Insurance Contract Law Issues Paper 2 Warranties - Law Commission

8.14 Although there would not be a blanket exemption, however, the provenance of
the terms and the degree to which they are excepted in the market would be
highly relevant to any decision about whether they are reasonable. If terms are
the result of genuine negotiation by both sides of the market acting on equal
terms, it is very unlikely that a court will find them to be unfair.
THE ARGUMENTS FOR EXTENSION
8.15 We do not think that extending sections 3 and 17 and their replacement to
insurance would make any difference to consumer contracts. As discussed
earlier, the Unfair Terms in Consumer Contract Regulations already require that a
term must be fair, if it enables the insurer to render a contractual performance
substantially different from that which was reasonably expected. Furthermore, in
1990, the Insurance Ombudsman stated that he would apply the spirit of the
Unfair Contract Terms Act 1977, and the Financial Ombudsman Service has
continued this tradition. However, the section would give substantially improved
rights to small and medium businesses that are forced to contract on the insurer’s
standard terms of business.
8.16 We see three main advantages in extending sections 3 and 17 of the Unfair
Contract Terms Act 1977 to insurance contracts:
(1) The protection only applies to standard term contracts. It does not
interfere with the freedom of large businesses to negotiate contracts on
an individual basis. We would prefer to make a distinction on the basis of
how the contract was negotiated rather than attempt to find some other
proxy for those who need protection and those who do not, such as size
or nature of the business.
(2) It applies to any term that defines cover in a way that policyholders would
not reasonably expect, and to any term that allows the insurer not to pay
a claim at all. Unlike section 54 of the Australian Insurance Contracts Act
1984, it looks at the substance of the term rather than its form. It
therefore avoids the sort of semantic distinctions between, for example,
“omissions” and “inactions” that have bedevilled section 54. In the case
of claims made and notified policies, for example, the court would start
with looking at what policyholders would reasonably expect. If the
insurance had been sold in such a way that the policyholder should have
realised that it was limited to claims made and notified during the
contractual period, that would be the end of the matter. But if a “condition
precedent” were written in such a way that an insurer could avoid paying
a claim for which they were otherwise liable for a trivial delay, the court
would need to examine how far the clause was fair and reasonable.
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