In a bind
8 October 2007
On 17 July 2007 the Law Commission in England and Wales and the Scottish Law Commission released the first consultation paper of their ongoing review of insurance contract law, bringing us one step closer to a possible Insurance Contracts Act 2010.
The paper draws together the contents of three preceding issues papers concerning information provided at the pre-contract stage, focusing on misrepresentation, non-disclosure and breach of warranty by the insured and the role of intermediaries.
The commissions' stated aims for reform have always focused on the simple fact that the present law does not reflect current practice, specifically in the area of consumer insurance, and that this state of affairs means there is a lack of coherence and understanding.
While general contract law has evolved over the years with the introduction of such legislation as the Unfair Contract Terms Act 1977 (UCTA), the somewhat archaic Marine Insurance Act 1906 has remained the legislative backbone for insurance law. Indeed, the insurance industry lobbied successfully to make insurance contracts exempt from UCTA.
As such, the commissions believe that the law does not meet the reasonable expectations of customers and so they have concentrated on reform so as to favour the consumer. This has necessitated a clear consumer/business divide. Such a division is not found in any other major European jurisdiction; rather a single regime of contract law is applied to all, providing certainty and clarity.
Under the current proposals, the consumer insured's duty to disclose all material facts will go. Instead, insurers will be obliged to ask clear questions relating to information they actually require to write the risk. It is proposed that consumer insureds will be under an obligation to answer the questions honestly and with reasonable care. If an insured satisfies this obligation, no remedy will exist. If, however, they have made a 'deliberate' or 'reckless' misrepresentation that leads the insurer to enter into the contract in circumstances where a reasonable person would not have done so, the remedy of avoidance will be available.
But what about negligent misrepresentation? It is suggested that a proportionate remedy be available. The question must be asked: what would the insurer have done had they known the true facts? The answer might lead to a pro-rated increase of the premium, the rewriting of policy terms, or even avoidance in circumstances in which the risk would have been declined. While the idea of a proportionate remedy is attractive on paper, the actual application is more problematic.
The issue of that most powerful weapon in the insurer's arsenal, the warranty, is also dealt with. It is proposed that all warranties of future conduct must be set out in writing and that there can be no reliance on a breach unless it was causally connected to the loss. The insured must prove that the breach did not contribute to the loss.
The burden of proof rests with the insured, which is different from normal principles of general contract law. Arguably, the burden should rest with the insurer as the party seeking to rely on the breach. Surely it must be to the benefit of all to have the principles of insurance contract law in line with general contract law as much as possible.
The commissions also tackle the consumers' lack of understanding over the role of intermediaries at the proposal stage. They propose that, unless they obviously represent the insured, intermediaries should be treated as the insurer's agent. This would enable the aggrieved insured to make a claim directly against the insurer, rather than navigating the complex issues surrounding current agency law in order to identify the correct party to pursue.
The commissions suggest that the insured's signature on an erroneous proposal form should not be regarded as conclusive evidence of the insured's honesty or lack of care in the way the form was completed. The signature could 'give way to better evidence of the insured's true intention.
The parol evidence rule in general contract law presumes that the written contract embodies the complete agreement between the parties. The commissions' proposal that a signature would not necessarily bind the signatory is a dangerous one in circumstances in which insureds are signing off the accuracy of the answers they have given and would seem to flout this cornerstone of contract law. It is hard to see how such a situation could exist in insurance contract law alone. It is sure to spread into general contract law and could have grave consequences for all contracting parties.
Perhaps the commissions' biggest departure from the issues papers is the introduction of a default regime applicable to all business insurance. The regime includes provisions similar to those suggested for consumers but, whereas those proposals are for mandatory rules, it will be possible for business insureds to contract out of even the most basic of rights, such as not allowing an insurer to avoid the contract in the event of a completely innocent misrepresentation. This will be subject to sensible controls, with the policy being written on the insurer's standard terms.
The reasoning behind the ability of businesses to 'contract out' is sound in principle and preserves their freedom to contract.
The proposed controls on standard-term contracts mean that an insurer must ensure that the business insured's 'reasonable expectations' of cover are not defeated. But what does this mean? Essentially, as long as the insurer draws to the attention of the insured anything that falls outside of the default regime and explains the ramifications, the 'reasonable expectations' of the insured will be met should that clause be relied on at a later date.
But is this test a fair way of protecting the business insured?It would seem that the test now proposed could all too easily be satisfied by an insurer in circumstances in which an insured might not have any real choice in the matter given the relative bargaining powers of the contracting parties. The 'reasonable expectations' test is different from and falls short of the 'unfair term' approach in general contract law, but is perhaps a first step along that route.
The consultation paper strikes a fairer balance between consumer and business insurance interests and the commissions have listened to the comments on their earlier issues papers. The rights of consumers have been clearly delineated and it is refreshing to see an effort to preserve the freedom to contract for businesses.
Richard Evans is a partner and Tom Watkinson is an associate at Beachcroft