Professional Documents
Culture Documents
By Gerald Swaby
By Gerald Swaby
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Findings – First, the paper finds that the current state of the law is unfair in relation to consumers
and small businesses and much reform is needed to rebalance the nature of insurance contracts to
reflect modern day practice.
Research limitations/implications – This work does not address detailed issues in relation to
fraudulent misrepresentations.
Practical implications – The law will be brought into line with current practice by the Financial
Ombudsman Service.
Originality/value – This paper will be of interest to legal practitioners and academics and those in
the insurance industry.
Keywords Laws and legislation, Insurance, United Kingdom, Australia, Case law
Paper type Research paper
Introduction
The purpose of this article is to provide the reader with an overview of the current
changes that are proposed to the area of consumer insurance. This article will consider
those pre-contractual duties of misrepresentation, non-disclosure and utmost good faith.
Many consumers face problematic issues in this area and this is, in part, due to the
difference between what has been practiced and the way in which the law has developed.
As will be seen the Financial Ombudsman Service’s approach and that of the law differs
significantly and this is, in part due to the fact that the law itself stems from the mid
1700s and is therefore somewhat outdated in relation to the twenty-first century.
Background
The common law principles for insurance law started much of their development in the
mid 1700s. During the late 1800s, there was driven support from businessmen to codify
many of the commercial areas of the common law such as the Sale of Goods Act 1893,
the Partnership Act 1890 and the Marine Insurance Act 1906. This codification would
introduce certainty into many areas of the dealing of such men. The law at this time
reflected the then current practice and while the courts can distinguish and overturn
cases where the principles are too old to apply today, they cannot overturn or disapply
a statutory act of Parliament. They can only interpret it. While there have been many
reforms[1], to these commercial codification acts to meet present day needs, it has been
insurance that has undergone virtually no reform and the codification of common law
International Journal of Law and
Management
In relation to acknowledgements, the author is particularly indebted to Birds (2007), Birds’ Vol. 52 No. 1, 2010
Modern Insurance Law; Lowry and Rawlings (2005), Insurance Law; Pynt (2008), Australian pp. 21-39
# Emerald Group Publishing Limited
Insurance Law; publications by the Law Commission, the Australian Law Commission and 1754-243X
Professor Robert Merkin’s papers on ‘‘reverse transportation’’. DOI 10.1108/17542431011018525
IJLMA into the Marine Insurance Act 1906 (MIA) remains as it was at the time of drafting. The
short title indicates that this Act is specifically for marine insurance however it has
52,1 been held by the House of Lords in Pan Atlantic Insurance Co Ltd v. Pine Top Insurance
Co Ltd [2] to apply equally to all insureds whether they be marine or non-marine
consumers or businesses.
One of the key issues with the MIA 1906 is that it favours the insurer in relation to
the remedies as he can avoid a policy for a misrepresentation, non-disclosure or breach
22 of the utmost good faith. While there may be little doubt that the insurer should have
the right to avoid a policy where there has been a fraudulent misrepresentation or non-
disclosure, the House of Lords in Economides v. Commercial Union Assurance Co plc [3]
mitigated the harshness of this remedy to prevent the insurer from avoiding his policy
obligations where there had been an innocent misrepresentation or non-disclosure.
However, this did not address the issues of negligent non-disclosure. Under the current
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Non-disclosure
The law of non-disclosure originates from Lord Mansfields judgment in Carter v.
Boehm[6], where he stated that the insurer provides the underwriting in the basis of the
representation made and that the insured ‘‘[. . .] [should] not keep back any
circumstance within his knowledge, to mislead the underwriter [. . .]’’ This means that
the insured’s subjective knowledge becomes relevant. In this case the Governor of
Sumatra insured Fort Marlbrough against attack. When the claim was made upon the
policy the insurer contended that there had been a non-disclosure. In judgment Lord
Mansfield placed emphasis on the fact that the insurer in Europe was in a better
position to know the current circumstance of hostilities and this was in no part due to
the problematic and sporadic issues with communication in those times (Birds, 2007,
p. 115). He also stated that the insurer knew that the Governor could not disclose some
facts, as this could clearly have compromised the defensive capabilities of the fort and
the condition of the fort was ‘‘in general, well known, by most persons conversant of
acquainted with Indian affairs . . . and could not be kept secret or concealed from
persons who should endeavour by proper inquiry, to inform themselves’’. Therefore if
the insurer ‘‘knew the governor, by insuring, apprehended, at least, the possibility of
attack. With this knowledge, without asking a question, he underwrote. By so doing, he
took knowledge of the state of the place upon himself. It was a matter, as to which he
might be informed in various way: it was not at matter, within the private knowledge
of the governor only’’ (Birds, 2007, p. 1915). Thus the emphasis was on the insured to
ask a question.
While this approach continued for a short period, it later developed away from this
interpretation during the Victorian era to become a heavier duty on the insured so that
he had to disclose all material facts and not make material misrepresentations.
Therefore the issue becomes, ‘‘What is ‘materiality?’’’
The answer is contained within s. 20(2) and s. 18(2) MIA and states: ‘‘Every Insurance law
circumstance is material which would influence the judgment of a prudent insurer
fixing the premium, or determining whether he will take the risk’’.
Therefore there are two issues that have to be addressed in this section. The first is
‘‘materiality’’ and the second is ‘‘influence.’’ In relation to the test of materiality, the key
issue is that of a reasonable or prudent insurer. This is an objective test and therefore
does raise issues for the insurer if a fact is not objectively deemed to be material (Birds,
2007, p. 121). In relation to influence this is has been interpreted so that a fact would be
23
deemed to have influenced the formulation of an opinion, or judgment so that a
reasonable insurer would have acted in a different way. Once this has been proved the
next issue is that of ‘‘inducement.’’ The requirement for the insurer to be induced was
introduced by the House of Lords in Pan Atlantic v. Pine Tops[7], where it was stated
that a particular insurer, in cases of non-disclosure and misrepresentation of a material
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Ombudsmans
During the 1980s, the insurers established an ombudsman service called the Insurance
Ombudsman Service. This had a remit and as a result of the Financial Services Act
IJLMA 2000 (FSA) the Insurance Ombudsman Bureau establishment of the Financial
Ombudsman Service.
52,1 The need for consumers to be treated differently developed at a rapid pace over the
last 30 years where consumerism has become a multi-billion pound marketplace. In
relation to the consumer and small business insured, the duties of disclosure and of
misrepresentation were no longer considered adequate[12] after the industry’s
exemption from the Unfair Contract Terms Act 1977. The industry’s own self-
24 regulation established the Insurance Ombudsman Service to investigate and adjudicate
on disputes with consumers and small business up to a value of £100,000. Its decisions
would be binding on its members although not on the consumers using the service.
This non-statutory body has now been subsumed into the Financial Ombudsman
Service established under the FSA 2000. Both the former and the latter ombudsman
service follow the same approach when dealing with consumers who make
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therefore the amount the insured has contributed to his own negligence can be reduced.
However, the more negligent the mistakes he makes, or the accumulation of them, on a
sliding scale increases his contributory negligence.
Therefore, the approach the FOS takes in settling such cases appears to be far more
flexible than the actual law, in that it applied the principle of proportionality. The
insured’s premiums would have been increased by 30 per cent they would receive an
amount proportional, i.e. the value of the claim less 30 per cent. However, if the insurer
were to have accepted the policy but subjected the policy to an exclusion or limitation
clause then the FOS may side with the insurer and allow refusal of the claim, but
probably not the avoidance of the policy. If however the insurer would not have
accepted the insured and refused the policy the FOS can agree with the insurer and
permit the refusal and possibly avoid the policy. Clearly, this is a better series of
outcomes than non-payment of the policy and its avoidance ab initio. This is in stark
contrast to the statements and code of practice, which the insurer can avoid for a
negligent misrepresentation or non-disclosure.
However, the law has diverged from what occurs in practice. Clearly, there is a
significant difference between the approaches of the law, the statements of practice and
rules, the FOS’s approach and some reform is necessary, especially in the cases of
consumers. In relation to misrepresentation and non-disclosure, it can be seen that
the law clearly allows the insurer to rely on non-disclosure and avoid the policy where
the insured has not provided some form of information. This is also the position in the
statements of practice and the FSA’s insurance conduct of business rules (ICBR). This
is contrary to the position of the FOS. In the view of the FOS, if the insurer wants to
know the answer to a question then he should ask, and if he does not he will not be
allowed to avoid the contract for want of his own failings. Furthermore, the statements
of practice do not allow for a remedy to be sought by the insured against the insurer if a
requirement is breached, assuming that he knew about them. Therefore as not all
consumer insureds know of the FOS, they fall through its protection. Furthermore,
there are also the cases where applications are made to the FOS, but the FOS refuse to
deal with the complaint. This it is permitted to do under its own rules[15], where for
example, a third party needs to be cross-examined. Furthermore, the FOS may be a
victim of its own success, in that, by dealing and resolving the large number of cases at
hand, it removes cases that would otherwise have been heard in court and thus
expanded, modified or codified the common law.
However, one key issue where the FOS has stayed stagnant is in relation to the
monitory award. The maximum award that can be made is £100,000[16]. This has
IJLMA stayed at this limit since it was set in the 1990s. Therefore as this has not been indexed
52,1 linked, it is worth significantly less today than in previous years, perhaps more so if
one considers that a large detached house would not have cost £100,000 in the early to
mid 1990s yet the average price at the time of writing is close to £275,000. Therefore,
this is a significant disadvantage to the consumer that needs to be addressed.
Overall it can clearly be seen that there is a divergence between law and practice.
26 Some insured’s fall through the system where the insurers may avoid a policy for
unrelated reasons. Gaining a remedy, if at all possible, requires knowledge of the law,
policies, self-regulatory procedures and practice, the FOS, its policies, procedure,
remedies and discretion. Therefore, this is totally unacceptable and reform is needed.
While there is a clear need for reform as identified above, it is unfortunate that the
reforms have been somewhat reticent at arriving. With the dichotomy of industry good
practice, championed by the FOS (focused on the consumer and small business
following its own path) on the one hand, and the harsh black letter of the law (followed
by the large commercial marine and aviation transportation industries) on the other. It
is clear that these divergent approaches can only be resolved with the aid of statutory
reform. To these ends, a joint review of the whole area of insurance law has been
undertaken by the Scottish and English Law Commissions.
Materiality
The Law Commission’s proposals are to redefine what is, or is not, a material fact from
the view point of the consumer. It will be recalled that materiality[18] is currently
defined under the MIA as a statement that would, ‘‘Induce the judgment of a prudent
insurer in fixing the premium or determining whether he will take the risk’’[19]. As this
has caused some debate, as while some minor occurrence may be relevant to the
insurer, the insured may not think about, or appreciate its significance. As the current
law stands, it may lead to the avoidance of the policy (unless there was FOS
intervention), and therefore the Law Commission has instead proposed a reasonable
insured test. In relation to the consultations carried out by the Commission it was
nearly a 50/50 split[20] between those who wished to keep the current test and those
who supported the reforms for a reasonable insured test.
While the reform for a reasonable insured test has appeared to be fairly Insurance law
uncontroversial in a consumer context the same cannot be said to that of business.
Furthermore, as the test in both cases is based on the reasonable insured, any
proposals and comments on the latter will clearly apply to the former, as it is the same
test. The reasonable insured test would introduce flexibility, as the question to be asked
would focus on what the reasonable insured would do under those circumstances.
However, differences between a consumer and a business will remain due to the
differing business activities and because businesses differ in nature it would be hard to
27
‘‘[. . .] create a unilateral concept of the reasonable insured’’[21]. More than one insurer
identified this issue and it was also said that a specific business should have a specific
form to be completed[22]. Whereas in comparison to a reasonable consumer, their
needs are somewhat more predictable.
It appears that the majority of insurers and brokers supported the change as it
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would encourage better practice from the insurers and improve certainty[23].
Additionally in the case of businesses, adopting this new text would mean that the
insurer could no longer use non-disclosure as a means to avoid a contract because it
transpired to be a bad bargain.
The test proposed stated that the insurer must show certain things before being
entitled to a remedy, namely:
(1) Had it known the fact in question it would not have entered into the same
contract on the same terms or at all.
(2) It must also show either:
. that a reasonable insured in the circumstances would have appreciated that
the fact in question would be one that the insurer wanted to know about; or
. that the proposer actually know that the fact was one that the insurer would
want to know about.
The first part of this test requires nothing more than inducement. This is the current
test that was implied by the House of Lords in the Pan Atlantic decision and stands for
both misrepresentation and non-disclosure. It is the second part of the test that is
different. Clearly if an insured acts reasonably and provides disclosed information that
is relevant, then this would limit the amount of information that the insurer needs.
Ultimately, this does actually act as a benefit to the insurer as it prevents them from
being overloaded with all the information that they would otherwise have.
Furthermore, in many cases such as internet or even phone text message proposals
it is considerably more difficult to disclose some facts, even if the insured did wish to do
so. However in relation to telephone applications, it is clearly possible for the insured to
ask further questions and disclose other issues if he was asked the question.
Moreover, the Commission has proposed that the questions asked should be general
in nature although this may lead to the insured providing vague or incomplete
answers. The Commission argues that the insurer should take the risk that the answers
are vague, however this may not be the correct approach unless the law balances this,
for if the insurer receives vague answers, it could be argued, that he should be making
more enquiries. Thus if the insurer does not ask if the proposers home to be insured is
susceptible to flooding due to its locality to a nearby river then they should not be
allowed to avoid their policy obligations. However if the insurer asks a general
question about (if there are any) risks that they should know about, the proposer may
answer ‘‘yes’’ if there is a risk, but may not state what that risk is, or alternatively he
may explain a particular risk in relation to his house’s close proximity to a mine for
subsidence, but he may omit to explain that his house in on a flood plain. Partly the
question to be asked, and the answer, could be found in what the reasonable consumer
insured would do.
The reality is that the insurer will probably be more interested in gaining the
custom of the consumer than small vague issues on an application form and it will not
be until the insured makes a claim that the insurer will truly look at the proposal form’s
answers to establish their liability.
the contract, so that he would have his claim met by the insurer and that the insurer
would also have the correct premium. While no law in contract or insurance law exists
on this point it would be a practical answer. If this was to occur it would perhaps
address the point made by Lloyds in relation to proportionality[27]. Rather than the
claim being paid on a proportional basis (thus if 70 per cent of the true premium was
paid only 70 per cent of the claim would be awarded), the insured could pay the
difference in the premium to what the value of the true premium would be ‘‘but for’’ the
misrepresentation, then the insurer would be liable for the whole amount of the claim.
However, excluding the fact that the insured may be tempted to commit a fraud by
deliberately lying in hope to make up the shortfall if the risk materialised, if the insured
did have to pay the difference, this could raise issues of affordability, especially if the
cost of increasing the premium was to be significantly higher. Additionally, there
would also be a possible problem with the calculation of the initial policy premium.
Therefore, this may encourage the insurer to offset this against all his polices thus
having a contingency set in case this would occur. As it stands however, the insurer
will remain liable for the whole amount even if the true premium has not been paid.
insurer test were implemented however then under the same circumstance the insured
would have a potential remedy and the insurer would be held liable, albeit subject to
the basis of proportionality.
The advantage of the doctrine of proportionality indicates that the greater the
negligent misrepresentation the smaller the amount of compensation the insured will
receive. While the Law Commission suggests this is not arbitrary the Association of
British Insurers (ABI) contends that there should be a threshold above which the
insurer should not be liable. ‘‘It is not fair to charge honest applicant related terms and
allow other to be no worse off in all the circumstances even if there is a negligent
misrepresentation [. . .] [L]ife insurer should not be expected to treat someone whose
premium should be rated at up to þ50 per cent extra mortality the same as someone
whose premium would be rated at þ400 per cent extra mortality’’[33]. However, the
Commission has rejected this view on the basis of if a policy premium was £500 for
£100,000 in life assurance cover, a 400 per cent increase would be £2,500 for the same
cover, but the amount awarded would be proportional at £20,000. Therefore, this
approach follows that of current good practice conducted by the FOS.
There will undoubtedly be circumstances where there has been a negligently made
misrepresentation, but it is relatively minor and thus this will have no connection with
the claim being made, but nevertheless an insurer would still be allowed to avoid his
obligations as he may have declined the policy initially. This was supported by Lord
Justice Rix who states that the discretion ‘‘should be narrowly confined, e.g. where the
loss in unrelated to the fault and the fault does not extend to fraud or recklessness’’[34].
Furthermore in allowing the courts some discretion, it does no more than to allow the
already existing ‘‘[. . . ] overriding obligation to reach a decision that is fair and
reasonable’’[35] in the circumstances which the FOS currently operates.
Nevertheless no matter in what terms this duty is couched, it is difficult to see how
the insured could be compensated if the insurer would have declined the initial
proposal based on the insured’s subjective view. Therefore what may be needed is a
reference to an objective reasonable insurer, in that if a reasonable insurer would have
charged an additional premium then the proportionality doctrine would intervene to
mitigate the otherwise hardship that may otherwise be caused to the insured.
Conversely, the ABI opposed any need for discretion arguing that its guidance
states that an insurer can only rely on information that is connected with a claim[36].
Thus where there has been a misrepresentation that is unconnected with the claim, it
should be severed from the facts in that case. The ABI’s approach is purely guidance
and perhaps currently this may be as a result that in previous cases negligent
misrepresentation would have allowed the insurer to avoid their obligations and Insurance law
therefore the insurer would go on a ‘‘fishing expedition’’[37] to find an unconnected
reasonable why they should not have to pay the claim[38].
The recommendation is to make the test partly subjective, in that, he (the insured) has a
duty to disclose those facts that he actually knew or which he ought to have known.
Therefore, the latter part of this test is objective and follows the Australian approach,
but in Australia this provision is also under reconsideration on this issue[39].
The current proposals have been made to distinguish negligent behaviour from
fraudulent (reckless or deliberate) behaviour. Therefore the question is one where if the
insurer asked, did the reasonable insured, if he knew the truth, make a
misrepresentation or non-disclosure negligently, recklessly or deliberately incorrectly.
If this test were to be adopted, the burden of proof would be moved from the insurer to
the insured to show that the insured did know or should have known the facts based on
the reasonable insured test.
However, a further issue for consideration is that the insurer is not an expert and
nor can he be held to be an expert in all fields of business. Therefore, this may generate
further difficulties for the insurer as it will be hard for him to demonstrate what the
insured knew or should have known. This argument did find some support among the
consultees with The Royal Bank of Scotland commenting that ‘‘The insured is better
positioned to present an argument for why it did not know’’[40], or the reasons for it not
knowing the facts in question.
Nevertheless, this proposal is clearly beneficial as it allows the insured to partially
rebalance the equation.
does not address is that of insurance practice. If the insurers were given the ability to
contract out of the provisions then as there is still significant imbalance in the
bargaining power between them and the smaller business, it is hard to see that there
would be anything capable of preventing the insurer’s dictating the terms to small
businesses, especially if it became a standard practice, other than perhaps a new FSA
code which the FOS could regulate.
As can be seen above by reference to the consumer, the burden of proof would be the
same in that it will be for the insurer to show that the insured did know or ought to
have known a particular fact.
difficulty for the insured as his premiums may be higher or insurance could be refused.
One particular area where this is greatly inconvenient is in relation to professional
indemnity insurance. For if membership of a professional body requires insurance and
thus if it has been refused or cancelled, it effectively prevents that individual from
earning a living. Therefore, it would be better to prevent an insurer cancelling a
contract part of the way through that contractual period.
Australian developments
For comparative purposes, the reforms and approaches that were undertaken in
Australia in relation to misrepresentation, non-disclosure and utmost good faith need
to be considered. Prior to the Insurance Contract Act 1984, the relevant law was
contained within MIA 1909 and was taken word for word from its English equivalent,
the MIA 1906[44]. The similarities do not end here. Similar insurance ombudsman
systems exist in both countries. The Australian Insurance Ombudsman Service Ltd
was established in 1993 and has similar duties to its UK counterpart in that it deals
with claims in accordance with good insurance practice rather than following the strict
letter of the law.
While the UK has talked about reforms, and despite various proposals (Law
Commission, 1979; 1980), no tangible reforms have been forthcoming. However, in
Australia things have been far more proactive. In 1976 the Australian Law Commission
was asked to review the whole area of insurance law. The Commission’s report was a
wide review that included a draft bill which lead to its enactment, albeit with a few
minor amendments in the form of the Insurance Contracts Act 1984. In relation to
misrepresentation, non-disclosure and utmost good faith the Act forms a complete
code[45]. However, it does not affect the Marine Insurance Act 1909 that still applies to
marine insurance in its entirety and has not been subject to any amendments or repeal.
made a factually incorrect statement, which would have given rise to the avoidance of
the policy. This was the same as the English position prior to Economides. However,
s. 26(2) replaces this materiality principle in that the insured will only have made a
representation if he actually knows or he should have known (based on the reasonable
insured) that the matter would have been relevant to the insurer. Furthermore, the
insurer then has to prove that they have been induced into the contract under s. 28
before they are entitled to a remedy. This is effectively the same requirement that was
introduced into s. 18 MIA by the House of Lords’ decision in Pan Atlantic. Therefore
‘‘the protection for the assured [under s. 28] is thus switched from objective materiality
to subjective intentions’’ (Merkin, 2007, para 4.28) and this is the same stance that the
English Law Commission has proposed should be maintained.
Non-disclosure
The provisions for the pre-contractual duty of disclosure are contained within s. 21(1)
ICA which states:
An insured has a duty to disclose to the insurer, before the relevant contract is entered into,
every matter that is known to the insured, being a matter that:
(a) the insured knows to be a matter relevant to the decision of the insurer whether to accept
the risk and, if so, on what terms; or
(b) a reasonable person in the circumstance could be expected to know to be a matter so relevant.
Knowledge
The approach under s. 21 above it not to define knowledge, it merely makes reference to
the fact that must be known to the assured. This is unlike its English equivalent where
knowledge has been defined as actual or willful ignorance as the MIA required that all
material facts that are ‘‘known to the assured and the assured is deemed to know every
circumstance in which in the ordinary course of business is known to him’’[50].
In comparison the English Law Commission’s approach has recommended that both
of these tests in s. 21 should be adopted into English law. Furthermore while the
Australian duty of disclosure is limited to those questions asked, it can also be seen
under s. 22 ICA that the insurer cannot rely on disclosure if they have asked a specific
question and they have then failed to inform the insured of the consequences for non-
compliance. This is currently similar to the Statement of General Insurance Practice,
prior to their replacement by the Business Rules, and those of the SLTIP. The Law
Commission has made no recommendations on this point regarding the consequential
failure to disclose an answer to a direct question. However, given that it has worked
well in Australia it may prove to be of an advantage to the consumer or small business
type of insurance. Furthermore, it could assist in the maintenance good industry
practice if this were adopted into English law.
Conclusions
As the law currently stands, there is scope for considerable injustice for the consumer or
small business insured that have fallen foul of the duty not to misrepresent or to disclose
material facts while simultaneously having to abide by the duty of utmost good faith.
While the consumer has been provided with some practical remedies through the FOS,
the clear divergence from the law has restricted the development of the common law,
stagnating through a voluminous lack of cases, although in part this could also be due to
arbitration and mediation clauses that are operational and prevent cases going to court.
Ultimately, the joint review by the Scottish and English Law Commissions’
recommendations are to be welcomed as they clearly make provisions for a major
reform. It adopts a fairer and more balanced approach. If a new Act does incorporate
the provisions discussed, then the law and the approach of the FOS will be virtually the
same. Furthermore while the FOS remains a free investigatory service at the point of
access, with no legal costs, if the consumer is unhappy with the application of the law
then the FOS can now be judicially reviewed[53] or alternatively the consumer can use
the law, albeit at an additional cost of legal fees, to sue the insurer. This he may have to
do for claims over the £100,000 threshold.
Clearly the Law Commission’s proposal to abolish the duty of non-disclosure, unless
a question is asked, is a substantial improvement and this follows the original
subjective approach of Lord Mansfield’s judgment and the FOS as indicated previously.
This can only benefit the insured, but it would also reflect the practical reality that, in
many cases, the insurance company is never going to know, nor has any way of finding
out, if the insured has had a minor accident and compensated the injured party directly.
Therefore, this would be indicative of his past conduct, but may not represent a Insurance law
financial risk to the insurer. If the insurer did discover these facts, however, this would
be a negligent misrepresentation and rather than having the policy avoided the insured
would be able to rely on the policy of proportionality, provided the insurer would not
have refused the insurance. Therefore, this is a substantial improvement on the
approach of allowing the insurer total avoidance, as is the current law.
Within the current legal framework the insurers have very few duties towards the 37
insured[54]. Therefore if the consumer insured needs to seek a remedy against the
insurer he would be ill-advised to do so through legal proceedings and, as has been
seen, the only remedy available where the insurer makes a misrepresentation or has
been held to be in breach of utmost good faith is avoidance.
Under the existing provisions in the MIA either the insurer or the insured can only
gain the remedy they are seeking by treating the contract as though it never existed.
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Therefore, this all or nothing approach is somewhat drastic, although the FOS’s
position, which can prevent the total avoidance of the contract, is much to be preferred
and the Law Commission now shares this view.
The development of consumer and small business insurance has provided a
lucrative industry whereby nearly all the benefits have been taken by the insurers who
have managed to stave off virtually all attempts at reform despite the recommendation
of two previous Law Commissions’ reports. So far only the FOS and its predecessor
have been able to redress the balance for consumers and those small businesses with
turnover less that £1 million[55], but this is clearly inadequate given the £100,000 cap.
Thus, it can only be hoped that Parliament will act on the Law Commission’s
proposals to redress the inadequacies of the current law and restore, at least from the
consumer and small business perspective, some order out of this chaos in the draft bill
to be published later this year and then finally this area of insurance law may be fit for
purpose in the twenty-first century.
Notes
1. Whether it be repealing or amending an act such as the Sale of Goods Act 1893 that
has been replaced by the Sale of Goods Act 1979.
2. [1995] AC 501 per Lord Mustill at 518.
3. [1997] 3 All ER 636.
4. MIA 1906 s. 20(1).
5. MIA 1906 s. 18.
6. (1766) 3 Burr 1905.
7. [1995] AC 501.
8. [1995] 1 AC 501 (p. 549).
9. Hird N.J. ‘‘Rationality in the House of Lords’’ [1995] JBL 194.
10. The court would be required to hear evidence from expert witnesses who may assist
the court in reaching a decision as to what the hypothetical reasonable insurer would
have done. This may not fall within the grounds of the actual insurer in question as his
policies may be different, so that he would not have undertaken the risk at all.
Furthermore, if these issues surrounded a specialist risk, the reasonable insurer may
have chosen not to underwrite that risk.
11. Cost in this sense would be the reinterpretation of the law to conform with modern days
society. This would also generate more uncertainty as new cases would be necessary to
IJLMA provide further clarification. Furthermore, this would also have additional financial costs
to the insurance industry in retraining and redefining insurance proposal forms.
52,1 12. Law Commission report No. 104, C and Y 8046.
13. Insurance Contracts Act 1984, s. 21.
14. Although there at four key type in total with the latter two being reckless and deliberate.
15. Rule 3.3, DISP Sourcebook of the FSA Handbook.
38 16. This limit also includes small businesses who can use the FOS provided their turnover
is less than £1 million.
17. This will not be discussed as it is outside the scope of this work.
18. While materiality is under the heading of consumerism as it is common to both
consumer and business insurance, both issues will be addressed.
19. Marine Insurance Act 1906 s. 18 and s. 20.
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insured.
49. Section 12 – This Part is not to be read down. The effect of this Part is not limited or
restricted in any way by any other law, including the subsequent provisions of this Act,
but this Part does not have the effect of imposing on an insured, in relation to the
disclosure of a matter to the insurer, a duty other than the duty of disclosure.
50. Section 18.
51. ALRC 20, para 183.
52. Insurance Contract Amendment Bill 2007. Schedual 4, Part I, para 1.
53. Similarly the insurer could also seek a judicial review of any decision made by the FOS.
54. See La Banque Financiere de la Cite SA v. Westgate Insurance Ltd [1991] 2 AC 249.
55. The definition of a business that will qualify for FOS adjudication is currently under
review by the Law Commission.
References
Birds, J. (2007), Modern Insurance Law, 7th ed., Sweet & Maxwell, London.
Law Commission (1979), ‘‘Non-disclosure and breach of warranty’’, WP No. 73, Law Commission,
London.
Law Commission (1980), Insurance Law: Nondisclosure and Breach of Warranty, Cmnd 8064,
The Stationary Office, London.
Lowry, J. and Rawlings, P. (2005), Insurance Law, 2nd ed., Hart, Oxford.
Merkin, R. (2006), A Report of the English and Scottish Law Commissions on the Australian
Experience of Insurance Law Reform, Law Commission and Scottish Law Commission,
London and Edinburgh.
Merkin, R. (2007), ‘‘Reforming insurance law: is there case for reverse transportation’’, available
at: www.lawcom.gov.uk/docs/merkin_report.pdf
Ombudsman News (2005), ‘‘Insurance case studies’’, Issue 48, August.
Pynt, G. (2008), Australian Insurance Law, LexisNexis, Chatswood.
Corresponding author
Gerald Swaby can be contacted at: g.swaby@hud.ac.uk