Transcript Post-Legislative Scrutiny Project

INSURANCE CONTRACT
LAW REFORM
Manchester Claims Association – 5th July
Christina Sparks
Introduction and Consumer
Insurance (Disclosure and
Representations) Act 2012
Project timeline
• 2006 – Scoping study led to decision for a phased
programme.
• July 2007 – First Consultation Paper on pre-contract
disclosure and misrepresentation.
• December 2009 – Report on Consumer Insurance
Law: Pre-contract disclosure and misrepresentation.
• December 2011 – Second Consultation Paper on post
contract duties and other issues.
• March 2012 – the Consumer Insurance (Disclosure
and Representations) Act 2012 received Royal
Assent.
• June 2012 – Third Consultation Paper on business
insurance and warranties – responses by 26
September 2012.
• End 2013 – Publish final draft Bill.
Project breakdown
•
Divide Project into 3 –
1. Consumer pre-contract,
2. Post–contract matters and other topics, and
3. Business pre–contract and warranties
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Consumer/business divide unusual for insurance
law but normal elsewhere.
Reflects market, FSA, FOS practice.
Economic and social policy reasons for split.
Consumer Insurance
(Disclosure and
Representations) Act 2012
•
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•
Active market participation has
produced workable solution to 50 year
old problem.
Like 1906 Act codifies existing rules.
Royal Assent March 2012.
Implementation scheduled March
2013.
Definition of consumer and
consumer insurance contract
• Section 1
– An individual – so a natural person
– who enters into the contract wholly or mainly for
purposes unrelated to trade, business or
profession.
– contract between the individual and a person who
carries on the business of insurance.
– No contracting out.
No Duty to Disclose without
Questions
• Section 2(4) substitutes any duty relating to
disclosure (Marine Insurance Act 1906, section 18)
with a new statutory duty.
• Section 2(2) - the consumer must take reasonable
care not to make a misrepresentation. Otherwise
“Qualifying Misrepresentation”.
• Section 3 sets out test for reasonable care. Objective
but determined in the light of all relevant
circumstances. [NB relevance of insurers’ questions]
• Section 3(4) – particular circumstances or
characteristics of which insurer aware (or ought to
have been) taken into account.
• If consumer takes reasonable care – no breach.
Claim paid.
Qualifying Misrepresentations
• Qualifying misrepresentation (section 4) is one made in
breach of duty to take reasonable care.
• Deliberate/reckless:- insured knew (or did not care) statement
untrue or misleading and knew the matter (or did not care)
relevant to insurer. [“must have known”]
• Careless if not deliberate or reckless. [“ought to have known”]
• Dishonest misrepresentation always lacks reasonable care.
• The misrepresentation must induce the insurer to enter into the
contract at all or on the particular terms it did.
• Only remedies available are those provided by Act (schedule 1)
Insurer’s Remedies
• Remedies – schedule 1
– Deliberate/reckless - insurer may avoid and refuse all
claims.
– Need not return premium (unless unfair e.g. investment not
risk transfer).
– Careless – proportionate remedy based on what the insurer
would have done had the consumer complied with the duty.
– If insurer would not have entered contract – avoid.
– If entered on different terms (not premium) contract treated
as if on those terms e.g. excess, exclusions or warranties.
– If charged higher premium – reduce claim proportionally.
– Statutory formula to calculate reduction.
Other bits and bobs
– Section 6 bans “basis of the contract” clauses from consumer
contracts. These convert all answers in a proposal form into
contractual warranties.
– Section 7 Group Insurance:- where a member of a group scheme
makes a misrepresentation this will not avoid the whole policy but
will only have effect on cover for that individual.
– Section 8 Life insurance on the life of another – person being
insured is now under a duty not to make a misrepresentation.
– Section 9 preserves normal agency law – presumption agent of
consumer for these purposes unless authorised representative or
cover holder. Schedule 2 provides guidance in other
circumstances.
– Future proofing important – principles not list.
Third Consultation: The
Business Insured's Duty of
Disclosure and the Law of
Warranties
Business proposals: misrepresentation and
disclosure
Introduction
• S 17 Marine Insurance Act 1906 – utmost
good faith.
• S 18 MIA– duty of disclosure.
• S 19 MIA – Brokers’ duty of disclosure.
• S 20 MIA – Representations.
• Ss 33 – 49 MIA – Warranties and Voyage
Conditions.
• Inducement post Pan Atlantic
• Associated case law.
Current law - MIA 1906
• Contracts of utmost good faith.
• Proposer must disclose every “material
circumstance” a prudent underwriter wants to know.
• If questions - “material representations” must be true.
• Failure to disclose or a misrepresentation – insurer
can avoid policy. Only statutory remedy.
• Warranties – must be strictly complied with whether
material to the risk or not. Breach cannot be
remedied.
• Breach of warranty - insurer is “discharged from
liability” from date of breach.
Disclosure - what happens
elsewhere?
• Australia – retains duty disclosure but “materiality” as
considered by “reasonable insured” + proportionate
remedies.
• New York – duty of disclosure only for marine and
reinsurance – for other types remedy if
misrepresentation or “wilful concealment”.
• Eire – retains duty but balanced by a duty on insurers
to carry out reasonable investigations.
• France, Germany, PEICL – insurer must ask
questions.
Consultation proposalsbusiness
• Two policy areas to consider:
1) pre-contract. What is relevant? Who should know
what? How (or who) decide(s) materiality? Who does
what? (reasonable insured vs prudent underwriter)
2) “remedies” or post contract – what happens if…?
• 2007 Consultation - 50:50 for changes to materiality tests and even split
insurers and insureds.
- 60:40 for remedies but mixed views.
- The 40% concerned about remedies often proposed
alternatives i.e. “no but….”
Disclosure and materiality
• Inclined to follow thrust of consultation response.
Insufficient support for pre contract change +
difference reasonable insured advised by reasonably
competent broker vs prudent underwriter likely to be
minimal. Therefore evolutionary approach:
• Retain duty of disclosure. Familiar, may reduce cost.
• Retain current law on materiality (prudent underwriter
survives). Reasonable insured uncertain test.
• Codify inducement (as per consumer bill). Insurer
must show information relevant to its decision.
• Update s 18 to clarify responsibilities.
Update s18 MIA?
S 18 (1) ….the assured must disclose to the insurer,….every material circumstance which is
known to the assured and the assured is deemed to know every circumstance which, in
the ordinary course of business, ought to be known by him.
S 18(2) Material circumstance = something which would influence judgment of prudent
insurer in fixing premium, or determining whether he will take the risk.
S18 (3) In the absence of enquiry the following circumstances need not be disclosed,
namely:(a) Any circumstance which diminishes the risk;
(b) Any circumstance which is known or presumed to be known to the insurer. The insurer
is presumed to know matters of common notoriety or knowledge, and matters which an
insurer in the ordinary course of his business, as such, ought to know;
(c) Any circumstance as to which information is waived by the insurer;
(d) Any circumstance which it is superfluous to disclose by reason of any express or implied
warranty.
Update to cover recent case law and phrase in C21st language? In particular s18 (1) and
(3) (b) and (c).
Nothing new?
• Insurance is a contract upon speculation. …the underwriter
trusts to his (the proposer’s) reputation, and proceeds upon
confidence that he does not keep back any circumstance in his
knowledge, to mislead the underwriter into a belief that the
circumstance does not exist, and to induce him to estimate the
risque, as if it did not exist.
• If he (the underwriter) thought that omission was an objection at
the time, he ought not to have signed the policy with a secret
reserve in his own mind to make it void; if he dispensed with the
information, and did not think this silence an objection then he
cannot make it up now after the event.
Lord Mansfield 1766 (Carter v Boehm)
• Fair presentation on the one hand and no “claims underwriting”
on the other.
Policyholder’s obligations
• Policyholder must disclose all information needed to
give fair presentation of risk – query who and what?
• Who? - “Knowledge” for company = known to Board
and insurance purchasers – e.g. risk manager.
• Policyholder also has duty to disclose information
that would have been discovered by reasonable
proportionate enquiries (i.e. need good system).
• What? - Actual knowledge + “blind eye knowledge”.
• Broker should disclose information obtained as agent
for insured (s19 MIA 1906).
• Align representations (s 20 MIA 1906 ) – facts “ought
to know” – must be true. Otherwise statement must
be made “in good faith”.
Insurer’s obligations
• “...the proper line that an underwriter should take...is
absolutely to abstain from asking any questions and
leave the assured…to make full disclosure of all
material facts without being asked. Per LJ Scrutton
1926
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Appropriate C21st?
Professional competence?
Why employ underwriters at all?
Insurer should expect fair presentation but proposer
can expect competent and knowledgeable
underwriter.
Insurer’s obligations
• When insurer receives information which would
prompt reasonable underwriter to make further
enquiries cannot rely on failure to disclose what those
enquires would have revealed – (waiver).
Professional competence.
• Policyholder need not disclose matters of:
1) common knowledge;
2) matters which insurer writing relevant class should
know;
3) information already known to insurer (board or
underwriters or agent). IT systems?
Remedies
• S17 MIA “…if the utmost good faith be not
observed by either party, the contract may be
avoided by the other party”.
• Brutal but simple.
• Arguably imposes disclosure discipline but…
• Must over or under compensate insurer.
• Much criticised by judges and commentators.
• Quite limited support in 2007 consultation.
• Often not followed.
• Not very mutual in practice.
“Proportional” solution?
• Follows inducement – “OK. What would you have
done?”
• Seek to restore parties to position should have been
in e.g. – Claim will not be paid if insurer would not have accepted risk
or imposed exclusion.
– Claim may be paid in part if insurer would have imposed
different limits or charged higher premium.
– Claim paid if insurer would have accepted on same terms
(less likely given P.U. and inducement).
Fault/Issues
• If non-disclosure or misrepresentation is deliberate or
reckless – avoid.
• Otherwise apply proportional remedy – reason for
error not relevant. Different to consumer bill.
• Default regime as now. Freedom of contract applies.
• Good faith continues as interpretative principle.
• Uncertainty? Yes – more apparent than real. Courts
very familiar with “what if?” elsewhere.
• Subscription market. Will require guidance – follows
inducement.
Micro-businesses
Single Business Regime?
Micro-businesses.
• Should micro-businesses be treated as consumers?
• Opinion divided. Concerns over definitions,
preventing abuse and creation of “third sector”.
• We have discussed inter alia with ABI, FOS, FoSB,
BIBA, BIS. Surveys of BIBA and ABI members.
• Problems revealed relate to process rather than law.
• Insufficient evidence of systemic problem or support
for change to justify law reform and increased costs.
• Therefore proposal for single, comprehensive
business regime.
Summary
• Any definition would be arbitrary, complex and difficult to apply at the
u/w stage.
• There is insufficient evidence of need to justify the potential costs of a
special regime.
• The Financial Ombudsman Service is able to prevent injustice in hard
cases.
• Reforms are proposed to the existing law (such as proportional
remedies) which should apply to all businesses, large and small.
– See Appendix A in Consultation Paper 3 for more detail.
Question?
Do you agree that one business regime should apply to all
businesses? If not, please provide evidence of need.
Warranties
Warranties: current law
• What is a warranty?
LJ Rix “It is a question of construction, ...”
• Can be express or implied. May or may not use word “warranty”.
• Is not the same as normal contract warranty and is not a
consumer guarantee.
• Section 33 MIA 1906 – partial definition which includes:
– a statement about past or present facts;
– a promise to do or not do something;
– a statement that some condition will be fulfilled.
• “Basis of contract clauses” – convert statements into warranties.
Warranties: current law
• Section 33(3) MIA 1906 – exact compliance (i.e. no link breach
and loss) or…
• Insurer automatically discharged from liability from date of
breach.
• Breach cannot be remedied.
• Section 34 (1) MIA 1906 - breach may be excused if warranty
“ceases to be applicable” or when compliance becomes
unlawful.
• Section 34(3) MIA 1906 – breach can be waived.
What does this mean?
• Warranties that– Ship has at least 50 hands on departure. Had 46 but picked
up 6 more shortly afterwards. Claim not paid.
– Lorry parked at address. Parked in safer location. Claim not
paid
– Item value £285. Actual price £271. Claim not paid.
– Vessel “fully crewed at all times”. Not crewed when berthed –
claim not paid.
• In practice rare for insurers to rely on strict rights.
FOS do not permit in consumer insurance.
Main defects in the current law
• “Basis of the contract” clauses – avoids s 20 MIA 1906. Catch
policyholders out (although some protection for consumers
now).
• Increasingly indiscriminate use of warranties – applied to terms
dealing with minor matters.
• Effect of breach automatic, complete (all risks discharged) and
severe. Policyholder may be without cover and not realise it.
• Later remedy irrelevant – even for most minor of breaches.
• Waiver – on what basis? “The contract is dead but the insurer
can still waive it back to life”.
• The court’s use of construction to moderate harshness of the
law – increased uncertainty. (Kler Knitwear)
Proposals for reform
• 1) Abolish “basis of the contract” clauses.
• 2) All warranties – breach suspends insurer’s liability
for duration of breach. Breaches can be remedied
and cover restored.
• 3) Terms designed to reduce the risk of a particular
type of loss – breach suspends insurer’s liability for
that type of loss for duration of breach. Insurer
remains liable for other types. Avoid causal
connection test (underwriting perspective – not
claims).
– See Vesta v Butcher, Bamcell II, Printpak v AGF
How will it work?
• Yacht policy has 3 warranties:1.
2.
3.
Premium payment warranty. Premium due on 1
June but not paid until 15 June.
Lock warranty on hatch. Specific lock required.
Pleasure use only warranty.
• Owners breach all three. On 1 July yacht is total loss
as a result of storm damage whilst on paid for whale
watching trip.
• What is the effect of these warranties?
Specific points
• Consumer insurance - new regime is mandatory.
• Business insurance - can contract out but only
effective if in clear, unambiguous writing and if
brought to attention of policyholder.
• MAT – regime applies to express and MIA 1906
implied warranties but can contract out.
• Implied voyage conditions retained and not brought
within the regime.
• Reinsurance – regime applies but can contract out.
Damages for late payment
Post contract - Damages for
Late Payment
• If an insurer delays payment causing the policyholder
loss what compensation can the policyholder claim?
• Can the policyholder claim for all losses caused by
any delay? If so on what basis? Or
• Only some losses caused by some delays? Or
• Is the policyholder confined to interest on the original
loss?
• English law follows the third option – sometimes!
• (Sprung v Royal Insurance) – insurer breaches
contract when loss occurs + no damages on
damages – therefore only interest.
• Unique – not Scotland/FOS/life/re-instatement/rest of
world etc.
Our current proposals: outline
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•
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A statutory duty to pay valid claims within a
“reasonable time”. Breach may lead to damages on
normal contract principles.
Definition of “reasonable time” - Insurers cannot
make decision until receive “clean claim”. Factual.
Insurers may contract out of liability in business
insurance (but not in consumer insurance).
– But insurers may only rely on an exclusion clause if they
have acted in good faith?
•
•
When does time start to run (limitation period)?
Damages for distress and inconvenience (consumer
only).
Consultation responses
• Consulted in Issues Paper 6 and CP 2.
• Over 80% agree reform required.
• Over 80% agree insurers should pay damages for
foreseeable losses.
• 80% agree consumers should be awarded damages
for distress and inconvenience but query whether
statutory reform required.
• Concerns relate to definition/calculation of
reasonable time for payment, abuse by policyholders,
ability/basis to exclude liability and calculation of
limitation period.
Insurers’ remedies for fraud
Insurer’s remedies for fraud –
the problem
• Serious and expensive problem and a major cost to
insurance industry – and customers.
• ABI reports that in 2010 insurers uncovered 133,000
fraudulent claims.
• Claims totalled £919 million or 5% of the value of all
claims made of ABI members that year.
• Insurance fraud costs UK economy £2 billion every
year (ABI News Release 31/11, July 2011).
• Social attitudes to dishonesty are complex.
• Fraud in practice is hard to define.
• Fraudsters should face sanctions – to have a
deterrent effect sanction should be clear.
Current law
Marine Insurance Act S17 quite clear:
“A contract of marine insurance is a contract based upon utmost
good faith, and, if good faith be not observed by either party the
contract may be avoided by the other party”
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Is section17 in this context a codification of the common law? probably not.
Does this apply post contract? – courts have said yes and no
Do the courts apply S17? – no, not recently.
Law incoherent.
“The duty not to make a fraudulent claim has been characterised in
several irreconcilable ways by the courts…Alternative positions have
thus been created as to the remedies available to insurers in respect of
fraudulent claims, but none long-established”. [ABI]
Uncertainty about the effect of fraud on other claims (previous or
subsequent).
Insurer cannot sue an insured for damages following a fraudulent claim.
Our current proposals: outline
• New statutory remedies: s 17 of the 1906 Act would no longer
apply.
• Forfeiture:
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Forfeiture of whole claim.
Forfeiture of all claims after the date of the fraud.
Fraud does not affect previous valid claims.
• Insurer can claim damages for costs reasonably and actually
incurred.
• Subject to express terms in business insurance.
–
but not in consumer insurance.
• Group members to be treated in the same way as if insured.
• Joint policies – should innocent party have statutory protection?
• What is not covered:
–
–
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definition of fraud - we concluded the issue was best left to the courts. Fact specific and question
of morality.
criminal fraud.
third party claims.
Consultation responses
• Consulted in Issues Paper 7 and CP2.
• Over 90% of consultees agree that a policyholder who commits
a fraud should forfeit the whole claim to which the fraud relates.
This proposal was welcomed by many as an effective deterrent.
• Over 70% agree that they should also forfeit any claim where
the loss arises after the date of the fraud.
• Over 90% agree that they should be entitled to be paid for any
previous valid claim which arose before the fraud took place.
• Some issues raised relate to definition of fraud, fraudulent
devices/exaggerated claims, “minimal fraud” to allow recovery in
some cases, automatic forfeiture-notice to terminate instead.
Joint/group policies consultation response
•
•
80% agreed that a fraudulent act by one or more
group members should be treated as if the group
member concerned was a party to the contract.
Joint insureds - little evidence or examples
provided of a problem in practice. Nearly 70%
agreed that there is no need to legislate on the
effect of fraud by one joint insured on the other joint
insured’s claim.
Further information
• If you would like any further information
please see the Law Commission’s
website – insurance project page:
– http://lawcommission.justice.gov.uk/areas/i
nsurance-contract-law.htm