Insurance Contracts CP - Law Reform Commission

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.
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