UK: Consistency And Simplicity: A Review Of The Consumer Insurance (Disclosure And Representations) Act 2012

The first legislative response to the Law Commission's on-going review of insurance law concerns the obligation placed on consumers to provide information to insurers when taking out insurance. The Act has a narrow focus – targeted only at consumers, so its impact on the aviation insurance market will be most keenly felt in respect of general aviation. So, even though airline insurance and reinsurance, being business-to-business markets, will be relatively unaffected, the Act bears closer attention.

The Act is significant because it amends the principle of utmost good faith – sections 17-20 of the Marine Insurance Act 1906 – by abolishing the positive duty of disclosure and modifying the remedies for misrepresentation. The upshot is that insurers will need to focus on asking clear and comprehensive questions to potential insureds.

This article considers what the act does and why, despite years of work to address a perceived legal inequity, it does not radically alter the position of a consumer with a claim.

The Act was given Royal Assent on 8 March 2012, but will not fully come into force for at least one year from that date. This period allows insurers time prepare for its effect.

Why was the Act thought necessary?

The Law Commission concluded that the law operated unfairly towards consumers due to its complexity and severity. An insured, acting honestly and reasonably, might still have a claim denied. Indeed, an insured might be unaware that the law had been broken.

The law as it stood required the insured to volunteer information or not make a misrepresentation which a hypothetical prudent insurer would consider material. An insured, answering all the questions posed by an insurer, might unwittingly omit information that insurer considered material and so face the insurer's most powerful remedy – avoidance of the insurance contract.

The purpose of the new Act, then, is twofold; to simplify for consumers the application of the various insurance rules (which, aside current law, comprise certain Codes of Practice from the Association of British Insurers, the Financial Ombudsman Scheme (FOS) and the FSA's Insurance Conduct of Business Sourcebook (ICOBS)); and to make an insurer's remedy proportionate to an insured's breach of duty.

Consumer focus

Only section 1 of the Act is currently in force, which provides definitions for what constitutes a consumer insurance contract and who may be considered a consumer. The definition allows for mixed use contracts – ie, contract with individuals contracting wholly or mainly for purposes unrelated to the individual's trade, business or profession. So, even if an aircraft includes some use for business purposes – perhaps flying for client entertainment – the insured may still be 'a consumer' if the main use of the aircraft is not for business.

End of disclosure?

The Act provides that a consumer will have "a duty to take reasonable care not to make a misrepresentation to the insurer". The duty to volunteer information that an underwriter might deem material will therefore be abolished. Practically, an underwriter will have to pose questions to the insured to get desired information, which may mean making the proposal form more comprehensive.

The new duty will be assessed against the objective standard of a "reasonable consumer" and it will be for the insurer to prove that a consumer has failed to take reasonable care. Whether reasonable care has been taken will be determined by taking into account "all relevant circumstances" against the presumption that a consumer will have the knowledge of a reasonable consumer and knew that a clear and specific question from an insurer means that the matter is relevant to the insurer.

There is no provision for a continuing duty; a consumer's disclosure obligations are only active until the contract is made, although post-contact variations are subject to the duty. How a variation will be treated will depend upon whether or not it can be separated from the remainder of the policy.

What is a misrepresentation?

A misrepresentation is an untrue statement of fact made by the consumer prior to the formation of a contract, which induces the insurer to enter into the contract. The Act provides for two categories of "qualifying misrepresentations". They may be either (i) deliberate or reckless (which includes dishonesty) or (ii) careless, which is the default position for a misrepresentation that is neither deliberate nor reckless.

The burden of proving that a misrepresentation is deliberate or reckless falls on the insurer, who will have to show that the consumer knew or did not care whether a statement was untrue or misleading and knew or did not care whether the matter was relevant to the insurer. The latter aspect, again, highlights the need to ensure that well crafted questions are put to potential insureds, which may be especially true for any renewal.

Proportionality – what would the insurer have done differently?

An insurer will be able to refuse a claim and avoid the contract where a consumer deliberately or recklessly makes a misrepresentation. This is a familiar remedy for insurers and includes retention of the premium.

The remedies for a careless misrepresentation are where the Act makes a real difference. They are based on what the insurer would have done if the consumer had complied with its duty to take reasonable care. The options range from avoidance, if the contract would not have been entered into (but returning the premium), to adjusting the terms and reducing the amount to be paid proportionate with any higher premium that might have been charged.

Warranties/basis of contract clauses

The issue of warranties is relatively untouched; an insurer may still include warranties in a policy. However, the Act does provide that no pre-contractual statement shall be converted into a warranty by a term of the contract. Also, a basis of contact clause, which purports to convert all representations into warranties, will not be effective.

Agents

Access to the aviation market, especially when involving insurers at Lloyd's, is procured through the services of a broker. It is commonly understood that the broker acts for the insured when placing a risk but this is not always the case. The law of agency is not altered by the Act but it does provide a list of scenarios where a broker will be taken to act for the insurer: if a broker is expressly appointed and acts in representation of an insurer, or is acting as the insurer's agent. Otherwise, the broker will be presumed to be acting for the consumer, especially where the agent undertakes to give impartial advice or to conduct a fair analysis of the market, or where the consumer pays a fee.

Where an agent acts for an insured (which may include a travel agent or an IFA) and makes a misrepresentation, the insured is accountable and this is a factor taken into consideration in determining whether reasonable care has been taken. It is submitted that an insurer would normally have a remedy against the insured.

Consequences

An insurer will not be permitted to contract out of the Act. Prior to the Act, the remedies for an insurer with an actionable non-disclosure or misrepresentation were limited. The Act will provide courts with a tool to follow the spirit of the ICOBS and FOS, and so avoid the draconian effect of avoidance, which was clearly open to criticism and needed to be tempered. By limiting the ability to avoid a contract, there will be a broad consistency between the various forums for resolving insurance disputes. However, it is this consistency which, it is submitted, means that the impact of the Act will be limited. This is because insurers' strict legal rights are not always applied either by choice or through the operation of the FOS or the FSA rules. Nonetheless, the greater consistency and simplicity of the rules which will result from the Act should benefit both consumers and insurers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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