Insurance law reform: Law Commissions’ proposals

United Kingdom

On 21 March the English and Scottish Law Commissions published their third paper in a series of Issues Papers forming part of their wider review of insurance contract law. Although very much intended to promote discussion, the suggestions outlined within the papers so far have the potential to cause far-reaching and significant changes to the insurance industry if adopted in a planned bill at the end of the decade.

The third paper concerns intermediaries and their relationships with both insurers and insureds. It concentrates on three subjects:

  • pre-contractual receipt of information by intermediaries;
  • completion of proposal forms by intermediaries; and
  • section 19 of the Marine Insurance Act 1906.

In particular, the Issues Paper effectively suggests that some established agency principles should be rewritten and restrictions placed, in certain circumstances, on an insurer’s right to avoid.

To read our Law Now on the second Issues Paper (Warranties) click here

Summary of the Law Commissions’ Insurance Contract Law Issues Paper 3: Intermediaries and Pre-Contract Information

1. Pre-contractual receipt of information by intermediaries

What happens if the insured provides material information to the intermediary, but the intermediary fails to pass this information to the insurer? The answer very much depends on whether the intermediary was acting for the insured or the insurer. If the intermediary acts for the insured then the insurer can avoid the policy, leaving the insured party to pursue the intermediary. If the intermediary acts for the insurer the insurer is, of course, deemed to be aware of the information. In many cases the key question is therefore the legal status of the intermediary and its relationship with the parties.

The Commissions feel that, in the case of the insured consumer, there is a real need to clarify for which party an intermediary is acting in receiving pre-contract information. They say that the law should as far as possible meet the reasonable expectations of consumers. Where the insurer and intermediary are, in the eyes of the reasonable insured, closely linked, the risk of mistakes by the intermediary should be placed on the insurer. The law should also give an incentive to control intermediaries’ mistakes to the party who is best placed to exercise that control. The Commissions feel that where the insured is a consumer, it is the insurer who is the best placed to monitor the intermediary.

The Commissions suggest that the intermediary should be regarded as the insurer’s agent for the purposes of obtaining pre-contract information, unless the intermediary is genuinely searching the market on the insured’s behalf. As a result, single tied and multi tied agents will be deemed to act for the insurer, rather than the insured. The result is that the cases in which intermediaries will be deemed to act for the insurer will be broader than at present. It follows that where the agent acts negligently it is more likely that the insurer will have to bring an action against the agent, rather than avoid the policy against the insured.

In the case of commercial insurance it is unusual for insurance to be sold through tied agents, except in the case of small businesses. The majority of business is placed through independent brokers negotiating in the London market. As a result, the Commissions are not proposing to change the law governing commercial insurance, except in respect of smaller enterprises, which the Commissions suggest should be treated in the same way as individual consumers.

2. Completion of proposal forms by intermediaries

Material misrepresentations made by insureds at the proposal stage will in most cases give insurers the right to avoid contracts of insurance. Take, however, the situation where the insurer’s agent enters information onto a proposal form, on behalf of the applicant, which is incorrect. Leading case law has established a general rule that in doing so, the agent should be considered to be an agent of the insured, even though for all other purposes it is the insurer’s agent. In such cases the so-called “transferred agency” rule allows the insurer to avoid the contract.

The Commissions suggest that this rule should be abolished. They propose that the intermediary who acts as agent for the insurer, should remain as agent for the insurer whilst completing forms on the insured’s behalf. If the intermediary is at fault then the insurer should bear the liability of its own agent.

Where the agent completes the form and the insured signs it, the Commissions have stated that in deciding whether an insured has acted fraudulently, negligently or innocently in relation to a misrepresentation, the insured’s signature should not be regarded as conclusive of the insured’s state of mind. The Commissions do provide some comfort for insurers by stating that the burden of proof will be on the policyholder to establish that the intermediary failed to correctly record the information provided. Although a signature will not be conclusive, it will be admissible as evidence.

The Commissions believe that their suggestions in this respect should apply equally to commercial insurance cases as well as consumer cases.

3. Section 19 of the Marine Insurance Act 1906

Section 19 of the Marine Insurance Act imposes an independent duty of disclosure on an agent to insure. The Commissions have identified three issues under section 19(A), which are of particular relevance to commercial insurance, but which apply equally to consumer insurance contracts.

Remedy

The remedy for non-disclosure or misrepresentation, where the culpability lies with the agent in its acts or omissions, is avoidance of the policy as opposed to recovering damages from the agent. The Commissions appear to believe that this is unfair given that it is often information known to the agent, but not to the insured and is not information that the insured ought to have been aware of in the ordinary course of business. The Commissions suggest and have asked for opinions on whether in these circumstances the insurer’s remedy should be damages against the agent as opposed to avoidance of the contract with the innocent insured party. The Commissions admit that this would be a major change in the law, as section 19 does not currently provide insurers with a right to damages.

Chains of intermediaries

Where there is a chain of intermediaries, the Commissions noted that the duty to disclose appears only to apply to the agent who deals directly with the insurer. The Commissions have asked for views on whether an obligation should be placed on producing brokers to pass information to the next intermediary.

Scope of information to be disclosed

The Commissions consider that it is not clear whether the duty is to disclose any relevant information that the agent has or only that information gained in its capacity as agent for the particular insured. The Commissions have suggested that the agent should disclose all information, irrespective of the capacity in which it received the information. The Commissions consider that the impact on the insured of a breach of this duty would be lessened to some extent by the remedy for non-disclosure being damages against the agent as opposed to avoidance of the policy. The Commissions have said that an exception would apply where the agent is under an obligation not to divulge the information.

The Commissions intend to hold informal seminars and invite short responses at this stage to promote discussion and to gain feedback from the industry. The formal Consultation Paper will be published in the summer.

To access the Issues Paper please click here