The Law Commissions of England and Scotland are proposing a series of changes to insurance contract law that could change the face of age-old statute
Pages of the 102-year-old Marine Insurance Act are set to be ripped out and replaced with the kind of law that reflects the nature of today’s market.
Since the Act of Parliament was passed on 21 December 1906, the insurance industry has drastically changed with the emergence of new products, attitudes, risks and methods of distribution – it’s a different world.
The Law Commissions of England and Scotland have been working for more than a year to find a way of changing insurance contract law and with it, drag statute into the 21st century.
Under proposals contained within the Commissions’ first consultation paper following the publication of three issues papers on misrepresentation, non-disclosure and breach of warranty by the insured, insurers and consumers face a number of changes.
Provisional proposals for consumer insurance recommend that a mandatory regime based mainly on existing Financial Ombudsman Service’s (FOS) guidelines should apply; and for business insurance that a new default regime based on accepted good practice should apply in the absence of an agreement to the contrary.
The proposals cover the following areas:
• Pre-contract information in consumer insurance: the consumer’s duty to volunteer information will be abolished and replaced with a consumer's duty to answer questions honestly and reasonably.
• Pre-contract information in business insurance: changes will be made to the "default regime", which applies in the absence of any contractual terms to the contrary. This will include modifying businesses’ duty to disclose; and for misrepresentations, introducing new default rules similar to the scheme outlined for consumers.
• Pre-contract information: group insurance, co-insurance and insurance on the life of another will be reviewed in relation to misrepresentation.
• Warranties: these should be set out in writing and in consumer cases, must be brought to the consumer's attention; a breach of warranty would not automatically discharge the insurer from liability; in business insurance the parties could agree other consequences for breach of warranty subject to special controls where the business contracts on the insurer's standard terms.
• Pre-contract information and intermediaries: an intermediary should be regarded as acting for the insurer unless they are clearly independent of the insurer and acting on the insured's behalf; the Commissions will seek views on whether section 19(a) of the Marine Insurance Act 1906 should be repealed for consumer insurance. For business insurance the Commissions propose that breach of section 19(a) would give the insurer a right in damages against the intermediary rather than the right to avoid the policy.
“It remains to be seen whether the commissionsâ€™ review ultimately makes it to the statute book or indeed comes to naught, a fate suffered by many earlier reviews
Stephen Netherway, insurance and reinsurance partner, at law firm CMS Cameron McKenna
From a legal perspective these changes are seen as an integral part of modernising the system.
Richard Evans, partner and head of the policy coverage unit at Beachcroft LLP, says: "The proposals strike a fair balance between consumer and business insurance interests. The main mischiefs for consumers, including the duty of disclosure, have been addressed but I am glad to see that the Commissions have sought to preserve for businesses the freedom to contract, a basic tenet not only of insurance contract law but general contract law.”
Stephen Netherway, insurance and reinsurance partner, at law firm CMS Cameron McKenna, adds: “Many proposals presently being canvassed are quite radical in terms of the changes that they will make to the existing legal principles applicable to insurance.”
Insurers, however, take a different stance to the lawyers, looking on the proposals with caution and scepticism.
The ABI goes so far as to say that imposing more law on the insurance industry is "unlikely" to help customers.
Stephen Haddrill, the ABI’s director general, insists: “The insurance industry is closely and effectively regulated by the FSA. The industry also set up and supports an Ombudsman service that enables customers to settle disputes without going to court.
“More law is unlikely to provide a better deal for customers. The real challenge is for the industry and the FSA to make a success of principles-based regulation."
He adds: “We will scrutinise the Law Commission's proposals to ensure that they add real value to the regulatory system; are themselves principles-based, not prescriptive; and do not distract from the efforts already underway to modernise regulation.”
Any changes are unlikely to be implemented for several years, with a final Bill likely to be presented to Parliament for approval in 2010.
“It remains to be seen whether the commissions’ review ultimately makes it to the statute book or indeed comes to naught, a fate suffered by many earlier reviews, “ says Netherway. “If it does translate into a statute, be prepared for a whole new ball game in the process of the market’s ability to contest claims and to allocate financial responsibility between market members.”
Law Commission's reform of insurance contract law
Insurance contract law has been criticised as outdated and unduly harsh to policyholders. Reports recommending reform were published by the Law Reform Committee in 1957, the Law Commission in 1980, the National Consumer Council in 1997 and the British Insurance Law Association in 2002.
In January 2006, the teams working on the project at the two Commissions issued a scoping paper, inviting views on which areas of insurance contract law were in need of reform.
In the light of the responses they received, the teams published a joint paper giving their decisions on the scope of the project. It was decided that a first consultation paper would deal with the issues of misrepresentation, non-disclosure and breach of warranty.
The teams then developed their preparatory thinking for this consultation paper through a series of issues papers.
In July 2007 the Law Commission published jointly with the Scottish Law Commission a consultation paper on insurance contract law. They invited comments on provisional proposals to modernise the law relating to misrepresentation, non-disclosure and breach of warranty by the insured.