The Law Commission recently published a summary of responses to business insurance reform. There is going to be a further consultation on this in winter 2008/09. The Commission asked for views on a default regime with the option for the contracting parties to contract out. There were mixed reactions to the proposals as they impact on the freedom of contract and provide commercial assureds with further safeguards when dealing with insurers' standard terms. The assureds and brokers broadly favoured change.
Warranties
Currently, if a warranty in an insurance policy is breached, the cover automatically terminates as of the date of the breach despite the fact that the warranty may cover only minor issues and there is no related causation of the loss. The proposals introduce the need for a "causal connection" with the insurer being only able to avoid the claim to the extent that the breach caused or contributed to all or part of the loss. 73% supported this and 78% also supported an end to "basis of the contract" clauses transforming statements made by the assured to warranties.
The Duty to Disclose
Businesses would continue to have to disclose material information when applying for insurance. However, it was proposed that the materiality test should change from whether the information would have influenced a "prudent insurer" to whether the information was something a "reasonable assured" would have appreciated the insurer would wish to know. 52% of consultees approved the new "reasonable assured test". The proposal was welcomed for its flexibility but criticised for introducing uncertainty. 59% agreed that where a business assured has provided inaccurate/misleading information negligently, the insurer should have a range of remedies depending on the degree of fault. Insurers would only be able to avoid the policy altogether in cases of deliberate/reckless conduct.
Intermediaries
There was also strong opposition to the Commission's attempt to reform the law so that a broker is treated as acting for the insurer when it receives pre-contract information except when he is clearly acting for the assured and is independent of the insurer. The issue determines whether the insurer or the assured takes on the risk of the broker not communicating the correct information to the insurer in which case the latter can avoid the policy even if the assured is innocent. Currently even if in practice the broker is acting as the insurer's agent, he is legally considered to be the assured's agent when completing the proposal form on its behalf. 70% opposed the suggestion that a broker not searching the whole market is not independent and should be treated as the insurer's. 80% thought the issue should be determined on common law principles.
Standard Terms
The proposals highlighted the concern to protect smaller businesses, who may not be better informed than consumers. The Law Commission proposed a mandatory rule that would prevent insurers contracting on standard written terms from giving themselves greater rights to avoid claims than under the default regime if this substantially changes the assured's expectations of cover. Only 28% supported this. Those against were concerned about what constituted standard terms in a market using combinations of wordings.
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