A review of insurance contract law recommends shifting insureds’ responsibility to brokers. Ling Ong and Michael Walkington explain

The Law Commission has published its consultation paper on insurance contract law, covering the issues of misrepresentation, non-disclosure and breach of warranty by the insured.

For consumer insurance, the commission provisionally proposes that there should be no duty on the person seeking insurance to disclose information about which questions were not asked.

This is a consumer-friendly proposal reducing the obligation of disclosure from the current obligation to disclose everything that might be relevant, even where the insurer has asked no questions about it.

Where a broker is involved in consumer insurance of this kind, his responsibility may therefore be reduced. Thus he may not need to help the consumer to identify all information, however obscure, that might be material to an insurer.

Another consumer-friendly proposed change is that an insurer would be able to avoid a policy for misrepresentation or non-disclosure on only one ground. This is where a reasonable insured would have appreciated that a fact that was stated inaccurately or was omitted from an answer, would be one that the insurer wanted to know about.

Nevertheless, the Law Commission also recognises that the less well-informed an insured is, the less he would know about what the insurer is likely to be interested in.

But where a broker is involved in the placing, there will be a greater likelihood that an insured will appreciate the importance of a piece of information.

Brokers should not relax and think they can rely on the duty in consumer insurance becoming less onerous.

One knotty issue the Law Commission has sought to address is who should bear responsibility if an intermediary completes the information in a proposal form incorrectly and the insured then signs off on it.

The commission proposes that an intermediary is deemed the insurer’s agent where it acts for only one or a limited number of insurers, rather than reviewing the market as a whole on behalf of a potential insured.

Where the broker is the insurer’s agent generally, he will remain so while completing the proposal form. In that way, any mistake made by the broker in completing the form will not be blamed on the insured and will not enable the insurer to avoid the policy.

As far as the insured signing the proposal form is concerned, the paper proposes that a consumer insured’s signature on a proposal form that has been completed incorrectly should not be regarded as conclusive evidence that the insured knew what was in the proposal.

In those circumstances, there would be a greater onus on the broker to ensure that insureds read the document carefully, check all the answers and confirm their understanding of the impact of any incorrect answers. Otherwise, the broker may be in the firing line for claims from insurers who are disgruntled by having to pay up on claims based on inaccurate proposal forms.

The Law Commission and many others feel that the statutory embodiment of insurance contract law, the Marine Insurance Act 1906, has been creaking for some time.

For example, s19(a) of the Act provides that the agent must disclose to the insurer “every material circumstance which is known to himself, and an agent to insure is deemed to know every circumstance which in the ordinary course of business ought to be known by, or to have been communicated to, him”.

The commission now proposes that, in business insurance, where a broker breaches this provision, the insurer should no longer be entitled to avoid the policy but should instead have a right in damages against the broker.

From the brokers’ perspective, this may be an unattractive prospect in that insurers may be more inclined to litigate than the average insured and may have deeper pockets to fund claims against brokers.

Brokers should therefore consider more carefully than ever whether they have any additional information which they need to impart to insurers when placing a business risk.

The Law Commission document is only a consultation paper and comment should be sent by 16 November.

It is therefore uncertain which of the proposals may become law.