Richard Evans looks at high priority issues in the Law Commission's insurance contract scoping paper
As we approach the 19 April deadline for responding to the Law Commission's joint scoping paper, it is necessary to consider what the greatest 'mischiefs' are in insurance contract law that deserve a high priority ranking.
The Law Commission has made it clear that there is limited parliamentary time available and it is therefore vital that the key issues are flagged up now.
While non-disclosure and breach of warranty are confirmed as being included in the scope of the forthcoming review, these topics should be given priority over any other questions raised in the scoping paper.
However, question 8, which relates to the post-contractual duty of good faith, is obviously closely related to non-disclosure.
The time is right to reconsider issues such as the true relative knowledge of insurers and insureds in light of the range of information now available to insurers; the existing test of materiality and whether the views of a prudent insurer should be replaced by those of a reasonable insured, with whom it is easier to identify.
Also, the related issue of the state of mind of the insured; proportionality, already applied elsewhere in Europe; and a requirement for a causal link with the loss, in relation to non-disclosure and breach of warranty.
Of the questions raised for comment in the scoping paper, damages for unjustifiable delay must be one of the most fundamental.
In the case of Sprung v Royal Insurance , one can readily sympathise with the seemingly inequitable effect of the current law on the likes of Sprung, whose small business collapsed before insurers finally paid out under his policy nearly four years after the loss and for whom there was no redress.
It seems clear even at this stage that insurers, like King Canute, will not be able to hold back the tide on this issue and must ask themselves instead what level of change they consider appropriate.
One concern about an approach which not only recognises damages for losses that arise naturally from the breach but also those in the contemplation of both parties at the time they made the contract is that insurers will be inundated with the minutiae of an insured's financial status, client list and contractual obligations.
In this way, an insured will have paved the way to (threaten to) bring a claim for significant consequential losses should there be a delay in dealing with their claim.
An up-side to such practice, however, is that it may assist underwriters in obtaining more detailed disclosure and claims handlers in assessing quantum on any business interruption claim.
There may well also be considerable discussion about what actually constitutes a breach and precisely when an insured has complied with all reasonable obligations placed upon him under the policy.
I would suggest that if damages are recognised for unjustifiable delay, insurers should still be free to include an express provision limiting liability to that under the policy.
The parties should not be prevented from freely negotiating limits of liability in this way and protection to the consumer can be afforded by controls, comparable to those set out under the Unfair Contract Terms Act 1977, which assess the reasonableness of the provision by considering, for example, equality of bargaining power.
This could in turn allow insurers more accuracy in considering their reserves and thereby reduce the impact on premiums. A new type of insurance could even emerge to cover losses flowing from insurers' "professional negligence".
Insurers could even suggest that, if this is now to be a level playing field, they should be allowed similar redress if an insured makes an unjustified claim. This would obviously impact on the issue of fraud raised at question 9 of the scoping paper.
One of the greatest difficulties with the current law is its discrepancy with the "fair and reasonable" approach adopted by the Financial Ombudsman Service (FOS) in relation to consumers and small businesses with an annual turnover of less than £1m.
There are effectively two separate strands of law-making on which to advise in relation to eligible insureds, that relating to the FOS being all the more difficult for the lack of publicised decisions.
In fact, compound this with increased mediation and there is a general dearth of fresh authority altogether.
It is therefore clear that, for this class of insured at least, the law is crying out for consolidation.
There would appear to be a justification for law which accommodates both consumers/small businesses and medium/large businesses, based on considerations of (in)equality of bargaining power and access to advice.
In such circumstances, consideration should be given as to whether the risk has been arranged directly by the policyholder or under advice from a broker.
The role of the intermediary as raised at question 3 is therefore also a key issue for the Law Commission.
Looking to the future, the Law Commission's suggestion that an Act could be split into two stages - consumer law and then business law - is an attractive one as it is more likely to receive the necessary parliamentary time.
As for the provisional timetable, the scope of the review will be determined in May 2006, followed by various position papers on individual issues.
A second consultation paper is then expected in May 2007 with a final report and draft bill in 2008.
It is vital that everyone associated with the insurance industry thinks carefully about the areas being proposed for change and contributes now to the debate.
The case studies in the scoping paper clearly indicate the mischiefs that the Law Commission feels it needs to review.
Those in the industry need to decide at this stage whether they agree and over the coming year need to think constructively and innovatively about how these mischiefs can best be managed. IT
' Richard Evans is a partner and head of the commercial and property risk group at Beachcroft Wansbroughs.