Insurance Contracts CP - Law Reform Commission

insurer is seeking to avoid the contract ab initio and it is arguable that the decision by the insurer to avoid
may pre-empt any judicial discretion; Professor Malcolm Clarke has made this argument and even though
it has been rejected by other authorities there is no clear judicial decision on the point. Furthermore, the
relevance of the section to cases where an insurer seeks to avoid the contract for a breach of a
representation of fact that has been converted into a contractual term – for example, the insurances
proposal form or the policy makes a statement of fact a warranty – has not been established by case-law,
but there does not seem to be any judicial discussion on such an obvious point. The learned authors of
Chitty on Contracts observe that while the point is an open one this is not thought to be the result of s.2(2)
and that ―in any event it is very unlikely that the court would exercise its jurisdiction to prevent an insurer
rescinding on the ground of misrepresentation by the insured.‖ With respect, this seems to be a curious
argument. If fraud is removed from the equation, there is no reason why a court could not decide that an
innocent misrepresentation might be best remedied through an award of damages, regardless of whether
the statement is or is not a contractual term. The same may also hold true in cases where the
representation was made negligently. The section 2(2) discretion appears to be rather inelastic if
observations of the kind made by Chitty represent the law.
10.31 It might be possible to build upon section 45(2) of the 1980 Act by clarifying that the judicial
discretion does indeed apply to instances of ab initio avoidance and that the discretion applies even to
misrepresentations that are integrated into the contract as warranties of existing or future fact. It is
arguable that such a revision of s.45(2) would inject into this provision some of the vitality that the authors
of the provision had in mind when this reform was initially contemplated in England and Wales.
(c) Damages – measure of loss under section 45(2)
10.32 As shown above, section 2(2) of the Misrepresentation Act 1967 (UK) and section 45(2) of the
Sale of Goods and Services Act 1980 have not been used to any extent and there are no authoritative
decisions on the measure of loss that a court would award should the discretion be exercised.
10.33 In the 1980 Report the Law Commission did not address the relationship between the 1967 Act
and insurance law. The Law Commissions, in the 2007 Consultation Paper appear to have discounted
the s.2(2) remedy on the ground that case-law is against applying the provision to commercial insurance
and because the measure of damages ―is obscure‖ 31 . The Commission is forced to conclude that the
uncertain nature of section 45 of the 1980 Act makes it an unsatisfactory basis upon which to build a
compensatory remedy. Nevertheless, it may be asked whether these objections to judicial use of section
45(2) are necessarily valid, especially in the light of the Consumer Insurance (Disclosure and
Representations) Bill 2011. Schedule 1 of the Bill provides a set of rules that should guide any judge
when deciding whether to exercise any discretion available in respect of section 45(2) of the 1980 Act and
the relevant provisions are these (in abridged form):
10.34 The insurer‘s remedies are based on what it would have done if the proposer had complied
with the duty. If the insurer would not have entered into the insurance contract on any terms, the insurer
may avoid the contract and refuse all claims, but must return the premiums paid. If the insurer would
have entered into the insurance contract, but on different terms (exluding terms relating to the premium),
the contract is to be treated as if it had been entered into on those different terms if the insurer so
requires. In addition, if the insurer would have entered into the insurance contract (whether the terms
relating to matters other than the premium would have been the same or different), but would have
charged a higher premium, the insurer may reduce proportionately the amount to be paid on a claim.
―Reduce proportionately‖ means that the insurer would need to pay on the claim only X% of what it would
otherwise have been under an obligation to pay under the terms of the contract.
D
Compensatory Remedies – damages for late payment of a claim
10.35 One of the most controversial aspects of insurance contract law is not addressed by the Law
Commission in their 2007 Consultation Paper, possibly because the question resonates across the law
relating to compensatory reliefs in commercial law. Should the insurer be required to pay compensatory
damages to an insured when the failure by the insurer to settle a claim has caused consequential loss?
31 Consultation Paper 2007, para.2.14.
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