Current projects

Insurance Law

Commissioner
Professor Hector MacQueen

Team members
Mrs Gillian Swanson, Project Manager
Mr Laurence Diver, Legal Assistant
Mr Garry MacLean, Legal Assistant

We are assisting the Law Commission for England and Wales with this project which they are carrying out under their Tenth Programme of Law Reform.

Consumer insurance

Our joint report onConsumer Insurance Law: Pre-Contract Disclosure and Misrepresentation (containing a draft Bill) was published on 15 December 2009. A Summary, News Release, Press Outline and Impact Assessment are also available.

The current law requires consumers to volunteer information about everything which a “prudent insurer” would consider relevant. A failure to do so allows the insurer to treat the insurance contract as if it never existed and refuse all claims under the policy.

The Commissions recommend that the consumer’s duty to volunteer information to the insurer should be abolished. Instead, insurers should be required to ask questions about the things they want to know. Consumers would then have a duty to take reasonable care to answer those questions fully and accurately. If consumers provide information which was not asked for, they must take reasonable care to ensure that it is not misleading.

Where an insurer has been induced by a misrepresentation to enter into an insurance contract, the insurer’s remedy will depend on the nature of the misrepresentation:

If the misrepresentation was honest and reasonable, the insurer must pay the claim. The consumer is expected to exercise the standard of care of a reasonable consumer, taking into account a range of factors including the type of insurance policy and the clarity of the insurer’s question.
If the misrepresentation was careless, the insurer has a compensatory remedy based upon what the insurer would have done had the consumer taken care to answer the question accurately. If the insurer would have excluded a certain illness, for example, the insurer need not pay claims which would fall within the exclusion but must pay all other claims. If the insurer would have charged more for the policy, it must pay a proportion of the claim.
If the misrepresentation was deliberate or reckless, the insurer may treat the policy as if it never existed and may decline all claims. It would also be entitled to retain the premiums, unless there was a good reason why they should be returned.

The Commissions’ recommendations reflect the approach already taken by the Financial Ombudsman Service (FOS) and generally accepted good practice within the insurance industry. However, the draft Bill would enshrine this good practice in law. It would make the law simpler and clearer. Insurers would be less likely to turn down claims unfairly and consumers would have greater confidence in the insurance industry.

The draft Bill also:

Explains what is meant by “reasonable care” and “deliberate or reckless” misrepresentations.
Establishes a statutory code to determine for whom an intermediary (an “agent” or “broker”) acts when arranging insurance. This code is based largely on the existing law, as supplemented by FOS practice and industry understanding.
Abolishes “basis of the contract” clauses.
Includes special provisions for group schemes, where one party (typically an employer) arranges insurance to benefit members of the group. The draft Bill provides that where one group member makes a misrepresentation, it has consequences only for that individual and not for others within the group.
Prevents insurers from contacting out of the scheme to the detriment of the consumer.

As far as legislative competence is concerned, it is our view that the law of insurance is a reserved matter under Head A, Section A3 of Schedule 5 to the Scotland Act 1998. Further, we consider that our recommendations, if enacted, would not give rise to any breach either of the European Convention on Human Rights or of Community law.

Business insurance

There is also support for reform of pre-contractual business insurance law. In response to comments raised by consultees we are consulting further on this; for example in April 2009 we publishedIssues Paper 5 on micro-businesses. The paper sought views on whether micro-businesses should be treated like consumers for the purposes of pre-contractual information and for potentially unfair terms in their contracts of insurance. We are grateful to all those who responded. A Summary of those responses and a News Release are now available. Our recommendations to reform business insurance law will follow in 2010.

Second joint Consultation Paper

We are also working towards our second formal consultation paper. Its main topics will comprise insurable interest, fraud, post-contractual good faith and damages for late payment of claims.

On 14 January 2008 we published Issues Paper 4 on insurable interest. As with previous issues papers this sets out the preliminary thinking of the joint team. Regarding life insurance, we tentatively propose extending the categories of people able to insure others' lives. Regarding indemnity insurance, we point out the confused state of the current law and discuss whether the concept of insurable interest is needed at all. A summary of the paper is also available. We plan to publish a further issues paper on Damages for Late Payment in spring 2010.

Summary list of papers published so far:

January 2006 News Release on the Scoping Paper and the Scoping Paper

August 2006 Analysis of Responses and Decisions on Scope

September 2006 Issues Paper 1 - Misrepresentation and Non-Disclosure

November 2006 Issues Paper 2 - Warranties

March 2007 Issues Paper 3 - Intermediaries and Pre-Contract Information

July 2007 Joint Consultation Paper on Insurance Contract Law: Misrepresentation, Non-Disclosure and Breach of Warranty by the Insured (SLC DP134; LC CP 182); Key Proposals with Examples; News Release and Summary of the paper

January 2008 Issues Paper 4 - Insurable Interest and Summary of the paper

May 2008 Summary of responses on consumer insurance contract law

October 2008 Summary of responses on business insurance contract law

March 2009 Insurance intermediaries and pre-contractual information: a policy statement

April 2009 Issues Paper 5 - Micro-businesses

November 2009 Summary of responses to Issues Paper 5: Micro-businesses

December 2009 Joint Report on Consumer Insurance Law: Pre-Contract Disclosure and Misrepresentation

Contact

If you require any further information on the Insurance Law project, or if there are matters you wish to raise, please email: gillian.swanson@scotlawcom.gov.uk

If you would like to be kept informed of future publications and events we should be happy to add you to our email mailing list on request.

Page last updated: 15 December 2009