Insurance Contracts CP - Law Reform Commission

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carefully and responsibly when seeking to enter into a contract of insurance. The Commission would welcome views on whether this situation should be addressed in the forthcoming Report on Insurance Contracts but the Commission, at this time, would not favour creation of such discretionary powers. 10.17 Perhaps the most problematical question that arises is the scope of the Commission‘s recommendations relating to the creation of a compensatory remedy. Should the shift away from avoidance and rescission as the insurer‘s primary remedy to damages (save in instances of fraud) apply across the board? This is the situation in Australia. In the United Kingdom the Law Commissions certainly felt that this should be the case, as a matter of principle, but the joint Consultation Paper stopped short of recommending the demise of the avoidance remedy in business insurance as well as in consumer insurance cases where the proposer has been negligent. In the 2009 Report this disctinction between fraudulent and negligent non disclosure and misrepresentation was maintained; the Consumer Insurance (Disclosure and Representations) Bill 2011 provides for different remedies for an insurer following upon deliberate or reckless misrepresentations and careless misrepresentations. In the first situation the insurer may avoid the contract and refuse all claims, retaining the premium except to the extent that it would be unfair to the consumer to retain them. In cases of careless misrepesentations the remedies to the insurer are based upon what the insurer would have done had the duty not to make a misrepresentation been observed. If the insurer would not have entered the contract on any terms, the claim may be declined and the premiums returned. If the insured would have added terms (eg disclaimers) the contract should be read as if it contained those terms. If a higher premium would have been charged ―the insurer may reduce proportionately the amount to be paid on a claim. After taking the position that ―avoidance in every case of negligence over-compensates the insurer for the loss it has suffered‖ 22 the Joint Consultation Paper addressed three main arguments against restricting the availability of the avoidance remedy in business insurance. (1) it is difficult to prove the insured acted dishonestly; (2) the difficulty of sharing what the insurer would have done (creating a field day for expert witnesses); (3) the need to maintain strong incentives for proposers to act carefully. 10.18 The Law Commissions did not take a view on this, inviting submissions both on the question whether the law should distinguish between dishonest and negligent misrepresentation/non-disclosure and whether, for negligent conduct, ―should the law provide a remedy which (unless the parties have agreed otherwise) aims to put the insurer into the position it would have been had it known the true circumstances?‖ 23 10.19 In the United Kingdom the Law Commissions propose to return to business insurance contract issues late in 2011. The signs are that if the Law Commissions recommend anything at all, the changes proposed will be default rules that can be avoided by agreement, subject to the possibility that some small businesses, who do not arrange insurance through a broker, may be treated as if they were a consumer proposer. The Commission think that this is a reasonable inference to be drawn from the 2007 Consultation Paper. 10.20 The Commission concludes that the law should continue to distinguish between dishonest and negligent conduct and that dishonesty should continue to allow the insurer to refuse to meet the claim and retain the premiums. In cases of negligence the position to be adopted should be based upon what the insurer would have done had the misrepresentation not been made. The Commission conclude that this will provide the insurer with a remedy in damages in accordance with the principle that the insurer is to be put in the position the insurer would have been in had the insurer known the true circumstances: in cases of non-disclosure where the proposer negligently breaches the reformulated duty of disclosure, and in 22 23 Consultation Paper, para. 5.88. Soyer, in ―Are the Law Commissions on the Right Track?‖ [2008] JBL 385 and ―Reforming Pre-Contractual Information Duties in Business Insurance Contracts – One Reform Too Many?‖ [2009] JBL 15 argues that the Law Commissions restrictions on the availability of avoidance for negligent breach go too far. Consultation Paper, para.5.107. 200
elation to negligent misrepresentation, the insurer should only avoid the policy or rescind the contract where the insurer can show that the risk would not have been accepted or that an exclusion applicable to the risk that materialised would have been imposed. 10.21 The Commission provisionally recommends that avoidance of the insurance policy should no longer be the main remedy, and that in cases of non-disclosure and misrepresentation the principal remedy should be one of damages in proportion to the failure by the insured. 10.22 The Commission provisionally recommends that the insurer should be able to avoid the policy prospectively upon discovery of a negligent non-disclosure or misrepresentation even if the insurer is bound to meet any claims submitted by the insured. Should the insurer decide to exercise this right the avoidance will be effective upon giving the insured written notice of this decision. C (a) Compensatory Remedies – Building on the 1980 Act Damages for Innocent misrepresentation? 10.23 For historical reasons the common law has not afforded the victims of an innocent misrepresentation any rights to seek damages: the primary remedy has been a right to rescind the contract. Case-law in the twentieth century began to recognise both the injustice and the inappropriateness of such a position by broadening promises into contractual terms, and by creating new tortious actions for negligent misstatements and breach of a fiduciary duty. Section 2(1) of the Misrepresentation Act 1967, the template for section 45(1) of the Sale of Goods and Supply of Services Act 1980, provided a misrepresentee with a statutory right to damages; ―(1) Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made that the facts represented were true.‖ 10.24 In theory this cause of action could be useful in relation to both insurers and insureds, insofar as a contract of insurance is within the statute as being a contract for services (see s.43 of the 1980 statute). But, as it will be shown, there are some obstacles preventing either party from using these provisions and judicial opinion stands against creating a right to damages for breach of a contract of insurance. 10.25 The Law Commissions noted that the English courts have taken a policy decision in relation to the scope of the s.2(1) action for damages following upon a non-fraudulent misrepresentation but it is the Commission‘s view that the impact of Highland Insurance 24 can be overestimated: that case concerned a contract of reinsurance effected as between sophisticated and experienced commercial entities and Steyn J‘s observations must be seen in this context. Nevertheless, s.2(1) does appear to set the bar at a high level, if Banque Financiere v Westgate Insurance Co. 25 is to be followed in Ireland. In the Court of Appeal Slade LJ observed that if the plaintiff is to recover damages under s.2(1), ―the ingredients of a fraudulent misrepresentation have to be present save for the ingredient of dishonesty.‖ 26 Because the plaintiff could not show that a misrepresentation had been made with the intention that it be acted upon by the other party, an essential element in the tort of a deceit was missing. More importantly perhaps, Slade LJ held that s.2(1) could not be used where a misrepresentation in the strict sense had not been made. If the defendant failed to observe a duty of disclosure that stopped short of a misrepresentation, s.2(1) is of no avail: after referring to the use of ―misrepresentation...made‖ in s.2(1) of the 1967 Act, Slade LJ said the expression: 24 25 26 Highland Insurance Co v Continental Insurance Co [1987] 1 Lloyds‘ Rep. 109. [1989] 2 All ER 952. Ibid, p.1003, decision affirmed by the House of Lords [1990] 2 All ER 947. 201
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CONSULTATION PAPER INSURANCE CONTRA
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MEMBERSHIP The Law Reform Commissio
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ADMINISTRATION STAFF Head of Admini
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ACKNOWLEDGEMENTS The Commission wou
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TABLE OF CONTENTS Table of Key Legi
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CHAPTER 4 (3) Factors covered by an
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(10)Enforcement 149 CHAPTER 7 FORMA
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TABLE OF KEY LEGISLATION Assurance
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Pg No. Economides v Commercial Unio
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Ireland Ltd Pg No. Roselodge Ltd v
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D Regulation and Supervision of Ins
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has been the Consumer Protection Co
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this definition would apply both to
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Commission provisionally recommends
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2005 Final Report and Recommendatio
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in Coleman accords with data protec
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functions may in the future be merg
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estrictions on the ability of the O
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(2) Adverse comments on the propose
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harmonisation of insurance contract
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1.49 Before leaving the general iss
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(2) Decisions of the Financial Serv
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uberrima fidei, regulatory requirem
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1.68 The Commission provisionally r
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2.03 In contrast, a non-indemnity
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CJ expressed the view that it made
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2.18 In the House of Lords, Lord El
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Lord Eldon formulation, 45 overrule
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interest in respect of the property
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drawings themselves, Auld LJ and Si
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the judges to complicate the law by
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Insurance in the UK, Ireland and EU
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any existing doubt, or prevailing m
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(2) A potential financial loss reco
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to the extent of monies actually ex
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took out a life insurance policy on
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2.86 The Commission invites submiss
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and social provision be integrated
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and deny enforceability. The leadin
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(6) Defining Insurance Contracts in
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3 CHAPTER 3 DUTY OF DISCLOSURE A In
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the Ohio case of Hartford Protectio
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the basis that the insurance contra
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that which the signatory could reas
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―(i) In order to be entitled to a
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withholding information on the basi
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public interest in running blockade
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In Manor Park, McMahon J. took a si
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at the precontractual stage. The de
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decisions in which the Ombudsman ha
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(8) The English Law Commission’s
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(10) Australia 3.88 In ALRC Report
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Article 3:103 Exceptions The sancti
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it is desirable to retain the duty;
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B Judicial approaches to limiting a
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will no doubt arise in the future.
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questions that are incapable of a y
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(1) Marine Insurance Act 1906 and m
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(3) Should the right to rescind be
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y English judges to any extent, and
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non-disclosure or misrepresentation
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Factually incorrect answers to a qu
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4.68 While the English and Scottish
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terms to be construed by reference
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conclusion, ―with considerable re
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the present was held not to be prom
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(10) Limiting the scope of the warr
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have been forthright in suggesting
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nature and potentially draconian na
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(b) that even though the loss was o
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whichever is the earlier event. 103
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5.67 Nevertheless, the law reports
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may properly consider to be relevan
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―It is easy to sympathise with th
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decisions, and case-law, that preve
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the terms of the insurance contract
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householder each assuming the other
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whether in all the circumstances it
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may be regarded as technical or unm
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―Basis of contract clauses would
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The court may be influenced by the
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―consumer‘s reasonable expectat
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of the term, particularly in the co
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Page 172 and 173: premium, thus taking the contract o
Page 174 and 175: the Provider could not provide the
Page 176 and 177: exceptions to these requirements in
Page 178 and 179: (l) the existence of guarantee fund
Page 180 and 181: policy should be issued within fift
Page 182 and 183: contains interesting and helpful ad
Page 184 and 185: in the Aro Road case who wrote that
Page 186 and 187: 8.11 The most visible demonstration
Page 188 and 189: common law position relating to sep
Page 190 and 191: F Effects of fraud 8.27 Once the fr
Page 192 and 193: 8.36 In the case of composite insur
Page 194 and 195: (i) consented to the act or omissio
Page 196 and 197: Insurance Corporation of the Channe
Page 198 and 199: not only an economic purpose, but a
Page 200 and 201: Article 6:104 Time of Performance (
Page 202 and 203: B The Problem in Context 9.04 The d
Page 204 and 205: D Exceptions to the Privity Rule (1
Page 206 and 207: 9.20 Because Ireland has not adopte
Page 208 and 209: cover but the defendants failed to
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Page 212 and 213: 9.46 The privity doctrine confines
Page 215 and 216: CHAPTER 10 REMEDIES A Introduction
Page 217 and 218: (4) Where the risk would have been
Page 219: isks‖ policy provided by Royal an
Page 223 and 224: insurer is seeking to avoid the con
Page 225 and 226: 10.38 The decision of Hirst J in Th
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Page 231 and 232: G Subrogation - Public Policy Excep
Page 233 and 234: (ii) Subrogation - Employee Liabili
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Page 237 and 238: ―an employer should be liable to
Page 239: Street Dublin against the embezzlem
Page 242 and 243: 11.09 The Commission invites submis
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Insurance Contracts CP - Law Reform Commission

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