In January and March this year, the Law Commission published draft clauses as part of its Insurance Contracts Bill and invited consultation and comment not on the actual form of words but as to whether the clauses met their published policy objectives.
On 17 June the Law Commission published a draft Insurance Contracts Bill which incorporated the draft clauses published in earlier in the year, amended following responses. The recently published draft is to be regarded as settled, according to the Law Commission’s guidance, with the exception of two clauses which require further guidance.
This bill is part of a review of insurance contract law being undertaken by the Law Commission in conjunction with the Scottish Law Commission. The project began in 2006 and led to the implementation of the Consumer Insurance (Disclosure and Representations) Act 2012 and the subsequent review of insurance contract law relating to commercial insurance as demonstrated by this new bill.
Should the response to the draft bill be positive and there be a broad consensus of support for its implementation, it may qualify for an accelerated passage into law under a procedure introduced in 2006 for Law Commission bills.
The main provisions of the draft bill
Clause 3 – The Duty of Fair Presentation
This clause, according to the Law Commission’s explanatory notes, is central to the proposed reforms. It requires the insured to make to the insurer, a “fair representation of the risk” before the contract is entered into.
This duty will be made up of three elements.
- Firstly, the insured is required to disclose “every material circumstance” which they “know or ought to know”. This replaces the disclosure duty in the Marine Insurance Act 1906.
- Secondly, if the first leg is not strictly satisfied, there will be no breach if the insured gives enough information to put a prudent insurer on notice that it should make further enquiries which would reveal material circumstances which the insured know or ought to know.
- Thirdly, this clause creates a duty not to make misrepresentations. As with the existing law, where a material representation concerns a matter of fact it must be “substantially correct”. Where it concerns a matter of expectation or belief it must be made “in good faith”.
This clause will only apply to non-consumer insurance contracts only.
Clause 8 – Remedies for Breach
This clause sets out the circumstances in which an insurer under a non-consumer contract of insurance will be entitled to a remedy for an insured’s breach of the duty of fair presentation. As with the current law position the insured will need to show that the breach induced them into the contract, however unlike in contracts of consumer insurance, a breach does not have to be deliberate or reckless in order to be actionable. An innocent breach may also be actionable but different remedies will apply.
Clause 9 – Warranties and Representations
This clause abolishes “basis of the contract” clauses in non-consumer insurance as they were abolished in consumer insurance by the Consumer Insurance (Disclosure and Representations) Act 2012.
Clause 10 – Breach of Warranty
Under current law, an insurer’s liability is completely discharged from the point of breach of a warranty. This is repealed by this clause 10 and instead the breach of a warranty suspends an insurer’s liability from the time of the breach until the time that the breach is remedied. This clause will apply to consumer and non-consumer insurance alike.
Clause 12 – Remedies for Fraudulent Claims
This clause codifies the current common law position. Under all insurance contracts (consumer and non-consumer), where the insured commits a fraud against the insurer, the insurer is not liable to pay the insurance claim to which the fraud relates.
The clause also gives the insurer a further remedy; the ability to treat the contract as if it had been terminated at the time of the “fraudulent act” once the insurer has given notice of this intention to the insured.
Clause 15 – Good Faith
This clause removes avoidance as a remedy for breach of the duty of utmost good faith under all insurance contracts.
Clause 16 and 17 – Contracting Out
Clause 16 makes it clear that in consumer insurance contracts, insurers are prevented from contracting out of any of the provisions in the bill to the detriment of the consumer. A policy term that puts the consumer in a worse position than under the draft bill will be rendered void.
Clause 17 relates however to non-consumer insurance and allows parties to contract out of terms of the draft bill. There are only two exceptions to this rule:
i. the prohibition on “basis of contract” provisions; and
ii. deliberate or reckless breaches of the duty in clause 14 below.
There are two clauses that are still the subject of further consideration and may be amended or removed completely. Both of these clauses apply to both consumer and non-consumer insurance contracts. These two clauses are set out below.
Clause 11 – Terms Relevant to Particular Descriptions of Loss
This clause relates to certain warranties. Where the breach of such a warranty occurs, the insurer’s liability will only be excluded for losses of that type. The Law Commission’s explanatory notes give an example to demonstrate. Where breach of a warranty requiring a policyholder to have a fire safety system in place, the insurer liability will be suspended for damage caused by fire, but not other unrelated losses, for example flood losses.
Clause 14 – Implied Term about Payment
This clause implies an obligation to pay valid insurance claims within a reasonable time. As this is a contractual term that is being implied, remedies for a breach of the term will be the usual remedies for breach of contract.
The response to this consultation will therefore be crucial. A positive result could see this draft bill coming into force sooner rather than later. It is interesting to note that the release of this draft came just days after the commissioner for commercial and common law David Hertzell called on parties backing the bill to write to Chancellor George Osborne to demand progress for the bill before next year’s election. This may suggest that the Law Commission would like to see this bill enacted within the next 10 months. The plans currently have bipartisan support but the reaction of the insurance industry to this consultation will be key to its quick implementation.
More information and the text of the draft bill can be found on the Law Commission’s website at http://lawcommission.justice.gov.uk/consultations/insurance-draft-clauses.htm.