v National Bank of Scotland 1916 SC (HL) 154.
84