In September 2006, the Law Commission published its first “issues” paper, setting out tentative proposals for reforming misrepresentation and non-disclosure, as part of a major overhaul of insurance contract law. Driving the reform is a desire to give a fairer deal to policyholders.

Its headline proposal, in relation to consumers, is to replace the insured's duty to disclose information with a duty on insurers to ask specific questions.

Should there then be a misrepresentation, the test of materiality would require the insurer to show both that they were induced to enter into the contract on the relevant terms, and that the consumer appreciated that the representation in question would have that significance, or that a reasonable insured in the circumstances would have so appreciated. This would replace the “prudent insurer” test.

Remedies would broadly follow the distinctions drawn by the Financial Ombudsman Service as to whether the misrepresentation was fraudulent, negligent or innocent. Where fraudulent, insurers would be allowed to avoid the policy. Where innocent, the insurer would have no remedy. For the middle ground of negligent misrepresentation, the court would consider what the insurer would have done, had they known the facts. For example, if they would have declined the risk or added an exclusion which would have applied, the claim could be refused. If a higher premium would have been charged, the claim would be reduced proportionately. It is also proposed that “basis of the contract” clauses should be ineffective.

For businesses, the duty of disclosure would be retained but the same test of materiality would apply. A similar approach would also be taken in relation to remedies, except that the application of proportionality in a business context has been left open.

The proposals could have significant implications. Proposal forms may become far longer and would certainly need to be more tightly worded. On renewal, insurers would need to include the content of answers previously given. In general, insurers would need to be more aware of information kept in their files, which they would be deemed to know provided it was reasonably identifiable. The remedies limit the draconian measure of avoidance only to cases of fraud. The test of fraud would include a requirement that the insured knew the statement was material to the insurer.

A second issues paper on warranties is expected in November 2006. The first of two consultation papers is anticipated next summer, at which point the Law Commission's proposals for these important areas are likely to be finalised.

This Viewpoint item appeared in issue 110 of JTW News - November 2006

Author: Julian Miller - Beachcroft LLP