Insurance Contract Law Issues Paper 2 Warranties - Law Commission

(3) In examining whether a term was fair and reasonable, the court would
need to take into account both the extent to which the term was
transparent and its substance and effect. This means that a term written
in plain language and brought to the policyholder’s attention would be
much less likely to be found to be unfair than one lost in obscure small
print. The reform would provide a strong incentive to insurers to re-write
their contractual documents in a way that policyholders understand. 5
THE ARGUMENTS AGAINST EXTENSION
Freedom of contract
8.17 The first argument is that controls on unfair contract terms interfere with freedom
of contract. A dynamic and innovative market is best served if the parties are
allowed to agree what they want. This argument was put to the joint Law
Commissions when we recommended the controls in 1975. 6 In 1975 we replied
that:
It is valid only to the extent that there is true freedom of contract to
interfere with, and the objection has no validity where there is no real
possibility of negotiating contract terms, or where a party is not
expected to read a contract carefully or to understand its implications
without legal advice. 7
8.18 It is of course difficult to distinguish between situations where there is genuine
freedom of contract and those where there is not. The fact that the contract is on
standard terms suggests that freedom is limited. We also thought that the
strength of the bargaining positions of the parties and their understanding of the
term in question should be taken into account in a test of reasonableness.
Uncertainty
8.19 The second argument is that it introduces unacceptable uncertainty into the law.
The insurance industry also put them with great force when it secured an
exception from the Unfair Contract Terms Act in 1977.
5 By contrast, the 1980 recommendations set out procedural and substantive safeguards
separately. Procedurally, the insurer need only supply the insured with a written statement
of the term. They need not ensure that the policyholder has actually understood it. If an
insurer required a certain specification of lock which was not fitted, they would not be liable
to meet a burglary claim where the thieves entered through the door - even if the
specification was buried in small print, and expressed in such technical terms that few
policyholders would have understood it.
6
Exemption Clauses: Second Report (Law Com No 69; Scot Law Com No 39) 1975, paras
66 and 67.
7 Above, para 67.
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