Insurance Contracts CP - Law Reform Commission

(3) Should the right to rescind be lost in cases where the proposer makes a negligent
misrepresentation?
4.36 Should a misrepresentee‘s right to rescind for a negligent misrepresentation be abridged? The
approach initially adopted in the 2007 Law Commission‘s Consultation Paper is very much along the lines
of that adopted in Australia in the 1984 Act. The decision was taken in Australia to confine the insurer‘s
right to avoid the contract for non-disclosure and/or misrepresentation to cases of fraudulent nondisclosure
or fraudulent misrepresentation. In the ALRC Report this position was defended on the ground
that avoidance or rescission of an insurance contract results in disproportionate consequences:
―The remedy or avoidance of rescission of a contract is not unique to insurance. But there is a
vital difference between the operation of that remedy in insurance and its operation in relation
to other contracts. Avoidance of a contract for, say, the sale of land does not usually result in
great hardship to either party. The vendor regains his interest in the land; the purchaser
recovers his money. But avoidance of an insurance contract normally takes place after a loss
has occurred and a claim has been made. In such a case, it inevitably results in a loss which
may well be overwhelming. The principle of restitutio in integrum is satisfied only in the most
technical sense. The insured gets back his premium and the insurer is freed from its
obligations. But that does not put the parties back into the substantial position they were in at
the time of the contract; at that time, the insured had not suffered an uninsured loss. In many
cases, the insurer‘s remedy is out of all proportion to the harm caused by the insured‘s breach
of duty. These considerations suggest that a limitation should be placed upon an insurer‘s
right to avoid a contract for a non-disclosure or misrepresentation. The limitation which
suggests itself is the substitution of a right to damages for the existing right of avoidance. That
would provide an adequate deterrent to misrepresentation and non-disclosure. It would also
ensure that insurers were entitled to adequate compensation for loss suffered as a result of
breach of the insured‘s duties. Disproportionate burdens would no longer be placed on the
insured‖ 47
4.37 The Law Commissions did not however go so far as to adopt this 1982 Australian
recommendation: in business insurance for example the rules set out in the 2007 Consultation Paper
were proposed as default rules, and at paragraph 5.110 of the Consultation Paper the view was
expressed to be that, subject to a requirement to be transparent in concluding business to business
insurance, the contracting parties would be free ―to agree that the insurer would have specified remedies
for misrepresentation, which may apply, even if the proposer was honest and careful in giving
information‖: a fortiori such remedies would be available in cases of negligence on the part of the
proposer. It cannot of course be known how UK law will ultimately be reformed on this question because
the 2009 Report and the Consumer Insurance (Disclosure and Representation) Bill 2011 do not address
business insurance generally. Contracting out of the restrictions on rescission as a stipulated remedy in
consumer insurance is not permissible under the 2011 Bill, but it must be likely that the United Kingdom
will continue with some level of contracting out/freedom of contract in business insurance generally.
4.38 The issue thus arises as to whether the duty of disclosure should be recast so that a proposer
is bound to answer specific questions honestly and carefully and disclose facts that are actually known to
him to be either highly relevant to a reasonable insured or facts which, in circumstances, a reasonable
insured would know to have a decisive influence on the insurer‘s decision in acceoting the risk or setting
the premium. Meeting such a duty should still require the proposer to comply with the general law of tort:
the duty not to misrepresent facts fraudulently or make negligent misstatements will generally provide the
misrepresentee with the right to rescind any contract resulting therefrom, and at first blush it is difficult to
see why a falsity uttered negligently or fraudulently in relation to an insurance contract aimed at
consumers and businesses via mass market sales mechanisms should be treated differently.
4.39 The reasoning of the ALRC – that the consequences are disproportionate – is persuasive, but
it can be argued that loss of the right to rescind may itself be disproportionate, seen from the perspective
47
ALRC Report No. 20, Insurance Contracts, para 187.
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