Disclosure encounters of a different kind

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

The headline proposal is to replace the duty of disclosure, at least for consumers, with a requirement for insurers to ask specific questions. Consumers would, therefore, only need to answer accurately the questions they are asked. If insurers do not ask a specific question, they would be regarded as having waived their right to such information. For businesses, however, the duty of disclosure would be retained.

While bringing the law into line with guidance from the Financial Ombudsman Service, in practice this suggestion is likely to create longer, more tightly worded proposal forms.

On renewal, insurers would also need to include the content of answers previously given. For brokers, this may simplify their position, the key requirement being to advise on the full scope of the questions being asked.

Any misrepresentation would then be measured against a proposed test for materiality which would require the insurer to show both actual inducement and that the insured appreciated that the fact in question would have that significance or that a reasonable insured in the circumstances would have so appreciated.

The advice received from brokers ought to influence the insured's appreciation of the significance of the questions being asked.

As far as remedies are concerned, it is proposed that these would depend on whether the misrepresentation was fraudulent, negligent or innocent, again following the lead of the Financial Ombudsman Service.

Only where there is fraud would insurers be able to avoid the policy. Even then, the proposed test would also require insurers to show that the insured knew that the statement was material to the insurer.

Where innocent, the insurer would have no remedy. For the middle ground of negligent misrepresentation, it is suggested that the court should look at what the insurer would have done, had it known the true facts. If it would have declined the risk or added an exclusion, the claim could still be refused.

If a higher premium would have been charged, the claim would be reduced proportionately.

A second 'issues' paper on warranties is expected in November and the first of two consultation papers is anticipated next summer. Further issues papers are expected in 2007, including on agency, and a second consultation paper in 2008. A final report and draft Bill is suggested for 2010.