Professor Hector MacQueen
Gillian Swanson, Project Manager
We are assisting the Law Commission for England and Wales with this project.
Our joint Report on Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment has been published (17 July 2014). A summary and news release are also available.
Annexed to the Report is a draft Bill which would implement our recommendations if enacted. In June 2014, HM Treasury consulted on the draft Bill and, we are pleased to report, on the same day as the publication of our Report, introduced a version of the Bill into Parliament. That Bill includes all of our recommendations apart from two provisions: the clause relating to late payment, and the clause concerning warranties and other terms relevant to particular descriptions of loss. These were omitted as HMT did not consider them suitable for the special procedure for uncontroversial Law Commission Bills. We will continue to work with stakeholders to find a workable solution on these points, to be introduced at the next legislative opportunity. The summary identifies the corresponding
provisions in the draft Bill and the Bill as introduced into Parliament.
The Bill also corrects a defect in the Third Parties (Rights against Insurers) Act 2010, so that that Bill can be implemented.
The Insurance Bill and accompanying Explanatory Notes are available at: http://services.parliament.uk/bills/2014-15/insurance.html. The Bill will follow the procedure for uncontroversial Law Commission Bills. The Government's announcement can be found at: https://www.gov.uk/government/news/government-takes-action-to-modernise-100-year-old-insurance-industry-rules.
Several stakeholders have asked how the duty of fair presentation under the Insurance Bill would apply where a single insurance contract covers a number of different people and/or legal entities. We have therefore produced a note setting out our interpretation of the current law and the position under the Insurance Bill.
The recommendations in our joint Report on Insurance Contract Law
Much of the current law is governed by the Marine Insurance Act 1906. The 1906 Act codifies principles developed in the eighteenth and nineteenth centuries. Although the 1906 Act only appears to relate to marine insurance, most of its principles have been taken to reflect the law for all insurance on the basis that it embodies the common law. The law is now seriously out of date and out of line
with modern commercial practices.
A duty of fair presentation in non-consumer insurance
The 1906 Act imposes a duty on a prospective policyholder to disclose to the insurer “every material circumstance” which would “influence the judgment of a prudent insurer” in fixing the premium or deciding whether to take the risk. Many businesses have little idea of what might influence a prudent insurer. Yet the penalties for failure to disclose information to insurers are harsh. If a policyholder fails to disclose material information, the insurer may treat the policy as if it does not exist and refuse all claims under it.
We identified several problems with the current law, including:
• The duty of disclosure is poorly understood.
• Knowing how to comply with the duty is difficult, particularly for large companies.
• The law encourages data dumping by businesses.
• The law encourages underwriting at claims stage.
• The remedy for failure is too harsh.
We therefore recommend:
• Replacing the duty of disclosure with a duty of fair presentation based on developments in case law, covering what should be disclosed and the form of disclosure.
• Encouraging insurers to take a more active role.
• Setting out rules concerning attribution of knowledge, particularly to non-natural persons such as companies.
• Putting the common law “inducement test” on a statutory footing.
• Providing a regime of proportionate remedies in the event of breach by the policyholder based on what the insurer would have done if it had received a fair presentation.
Warranties and other terms
An insurance warranty is a promise made by the policyholder to the insurer which, if broken, has harsh consequences for the policyholder. The general principles of insurance warranty law are founded on the rulings of Lord Mansfield in the eighteenth century, and codified in the 1906 Act. A warranty “must be exactly complied with, whether material to the risk or not”. If not, then “the insurer is discharged from liability from the date of the breach of warranty”. Once a warranty is breached, the policyholder “cannot avail himself of the defence that the breach has been remedied, and the warranty complied with, before loss”.
We identified several problems with the current law:
• An insurer may refuse a claim for a trivial mistake which has no bearing on the risk.
• The insured cannot use the defence that the breach was remedied before any loss occurred.
• Breach of warranty discharges the insurer from all liability, not just liability for the type of loss in question. For example, a failure to install the right sort of burglar alarm would discharge the insurer from liability for a flood claim.
• A statement may be converted into a warranty using obscure words that few policyholders understand. For example, if a policyholder signs a statement on a proposal form that their answers form the “basis of the contract”, this can have draconian consequences.
We make three recommendations in this area:
• Abolish “basis of the contract” clauses in business insurance, having already done so for consumer insurance in the Consumer Insurance (Disclosure and Representations) Act 2012.
• Where a warranty has been breached, the insurer’s liability should be suspended, rather than discharged. Where a
breach has been remedied before loss, the insurer should be brought back on risk.
• Where a term relating to a particular type of loss, or loss at a particular time or in a particular location, is breached, the insurer’s liability should only be suspended in relation to that type of loss or loss at that time or place.
(The last of these recommendations was not included in the Insurance Bill introduced into Parliament by the Government on 17 July 2014.)
Insurer’s remedies for fraudulent claims
The law should provide clear remedies for the insurer where a policyholder makes a fraudulent claim, yet the current law appears confused and contradictory. Under the common law, the fraudster forfeits the fraudulent claim. However, section 17 of the 1906 Act gives the insurer a statutory remedy of avoidance of the whole contract in the event of a breach of good faith. In theory, this allows the insurer not only to refuse to pay any part of the fraudulent claim, but also to avoid the entire policy from the outset, with the parties being returned to their pre-contract position. This means the insurer could recover from the policyholder any sums previously paid
out on genuine claims. Although, in practice, the courts have been reluctant to apply the remedy of avoidance, its status is still uncertain. As a result, it is not clear whether the insurer is liable to pay other genuine claims, whether they arise before or after the fraud.
• Where an insured makes a fraudulent claim, the insurer should not be liable to pay the claim and should be able to recover any sums already paid in respect of it.
• In addition, the insurer should have the option to treat the contract as having been terminated at the time of the fraudulent act.
• The insurer should remain liable for genuine losses before the fraudulent act.
Damages for late payment
Where an insurer has unreasonably refused to pay a claim or paid it only after unreasonable delay, the current law in England and Wales does not provide a remedy for the insured. Notably, the insured is not entitled to damages for any loss suffered as a result of the insurer’s unreasonable actions. This differs from the law in Scotland and most major common law jurisdictions, where such damages are available. The legal position in England and Wales is anomalous and out of step with general contractual principles. We consider that a policyholder should have a remedy where an insurer has acted unreasonably in delaying or refusing payment. However, we recognise that insurers need a reasonable time to investigate claims, and that the length of time required will depend on factors such as the type of insurance and the complexity of the claim. We also understand that the speed with which a claim can be paid may depend on the insured themselves, and other factors outside the insurer’s control. Furthermore, insurers have an obligation to ensure that only valid claims are paid.
• An implied term in every insurance contract that the insurer will pay sums due within a reasonable time. Breach of
that term should give rise to contractual remedies, including damages. In Scotland, a statutory provision would serve to confirm and clarify the position already established at common law.
• Guidance as to factors to be taken into account when considering what constitutes a “reasonable time”.
• Insurers should not be liable for delays caused by genuine disputes.
(The recommendations relating to late payment were not included in the Insurance Bill introduced into Parliament by the Government on 17 July 2014.)
The law currently provides for avoidance of the insurance contract where either party breaches the duty of good faith. We recommend removing this remedy. Good faith should be retained as an interpretative principle.
The Consumer Insurance (Disclosure and Representations) Act 2012 came into force on 6 April 2013. It derives from the recommendations in our joint Report on Consumer Insurance Law: Pre-Contract Disclosure and Misrepresentation (Scot Law Com No 219) further details of which can be found on the completed project page. The Scottish Government gave their initial response to the Report in March 2010 and gave a further response following the successful passage of the Bill through the UK Parliament.
The project began in January 2006. The joint team issued a scoping paper, inviting views on which areas of insurance contract law were in need of reform. In the light of the responses received, a paper setting out the scope of the project was published. The first joint consultation paper, published in 2007, covered pre-contract issues in both consumer and business insurance but the emerging scale of the project led the Commissions to introduce a phased programme of work, dealing with pre-contract consumer and business issues separately.
Our first report on Consumer Insurance Law was laid before Parliament in December 2009 and the Consumer Insurance (Disclosure and Representations) Bill was introduced in the House of Lords under the Special Bills Procedure in May 2011. The Bill, now the Consumer Insurance (Disclosure and Representations) Act 2012, received Royal Assent on 8 March 2012 and, as stated above, came into force on 6 April 2013.
The Law Commissions' second joint consultation paper (2011) covered post contractual issues: damages for late payment, remedies for fraudulent claims, insurable interest and policies and premiums in marine insurance. Our third joint consultation paper (2012)
covered disclosure in business insurance and warranties. Some of the results of these consultations fed into the second Report and draft Bill, published on 17 July 2014. That Report covers disclosure in business insurance, warranties, remedies for fraudulent claims, and late payment. All of these papers, and other papers published in relation to the project, can be accessed by means of the links
We are currently considering how best to deal with the issues on which we have consulted but not yet reported. These include matters such as insurable interest and policies and premiums in marine insurance.
Summary table of papers published so far:
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