Insurance Contracts Bill - Law Commission publishes draft clauses for consultation

United Kingdom

The Law Commission and Scottish Law Commission’s joint review of insurance contract law is moving towards its conclusion. The Law Commissions have said that they expect to publish their final report and much anticipated Insurance Contracts Bill later this year. Before publishing the full text of the legislation, the Law Commissions have published for consultation draft clauses covering the duty to make a fair presentation of the risk in business insurance contracts, fraudulent claims, late payment of claims, and a short provision repealing the remedy of avoidance for breach of the duty of utmost good faith.

The Law Commissions have invited comments on the draft clauses by 21 February 2014. They have, however, made clear that this is not intended to be a further consultation on the policy behind the reforms and that what they are interested in is whether the clauses as drafted implement the policy effectively. It is therefore unlikely that the substance of the clauses will change.

It is intended that, insofar as the draft clauses apply to consumer insurance, they will be mandatory but that there will be a default regime for business insurance contracts. The provisions setting out the circumstances in which parties to business insurance will be able to contract out have not yet been published and the Law Commissions have said that they are working on these as well as clauses that will deal with warranties.

The duty of fair presentation in business insurance

The draft legislation sets out a duty of fair presentation of the risk for non-consumer insurance contracts.

The duty would be either to disclose every material circumstance of which the proposer is aware or ought to be aware or to make a presentation that (taking the information provided in the round) gives the insurer sufficient information in relation to those material circumstances to put a prudent insurer on notice that it needs to make further enquiries. A proposer would have an obligation to disclose information held by his agent, including his insurance broker, but the separate duty of disclosure imposed on brokers by section 19 of the Marine Insurance Act 1906 would be repealed.

The remedies available to insurers where the duty of fair presentation is breached would depend on whether or not the breach was deliberate or reckless. If the breach of duty is deliberate or reckless, the insurer would be able to avoid the contract and would not have to return premium. If, however, the breach was not deliberate or reckless, proportionate remedies based on what insurer would have done if the insured had made a fair presentation would apply.

Damages for late payment of claims

Under the draft legislation, it would be an implied term in every contract of insurance that the insurer would pay claims within a ‘reasonable time’. If an insured suffered loss because the insurer breached the term the insured would be able to recover contractual damages. The duty would apply to both consumer and non-consumer policies (although it is intended that for non-consumer policies the parties would be able to contract out of the requirement).

What is a reasonable time would depend on factors such as the type of insurance, the size and complexity of the claim, legal compliance and circumstances beyond the insurer’s control. The insurer would also have a defence to a claim for late payment if it could show that there were reasonable grounds for disputing the claim

Fraudulent claims

The draft legislation would also introduce a default statutory regime for fraudulent claims. The insurer would remain liable for claims arising before the fraudulent act but, if the insurer elected to treat the contract as terminated, it would have no liability for future claims and would not have to return premium. The default regime would apply to both consumer and non-consumer contracts.

Utmost good faith

While retaining the duty of good faith, breach of the duty would no longer entitle either party to avoid the contract.

Comment

If, as expected, the final draft Bill mirrors in substance the draft clauses that have recently been published the legislation, in particular the provisions relating to fair presentation of the risk and damages for late payment of claims, would represent a significant change to the law. The final draft Bill will, in addition, include provisions concerning warranties and the circumstances in which parties to non-consumer contracts will be able to opt out of the default regime.

The Law Commissions have said that they hope to publish the final Bill in the summer of 2014. It seems that, despite the extensive consultation, the Commissions are taking forward only those reform proposals on which there has been relatively broad consensus. This may in part have been influenced by the hope that, given the lack of Parliamentary time between now and the next general election, the final Bill will be suitable for the special Parliamentary procedure that can be used for uncontroversial Law Commission legislation.

Further reading: Read our previous Law-Nows on the proposals for reform of business insurance law and the proposals for late payment of claims and fraudulent claims.