UK: Insurance: Proposed Law Reform - Business Insurance

Last Updated: 27 November 2008
Article by Michelle Brown and Stephen Netherway

In July 2007 the Law Commission and Scottish Law Commission published a Joint Consultation Paper setting out proposals for reform of the law relating to non-disclosure, misrepresentation and breach of warranty. To read our Law Now on the consultation paper click here. The Consultation Paper made separate proposals for consumer and business insurance and a summary of the responses received on business insurance reform has recently been published. Whilst no definition of "business insurance" is provided, the wide spectrum of activities it is intended to cover, from a sole trader to a multinational public limited company, is clear.

  • In contrast to consumer policyholders, it was proposed that the duty to disclose material information on placement should be retained for business insureds. On the whole, this proposal was supported. Whilst some responses highlighted the potentially harsh results for unsophisticated businesses, many felt that this would be mitigated by the proposed new test for deciding what is material information that needs to be disclosed.
  • The proposal that the test for determining whether a matter is material ought to change from the standard of a prudent insurer to what a 'reasonable insured' would think was relevant to an insurer, has met with a divided response. One concern voiced is that the new test could prove too uncertain in the absence of any recognised 'reasonable insured' standard.
  • Key among the proposals is that insurers' remedies for non-disclosure and misrepresentation should depend on the insured's state of mind: if an insured acts innocently then the claim should be paid and if dishonestly then the insurer should be entitled to avoid. For cases where the insured has acted negligently the Law Commissions asked whether a proportionate remedy should be introduced. The majority of responses welcomed differentiation between negligent and dishonest conduct, although some underlined the practical problems of a proportionate remedy and others argued that this would be giving businesses too much protection.
  • In relation to warranties of past and present fact, the majority of respondees agreed with the proposal that making an insured's answers in a proposal form the basis of the contract (and so automatically converting all such responses into warranties) should not be permitted. There was also general agreement that insurers should not be able to rely on a breach of warranty of fact unless it is material to the contract or the loss claimed for is connected with the breach.
  • The majority of respondees also agreed with the proposals relating to warranties as to the future, namely that the insured should be entitled to be paid a claim if it can prove, on the balance of probability, that the event or circumstance constituting the breach of warranty did not contribute to the loss. The majority of responses also agreed that if the insured can prove that a breach contributed to only part of the loss, the insurer should pay the part of the claim unrelated to the breach.
  • The proposal that intermediaries, such as brokers, should generally be regarded as the agent of the insurer unless the intermediary undertakes a search of the market on the insured's behalf for suitable cover, was unenthusiastically received. The generally expressed view was that in practice it would be difficult to decide whether a full or only limited search of the market had been made.
  • One potentially far reaching proposal put forward by the Law Commissions is that where a broker fails to disclose to an insurer every material matter known to the broker (whether or not the matter is known to the insured), instead of the insurer's remedy being the right to avoid the contract against the insured, the insurer should instead have a claim in damages against the broker. The proposal has met with a mixed response. A number were of the view that where the broker was the agent of the insured, the insurer should still have the right to avoid the contract. A majority agreed, however, that the duty to disclose should extend to producing brokers who should be obliged to pass relevant information up the chain to the placing broker and that a broker should not be required to disclose information given to it in confidence by a third party.

Although concerns were expressed by some respondents that reform of the current tried and tested system will result in the UK being a less attractive option for buyers of insurance, the majority of respondees were nevertheless in favour of reform. The Law Commissions have identified reform of consumer insurance law as their most pressing objective but have also acknowledged the support for business insurance reform. It is expected that a further issues paper on reform of business insurance law will be published in 2009.

Further reading: Summary of responses on business insurance reform: Joint Consultation Paper on insurance contract law

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 25/11/2008.

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