UK: Insurance: Draft Bill To Form Consumer Insurance Law

Last Updated: 18 December 2009
Article by Stephen Netherway and Olivia Glover

Yesterday the English and Scottish Law Commissions published their joint report and draft Bill to reform the law on what a consumer must tell an insurer before taking out or varying their insurance policy.

The consumer's duty to volunteer information as currently understood, based on the Marine Insurance Act 1906, would be abolished. Instead consumers would have a duty to take reasonable care to answer insurers' questions fully and accurately and to avoid misrepresentation. Whether an insurer would have a remedy if a consumer makes a mistake in an application form, would depend on whether the mistake was reasonable, careless or deliberate/reckless.

The report and draft Bill also address the status of intermediaries (brokers) in consumer contracts and make consequential provisions for this type of business. The draft Bill does not make any reform to the law of warranties in consumer insurance, a matter of previous review, except for the abolition of basis of contract clauses in this area.

The Law Commissions have urged that the draft legislation should be introduced to Parliament as a matter of priority.

To view the article in full, please see below:

Full Article

Yesterday the English and Scottish Law Commissions published their joint report and draft Bill to reform the law on what a consumer must tell an insurer before taking out or varying their insurance policy. The report and draft legislation are the next stage in a lengthy review by the Law Commissions of insurance contract law and the need for reform. Click here (/law-now/2007/insurancereformsjuly2007.htm) to read our Law Now on the Consultation Paper published by the Law Commissions in July 2007 and click here (/law-now/2008/Insuranceproposedlawreformbusinessinsurance.htm) for our Law Now on the responses received by the Law Commissions to proposed reform of the law applying to business insurance.

The draft Bill only applies to consumer insurance contracts. Additionally, the report and draft Bill address the status of intermediaries (brokers) in consumer contracts and make consequential provisions for this type of business. The draft Bill does not make any reform to the law of warranties in consumer insurance, a matter of previous review, except for the abolition of basis of contract clauses in this area.

Proposed changes in consumer insurance law

A consumer's duty of disclosure

The consumer's duty to volunteer information as currently understood, based on the Marine Insurance Act 1906, is abolished. Instead consumers would have a duty to take reasonable care to answer insurers' questions fully and accurately and to avoid misrepresentation. If a consumer makes a mistake on an application form, it will not necessarily follow that the insurer will have a remedy: this will depend on whether the consumer's mistake or the error made is categorised as "reasonable", "careless" or "deliberate / reckless":

  • Where a consumer acts honestly and reasonably ("reasonable" misrepresentations), the insurer must pay the claim. The applicant is expected to exercise the standard of care of a reasonable consumer.
  • Where a consumer acts carelessly ("careless" misrepresentations), a proportionate remedy is to be applied; depending on what the insurer would have done had it had known the facts.
  • Where a consumer acts deliberately or recklessly ("deliberate or reckless" misrepresentations), the insurer may refuse to pay the claim.
  • " For a misrepresentation to be considered "deliberate or reckless" the insurer must prove on the balance of probabilities that the consumer knew (a) that the statement was untrue or misleading, or did not care whether it was or not, and (b) that the matter was relevant to the insurer, or did not care whether it was or not.

Broker/intermediary provisions

  • An intermediary is to be considered to act for an insurer in consumer insurance business if the intermediary is the appointed representative of the insurer, or the insurer has given the intermediary express authority to collect the information as its agent or to enter into the contract on the insurer's behalf.
  • In other cases, the intermediary is presumed to act for the consumer unless, looking at all the circumstances, it appears that the intermediary acts for the insurer. A list of factors is set out in the draft Bill but new factors would be considered as the market changes.

Other provisions

  • Basis of the contract clauses are to be abolished in the consumer insurance context but there is no other reform of the law of warranties, which is to be further considered alongside business insurance reforms.
  • For group schemes, if a group member makes a misrepresentation, it only has consequences for the particular individual concerned.
  • Where a consumer takes out insurance on the life of another then if the person whose life is insured makes a careless or deliberate misrepresentation, the insurer has a remedy.
  • Insurers may not contract out of the proposed scheme.
  • The report suggests removing the smallest businesses from the business regime altogether and treating them in the same way as consumers for the purposes of giving pre-contract information. The Commissions are as yet undecided between a straightforward test based on the number of employees (0-9), on annual turnover of less than a specified amount (possibly £1 million), or on whether the business falls within the jurisdiction of the Financial Ombudsman Service. The current FOS threshold is a turnover of less than £1 million, but there are plans to change this to a combined test of fewer than 10 employees and a turnover of less than €2 million.

Rationale for changes

The draft Bill is intended by the Commissions to bring clarity to these areas of the law, and to reflect the approach already taken by FOS and generally accepted good practice.

The report comments that the existing legal regime, based on the Marine Insurance Act 1906, no longer corresponds to the realities of the modern mass consumer insurance market, with most consumers unaware that they are under a duty to volunteer information, yet with insurers now accepting that they should ask questions about the things they want to know. In particular the Commissions believe:

  1. The duty to disclose may operate as a trap for consumers, who are usually unaware that this duty exists or may have no idea of what is relevant to the insurer.
  2. Policyholders may be denied claims even when they have acted honestly and reasonably.
  3. The remedy for misrepresentation and non-disclosure may be overly harsh.
  4. A statement on a proposal form can be converted into a warranty using obscure words that many policyholders do not understand.

The Commissions believe that the law in the area of consumer insurance needs to be clear, straightforward and fair, but believe that at the moment it is not: new consumer legislation is a priority in their view but they also signpost that recommendations to change business insurance law will follow in 2010. This would mean that, like consumers, micro-businesses would no longer be under a duty to volunteer information to insurers when applying for insurance. They would only be required to answer any questions asked honestly and with reasonable care.

Next steps

The Law Commissions' view is that the draft Bill should be introduced to Parliament, either through the House of Lords specialist legislative procedure for Law Commission Bills or inclusion in the legislative programme for the 5th Parliamentary Session, as a matter of urgency. They believe there is clear industry and government support for it. With an election due next year, how that impacts on this aspirational aim remains to be seen.

Further reading: (

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

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 16/12/2009.

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