New Consumer Insurance Act receives Royal Assent

The Consumer Insurance (Disclosure and Representations) Act 2012 received Royal Assent yesterday and is expected to come into force in a year’s time.

The Act has received the backing of consumer groups, regulators and the insurance industry in general. It provides a long overdue update of consumer insurance law, shifting the balance of the law in favour of the consumer. It results from the Law Commissions’ 2009 Report on Consumer Insurance Law, which set out to ensure that consumer insurance law be clear, straightforward and fair.

Main legal changes to consumer insurance

• The Act abolishes a consumer insured’s duty to volunteer information to the insurer. A consumer’s duty will 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 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.
• If the intermediary is an appointed representative of the insurer, or is acting as the insurer’s agent, 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 Act abolishes basis of contract clauses. Therefore statements made by the consumer will not automatically be transformed into warranties.
• 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.
• The application of the Act is limited to individuals taking insurance wholly or mainly for purposes unrelated to their trade or business.

Comment

The Act finally brings the law into step with current market practice already adopted by the Financial Ombudsman Service and Financial Services Authority rules, providing clarity and consistency between regulators and the courts.

Insurers will now have one year to implement the necessary changes before the Act comes into force in 2013.

For further information please see our previous Law Now on the topic.