Consumer Insurance Law Reform

The Government has introduced a Bill reforming the law on what a consumer must tell an insurer before taking out or varying an insurance policy. The Consumer Insurance (Disclosure and Representations) Bill largely reflects the proposals to reform consumer insurance law made by the English and Scottish Law Commissions in December 2009 as part of the Law Commissions’ wider review of insurance contract law. Click here to read our Law Now on the Law Commissions’ proposals.

If passed in its current form, the new legislation will only apply to consumer insurance contracts although the Bill also addresses the status of intermediaries (brokers) in consumer contracts and makes provision for their treatment.

Headline legal changes to consumer insurance

• The present duty under the Marine Insurance Act 1906 to volunteer information to the insurer will be abolished for consumers. Instead a consumer’s duty would be limited to making sure it answers questions raised by insurers honestly and reasonably.
• Insurers will have to ensure they ask for any information they need to assess the risk being insured.
• If a consumer acts honestly and reasonably the insurer will have to pay the claim.
• Where a consumer acts honestly and reasonably but carelessly a proportionate remedy will be applied; the test will be what the insurer would have done had it known the full facts.
• An insurer will only be able to refuse to pay a claim if a consumer acts deliberately or recklessly in making misrepresentations.
• An insurer will need to prove on the balance of probabilities that a consumer knew: a) that a deliberate or reckless misrepresentation was untrue or misleading, or did not care whether it was or not; and b) that the matter was relevant to the insurer, or did not care whether it was or not. If a misrepresentation does not pass this test then it will be a careless representation and must be treated accordingly.

Intermediaries

The treatment of insurance brokers reflects the proposals in the Law Commissions’ 2009 report. If the intermediary is an appointed representative of the insurer they will be considered as acting for the insurer. In all other cases the intermediary will be presumed to be acting for the consumer.

Other provisions

• Insurers will be prohibited from contracting out of the effect of the Act.
• The Bill does not introduce any change to the law on warranties, save for the expected abolition of basis of contract clauses.
• The expected treatment of small businesses as consumers under the Bill has not transpired so its application is limited to individuals taking insurance wholly or mainly for purposes unrelated to their trade.
• The treatment of warranties and small businesses may be picked up in the Law Commissions’ business insurance law reform consultation paper to be published later this year.
• For group schemes, if a group member makes a misrepresentation, this will only have consequences for the particular individual concerned.
• If a consumer takes out life insurance on the life of another and the insured makes a careless or deliberate misrepresentation, the insurer will have the normal remedies.

Comment

The proposed legislation reflects the approach already adopted by the Financial Ombudsman Service to disclosure when dealing with consumer claims but will nevertheless bring clarity to the treatment of consumers in insurance law and reflects the Law Commissions’ desire that consumer insurance be clear, straightforward and fair. The significant change for insurers and intermediaries will be that consumer insureds will no longer be under a duty to volunteer information to insurers when applying for insurance cover. They will only need to answer any questions asked honestly and with due care.

Commencement

This Bill will not come into force until an Order is made by the Treasury confirming the date, but this date will be at least one year and one day from the date the Bill is passed. This will allow insurers sufficient time to get ready for the proposed changes.