The Law Commission report shows the law is now seriously out of date and out of line with modern commercial practices
Today, the 17th July 2014, the English Law Commission finally published a report on Insurance Contract Law following consultations with stakeholders for almost eight years. The reforms focus on Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment.
This report follows on from our first report in this area: Consumer Insurance Law: Pre-contract Disclosure and Misrepresentation, which resulted in the Consumer Insurance (Disclosure and Representations) Act 2012 (“CIDRA”).
In the July 2014 report, the Law Commission and the Scottish Law Commission recommend reform of the law in four key areas of insurance law:
- The duty of disclosure in business and other non-consumer insurance
- The law of insurance warranties
- Insurer’s remedies for fraudulent claims
- Late payment of insurance claims
These reforms would be a default scheme for business insurance, leaving the parties free to agree alternative arrangements in their contracts provided they do so transparently. The majority of the Law Commissions’ recommendations were accepted by the Government. The Insurance Bill was introduced in the House of Lords on 17 July 2014.
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 problems with the current laws date back to the 1906 Act which imposes a duty on a prospective policyholder to disclose to the insurer “every material circumstance” which would “influence the judgement 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.
The Law Commission 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.
The recommendations made were:
- 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.
John Hurrell, chief executive of Airmic, the UK’s risk management trade body, said: “The UK is unique among advanced economies in that our current legal framework potentially penalises the purchaser of commercial insurance and creates uncertainty over whether policies bought in good faith will pay out in the event of a claim. The new insurance bill will be good for business and help to maintain confidence in the London insurance market.”
Insurer’s remedies for fraudulent claims
The report says the law should provide clear remedies for an 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.
This in theory allows an 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 of this outdated law, it is not clear whether the insurer is liable to pay other genuine claims, whether they arise before or after the fraud, which has led to the Commissions recommending the following changes:
- 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.
Maurice Tulloch, chief executive of Aviva UK & Ireland GI said: “We’ve been pushing for contracts to be easier to understand and provide greater clarity for customers. Underpinning this is reform of insurance law to make it more relevant for today’s businesses. The Bill is a welcome development that will deliver significant benefits to both customers and the industry, helping make the UK a great place to do business.”
Refused claims or unreasonable delays
Now this part of the report woke me up. Back when my insurer refused my claim, the Financial Ombudsman did raise the fact my insurer had unreasonable delayed my claim and I was compensated a dismal £100.00. If you don’t use the ombudsman service the current laws in England and Wales actually don’t provide a remedy for policyholders if the insurer unreasonably refused to pay a claim or paid it only after unreasonable delay.
Notably, policyholders are 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. Here, Here.
The Commission considers that a policyholder should have a remedy where an insurer has acted unreasonably in delaying or refusing payment. However, they have warned 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. Any changes need to 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.
The Commission recommended that an implied term in every insurance contract that the insurer will pay sums due within a reasonable time. This will mean that any breach of that term should give rise to contractual remedies, including most importantly 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”, with insurers not being liable for delays caused by genuine disputes.
Finally, the law currently provides for avoidance of the insurance contract where either party breaches the duty of good faith. The Commission has recommended removing this remedy, but good faith should be retained as an interpretative principle.
The government has now put the 13-page Insurance Contract Bill before parliament to address what the government has described as “serious shortcomings in the legal framework”.
According to Andrea Leadsom, economic secretary to the Treasury, the new bill will bring in a “more modern legal regime”, which will benefit both insurers and their business customers. The bill aims to increase transparency and certainty over the rules that govern contracts between them and thereby reduce the number of legal disputes over time.”to
Ms Leadsom continued: “Britain’s insurance industry is a major success story, employing more than 300,000 people across the country, helping millions of British people and businesses every day and exporting across the globe. We want the industry to continue to grow and provide better services to customers, which is why we need to bring insurance contract law into the 21st century.”