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Copyright (c) 2013 by the Tulane Law Review Association

Tulane Law Review

June, 2013

Tulane Law Review

87 Tul. L. Rev. 1075

LENGTH: 25578 words

SYMPOSIUM: MODERN MARINE INSURANCE: COVERAGES, CURRENT ISSUES, AND CONNEC-

TIONS:
Reform of the Insurance Law of England and Wales - Separate Laws for the Different Needs of Businesses
and Consumers

NAME: Paul Jaffe*

BIO: * © 2013 Paul Jaffe. Senior Underwriting and Claims Counsel at Catlin. The views and opinions ex-
pressed here are the personal views of the author and not necessarily those of any company in the Catlin
Group of companies. The author would like to thank Kate Buzzard for her assistance in preparing this Article.

LEXISNEXIS SUMMARY:
... Following a discussion in Part III of the recommendations likely to be made by the English Law Commis-
sion in respect to the law relating to disclosure, warranties, and consequential damages for business insur-
ance, Part IV of this Article examines the new Consumer Insurance (Disclosure and Representations) Act
2012 and other areas relevant to consumers. ... The Law Commissions quote a judgment in which the
court stated, I have always understood the proper line that an underwriter should take, except in matters that
he is bound to know, is absolutely to abstain from asking any questions, and leave the insured to fulfil his
duty of good faith, and to make full disclosure of all material facts without being asked. ... The Law Commis-
sions now propose that the duty of disclosure be reformulated: 5.78 ... . (1) An insured should disclose every
material circumstance which it knows or ought to know. ... . .79 ... . (1) A material circumstance is ... required
to provide a fair presentation of the risk ; (2) A fair presentation of the risk should include: (a) Any unusual or
special circumstances which increase the risk; (b) Any particular concerns about the risk which led the policy-
holder to seek insurance; and (c) Standard information which market participants generally understand
should be disclosed . (3) Where the insurer receives information which would prompt a reasonably careful in-
surer to make further enquiries, an insurer who fails to make appropriate enquiries should not have a remedy
for non-disclosure of any fact which those enquiries would have revealed . ... . .78 ... . (1) Information a busi-
ness policyholder should disclose to an insurer ... . (2) Should include information known to: (a) The directing
mind and will of the organisation; and (b) Those who arranged the insurance on behalf of the
organisation . ... . (4) A business policyholder should also ... disclose information that would have been dis-
covered by reasonable enquiries, which are proportionate to the type of insurance and to the size, nature and
complexity of the business . ... . .50 In the absence of inquiry, a business policyholder need not disclose: (1)
Matters of common knowledge ; (2) Information relating to the practices and risks of the trade which a well-
informed insurer writing that particular class of business ought to know ; and (3) Information ... known to: (a)
The directing mind and will of the insurers; or to (b) The persons who make the underwriting decision . " With
respect to the remedy for non-disclosure or misrepresentation, the Law Commissions provisionally propose
that . the remedy of avoidance be retained where the policyholder's conduct is dishonest ; . where the policy-
holder's conduct is not dishonest, then the remedy be proportionate so that (1) If the insurer would not have
entered into the insurance contract at all, then the policy may be avoided and all premium returned; (2) If
the insurer would have entered into the contract on different terms ... the contract shall be treated as if it in-
cluded those terms ; (3) If the insurer would have entered into the contract but charged a higher premium,
 2

the insurer may reduce proportionately the amount to be paid on a claim ... . . both the insured and the in-
surer would then be able to cancel the contract prospectively on reasonable notice. . in respect of business
insurance, the Law Commissions propose that the parties be able to provide that the insurer be entitled to
avoid for all non-disclosures and misrepresenta-tions. . ... Many insureds in dispute with their insurers will
contend that the warranty is designed to reduce only a particular type of loss, and the author dares say that
many insurers will contend that the warranty is not so designed. ... Similarly, with regard to the proposals re-
lating to damages for late payment of claims, the proposals for consumer insurance are the same as those
for business insurance except that the Law Commissions recommend that consumer insurance damages for
late payment should not be excludable.

HIGHLIGHT:
This Article examines the English and Scottish Law Commissions' ongoing review of insurance contract
law and the demand for its reform. The difference between insurance law in England and the United States
is important in order to understand the possible recommendations for reform. The Article summarizes the re-
forms made to date to consumer insurance law and the recommendations likely to be made regarding dis-
closures, warranties, and consequential damages for business insurance. The Article concludes that the re-
forms made to consumer insurance law are not appropriate for business insurance, that the case for reform
is not made, and that such reform could likely be harmful.

In all mercantile transactions the great

object should be certainty. n1
Nothing is more mischievous than
uncertainty in mercantile law. n2 - Lord Mansfield

TEXT:
[*1077]
I. Introduction

Some one hundred years after the enactment of one of the most important, influential, and enduring com-
mercial statutes in England, the Marine Insurance Act 1906, n3 the English and Scottish Law Commissions
(collectively referred to as the Law Commissions) began a review of insurance contract law. n4 The review
remains ongoing and encompasses not only marine insurance, but also all areas of non-marine and life in-
surance. n5
Despite the widespread international emulation of the Marine Insurance Act, n6 the support that it seems
to have from the commercial community n7 and certain members of the English judiciary, n8 the Act, like a
prophet in its own land, has been under attack in England for some years.
Part II of this Article reviews the history of demand for reform and outlines the review process undertaken
to date by the Law Commissions. It then notes the division between consumer insurance law and commer-
cial insurance law in England and how that division [*1078] differs from the American approach. Follow-
ing a discussion in Part III of the recommendations likely to be made by the English Law Commission in re-
spect to the law relating to disclosure, warranties, and consequential damages for business insurance, Part
IV of this Article examines the new Consumer Insurance (Disclosure and Representations) Act 2012 and
other areas relevant to consumers. Part V puts English insurance law in its economic context, and the Arti-
cle concludes that the case for the reform of primary legislation relating to business insurance has not been
made and that such reform is likely to be harmful to international commerce and the U.K. economy.
II. History of Reform
A. History of the Calls for Reform of English Insurance Contract Law

The main areas that have attracted criticism over the years are those aspects of the law that relate to the
disclosure obligations of the insured and those that relate to warranties. The criticisms were largely focused
on the law's harshness when applied to individuals. n9
 3

In 1957, the English Law Reform Committee's Fifth Report examined the law relating to disclosure and
warranties in insurance policies. n10 This committee excluded marine insurance from the scope of its enquiries
and recommendations on the basis that "the general public is not interested in marine insurance and [they
had] no reason to believe that the business circles who are concerned with the subject are in any way dissat-
isfied with the law as it stands." n11 Nothing came of the committee's recommendations.
In 1980, the English Law Commission reviewed the law of insurance and concluded that these aspects
of insurance law were "undoubtedly in need of reform" and that such reform had been "too long delayed," n12
but its proposals were never implemented. The [*1079] insurance industry did, however, respond to the
criticisms of the law of warranties and disclosure with regard to personal-lines insurance by agreeing to the
Association of British Insurers' (ABI) Statement of General Insurance Practice in 1986. n13 This statement was
a voluntary undertaking by those insurers who were members of the ABI that they would comply with certain
principles for policyholders that took out insurance in their private capacity only. The statement included the
following provision:

(b) An insurer will not repudiate liability to indemnify a policyholder: -

(i) on grounds of non-disclosure of a material fact which a policyholder could not reasonably be expected
to have disclosed;
(ii) on grounds of misrepresentation unless it is a deliberate or negligent misrepresentation of a material
fact;
(iii) on grounds of a breach of warranty or condition where the circumstances of the loss are uncon-
nected with the breach unless fraud is involved. n14

On January 14, 2005, the Insurance: Conduct of Business (ICOB) rules issued by the Financial Services Au-
thority (FSA), which had substantially similar provisions, n15 came into effect. n16 The Financial Conduct Author-
ity (FCA) took over responsibility from the FSA on April 1, 2013. n17
In parallel with these codes for consumer insurance, another development gave consumers the ability to
enforce the code against participating insurers - the Insurance Ombudsman Bureau. The Insurance Ombuds-
man Bureau was established in 1981 to hear complaints by consumers against insurers - primarily for unfair
claims [*1080] handling. n18 It enforced the terms of the ABI Statement of General Insurance Practice, and
insurers complied with its rulings. The Insurance Ombudsman Bureau published annual reports and bulletins
thereby providing guidance for insurers and policyholders on how it might rule. n19 These roles have now been
taken over by the Financial Ombudsman Service (FOS), which rules not only on consumer complaints but
also on those by micro-enterprises, n20 charities with an annual income of less than £ 1 million, or trusts with a
net asset value of less than £ 1 million. n21 The maximum amount that the FOS may award is £ 150,000 (or £
100,000 for complaints received before January 1, 2012). n22
However, it should not be forgotten that neither the ABI Statement of General Insurance Practice nor the
FOS's rulings had the force of law. Effectively, what developed in the mid-1980s and remains in place to date
is an alternative system of insurance law and dispute resolution that applied to personal-lines insurance and
that while complied with by the insurance industry, does not have the force of law. n23
The limit on the amount that the FOS may award and the fact that this extralegal parallel practice did not
have the force of law and was therefore untidy may explain why pressure remained in England to reform in-
surance contract law. In 1997, a consumer body published a paper recommending insurance law reform,
n24
and seemingly of greater [*1081] importance n25 was a report published in 2002 by the British Insurance
Law Association that also recommended reform. n26 Like the reports before it, that report recommended only
minor changes to marine insurance and to reinsurance n27 and, importantly, in the context of marine insurance
stated:

It is a highly competitive market where the insured is represented by skilled brokers who are well able to rep-
resent the insured in negotiating terms with the insurers. Proposal forms are rare. Disclosure is very impor-
 4

tant, as are warranties... . Accordingly, in the marine market, the insured can normally negotiate for accept-
able terms without statutory protection. n28

Anyone familiar with the way in which other large business risks are placed in the London insurance market
might well wonder why only marine insurance was identified in this way, because what is said there is true of
many classes of insurance and reinsurance.
The ongoing pressure seems to have been driven by the position summarised by Lord Justice Long-
more: "Voluntary measures of self-regulation such as the Statements of Insurance Practice whereby insurers
volunteer not to rely on their strict entitlement under the law are no substitute for proper law reform." n29 The
proposed reforms presumably would have applied to English domestic insurance whether purchased by con-
sumers or by small or large businesses, but in all this history of pressure in England for insurance contract
law reform, the main reports, papers, and draft bills recommended that no substantial changes be made to
the law of marine insurance and reinsurance. n30
In its current project, the Law Commissions initially considered declining to reform marine insurance but
ultimately decided not to distinguish between marine and non-marine insurance for the following reasons:
[*1082]

. Marine, aviation, and transport (MAT) insurance is "no longer regarded as such a separate and distinct form
of insurance" as it once was. n31
. "It would be overly complex to require lawyers to apply one law to (for example) major [construction
projects], and quite a different law to ships." n32
. "The boundary between MAT and other insurance is extremely difficult to draft." n33 Consumers who own
pleasure craft, but also many small leisure businesses and fishermen who do not, fall within the description
of "professionals "who could reasonably be expected to be aware of the niceties of insurance law'" n34 and
logically should be entitled to the same protection as other consumers. "The result would be complex regula-
tions, with arbitrary dividing lines." n35

The decision to treat all business insurance consistently appears to have support. n36 The difficulty in drawing
a bright line between marine and non-marine insurance is likely to lead to a substantial volume of litigation to
determine precisely where that line lies. U.S. maritime lawyers who are familiar with the wealth of cases de-
termining whether a floating unit is a vessel will be all too aware of the difficulty in drawing these lines and
the seemingly endless litigation that these demarcations generate. n37 Such a conclusion does not mean that
marine insurance law requires reform. It simply raises, even more acutely, the question of whether large
commercial insurance requires reform.
[*1083]
B. Application of the Marine Insurance Act to Non-Marine Insurance

To understand the scope of insurance contract law, it is important to canter through a history of insurance
law. My good friend Alan Weir n38 has taught me that English insurance law cannot be understood without an
awareness of the role of Lord Mansfield. n39 Lord Mansfield is credited with transforming the law of marine in-
surance n40 with a number of important rulings that outlined the modern law of marine insurance. n41 The case
law at this time primarily concerned marine insurance because the marine venture attracted the highest val-
ues and was therefore the most likely to be insured. There was nothing in these cases that in any way ex-
pressly restricted the insurance law being developed to marine matters. n42
When in the late-nineteenth century Mackenzie Chalmers drafted the Marine Insurance Act, it was a cod-
ification of over 2000 cases that made up the law of marine insurance, n43 rather than an attempt to change
the law. n44 Although by its terms the Marine Insurance Act only applies to marine insurance, n45 it deals with in-
surance principles that are of general application n46 and has been accepted as a statement of insurance law
generally, not just of marine insurance. Cases interpreting the Act do not even necessarily arise out of marine
insurance. n47 There are some areas where non-marine insurance law [*1084] diverges from marine in-
surance law, but these are few and exceptional. n48 It has been suggested that one of these areas is the mat-
 5

ter of what constitutes a warranty, with any statement of fact bearing upon the risk in the policy being con-
strued as a warranty for marine insurance but with normal rules of construction applying to this determination
for non-marine insurance. n49 However, even the few apparent differences are not accepted by all commenta-
tors who prefer instead to construe cases in such a way that they apply equally to marine and non-marine in-
surance. n50
In other words, in England, marine insurance gave birth to modern insurance law generally. When ma-
rine insurance law was codified, that codification was taken as a statement of all insurance law in most ar-
eas.
C. Two Nations Divided by a Common Language

English insurance law was of course exported across the Atlantic and became part of the U.S. general mar-
itime law, with the United States Supreme Court expressly following a policy of deference to English deci-
sions. n51 Things took a slight turn after the adoption and ratification of the United States Constitution. Article
III, Section 2 of the Constitution grants the federal courts original jurisdiction over all cases of admiralty and
maritime jurisdiction, n52 which the courts held included marine insurance cases. n53 On the other hand, dis-
putes under non-marine insurance are governed by state law by virtue of the fact that powers not granted to
the federal government are reserved to the states. n54
Therefore, from the beginning of the American Republic, marine insurance law was governed by federal
law, which borrowed extensively from English law, while non-marine insurance was [*1085] governed by
state law. The states adopted their own insurance codes. Most states' insurance codes categorise insurance
into three or four markets: n55
. admitted market;
. surplus lines market;
. exempt market; and
. marine market.
While these categorisations contain different restrictions on the policy forms that the insurer may use and
the rates it may charge, the law applicable to these forms does not differ depending upon the category of in-
surance. While much state regulation of insurance appears to be directed towards consumer protection, the
approach of federal maritime law seems to have been to support commerce with a single marine insurance
law. n56 This settled state of affairs was disrupted by the United States Supreme Court in Wilburn Boat Co. v.
Fireman's Fund Insurance Co., n57 in which the Court held that there was no federal law dealing with the con-
sequences of a breach of warranty in a marine policy and that therefore the Court was required to look to
Texas state law for the remedy. Leaving aside the point that there was such a federal law n58 and not wanting
to become diverted on to the subject of the Wilburn Boat case about which so much has been written, it is
worth noting that the case involved a small business on an inland lake. n59 One might speculate as to the de-
gree consumer protection was behind that decision.
English insurance law, on the other hand, remained largely unified as a single set of principles, whether
applied to marine or non-marine insurance. n60 Where English insurance law was felt to be too harsh for con-
sumers, that harshness was mitigated by voluntary statements enforced by an ombudsman.
[*1086]
D. Unfair Terms in Consumer Contracts Regulations 1999

In England there are already separate regulations that apply to consumer insurance contracts (whether
marine or non-marine): the Unfair Terms in Consumer Contracts Regulations 1999. n61 The regulations allow a
court to review the fairness of all non-negotiated terms unless those terms define the main subject matter of
the contract or the adequacy of the price and provided that those terms are in plain intelligible language. The
extent of consumer protection provided by these regulations is unclear and the subject of some debate. n62
E. Law Commissions' Insurance Contract Law Reform Project
 6

As mentioned, in January 2006 the Law Commissions issued their Scoping Paper setting out the need, as
they saw it, for the review of insurance contract law, giving the reasons why they would specifically review
the law relating to disclosure and to warranties, and requesting respondents' views on the scope of the re-
view generally. n63
Following that paper, there followed a series of "issues papers" in which the Law Commissions set out
their views on specific areas for reform, including the reasons therefore, and their initial views on the form
that a change in the law might take. Responses were invited. Issues papers were released on the following
subjects:
. Misrepresentation and Non-Disclosure (September 2006) n64
. Warranties (November 2006) n65
. Intermediaries and Pre-Contract Information (March 2007) n66
. Insurable Interest (January 2008) n67
. Micro-Businesses (April 2009) n68
[*1087] . Damages for Late Payment and the Insurer's Duty of Good Faith (March 2010) n69
. The Insured's Post-Contract Duty of Good Faith (July 2010) n70
. The Broker's Liability for Premium (Section 53) (July 2010) n71
. The Requirement for a Formal Marine Policy (Section 22) (October 2010) n72
Following responses to the issues papers, the Law Commissions issued "consultation papers" setting out
their views in light of the responses received. The consultation papers issued have been:
. Misrepresentation, Non-Disclosure and Breach of Warranty by the Insured (July 2007) n73
. Post Contract Duties and Other Issues (Dec. 2011) n74
. The Business Insured's Duty of Disclosure and the Law of Warranties (June 2012) n75
With respect to Misrepresentation, Non-Disclosure and Breach of Warranty by the Insured, the Law
Commissions decided in the consultation paper to split the law between that applicable to consumers and
that applicable to businesses. Therefore, in December [*1088] 2009 a final report was issued covering
Consumer Insurance Law: Pre-Contract Disclosure and Misrepresentation. n76
That was followed by the Consumer Insurance (Disclosure and Representations) Act 2012, n77 which was
enacted in that year and came into force on April 6, 2013. n78
The Law Commissions expect to issue their final report on Post-Contract Duties and Other Issues, as
well as a report on Business Insurance Law: Pre-Contract Disclosure, Misrepresentation and Warranties, in
December 2013 together with a draft bill. n79
III. Business Insurance Reform
A. Main Areas of Review by the Law Commissions

As is self-evident from the number and subjects of the issues papers released by the Law Commissions, the
scope of the project is significantly broader than that envisaged by the previous reports and papers. The
scope is also so broad that space will not permit an examination of all the subjects of the issues papers.
In this Article, I examine the key areas of disclosure and warranties that form the heart of the Law Com-
missions' project together with their proposals regarding damages for late payment of claims. This Article ex-
amines these subjects from the perspective of the London insurance market, most of whose business is in-
ternational, and challenges the extent to which change to these areas of the law will support the commercial
needs of those operating in and purchasing from that market.
[*1089]
B. Non-Disclosure
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1. Existing Law

Much is written about the current state of English insurance law regarding the duty of disclosure and the
remedies therefore, n80 so this Part dispenses with a detailed review of the current state of English law and
provides only a very brief overview of the state of the law. This Part then proceeds to examine the Law Com-
missions' proposed approach to reforms, note the reasons for the approach, and comment on it. The law in
England is stricter than in some other jurisdictions. n81
The law regarding disclosures and representations is set out in sections 17 to 21 of the Marine Insurance
Act and applies to both marine and non-marine insurance. n82 Section 17 sets out the principle of utmost good
faith. The obligation of utmost good faith is generally, but not exclusively, manifested by the duty of disclosure
as set out in section 18, as discussed below. The obligation to act in utmost good faith applies to both the in-
sured and the underwriters. n83 Generally, however, the duty rests more heavily on the insured and its agents
than upon underwriters because the insured is the party in possession of the facts that the underwriter needs
in order to evaluate the risk.
The obligation of utmost good faith arises prior to the inception of the policy (during the placement) and
continues after execution of the contract. n84 However, in the absence of the insured requesting any changes
to the policy or any contractual requirement in the policy requiring ongoing disclosure, the insured is not
obliged to disclose facts that develop during the currency of the policy. n85
The insurance contract is voidable following material non-disclosure or misrepresentation at the option
of the party prejudiced. n86 The right to avoid the contract is waived if the party that is seeking to [*1090]
avoid acts in a way that treats the contract as remaining in existence. n87 In such a case, the right to avoid is
lost and the contract continues in full force and effect. n88 The effect of avoiding the contract is to put the par-
ties in the position that they would have been in had the contract not been entered into. n89 For this reason,
when an insurer avoids a contract of insurance it tenders return of the premium to the insured in the absence
of fraud. n90 The parties may contract out of the duties of utmost good faith and those embodied in sections 18
and 19 of the Act; n91 however, any such attempt to contract out of these duties will be narrowly construed,
that is, any ambiguity will be interpreted against such contracting out. n92 Furthermore, as with any English
contract, the parties cannot contract out of the duty not to make fraudulent misrepresentations to each other.
n93

Section 18 sets out the duty of disclosure before the insurance contract is concluded. n94 The insured
must disclose to the insurer every material circumstance that is known to the insured and every circumstance
that in the ordinary course of business ought to be known by it. If the insured is an individual, this means
those facts known to them personally; and if the insured is a company, this means knowledge of directors
and employees at an appropriate level. The duty of an insured to disclose material facts is a positive duty. Si-
lence, even innocent silence, as to a material fact entitles the insurer to avoid the contract. n95 The duty ex-
tends to disclosure of matters that go to the moral hazard of the risk and goes as far as, for example, requir-
ing disclosure of allegations of corruption against the officers of a corporate insured even when the allega-
tions are subsequently determined to be untrue. n96
The duty to disclose applies only until there is a binding contract between the insured and the insurer
and from each renewal until each renewal is agreed. If the policy is not renewed each year because it is a
continuous contract (as is often the case with quota share reinsurance) or a long-term policy, then the duty of
disclosure does not arise at each [*1091] annual re-signing unless the policy is cancelled and then re-
newed at that annual re-signing. n97
a. Material Circumstance

A circumstance is material if it would influence the judgment of a prudent underwriter in fixing the premium or
in determining whether to take the risk. n98 To determine whether an underwriter may avoid the policy for non-
disclosure, the court must ask two questions:
. Was the circumstance one that would have influenced the judgment of a prudent underwriter in taking
the risk or in the premium charged for the risk? n99
 8

. Was the circumstance one that would have influenced the judgment of the actual underwriter in taking
the risk or in the premium charged for the risk? n100
The second of those requirements, commonly referred to as "inducement," is in fact of recent vintage,
deriving from a House of Lords decision in 1995. n101 Earlier calls for reform failed to recognise the importance
of the actual insurer proving that it had been misled. The need to prove inducement is a very significant fetter
on the indiscriminate attempts to avoid policies, and challenges increasingly are being made to underwriters'
evidence on inducement. n102
If the answer to both questions is "yes," then the underwriter may avoid the policy. n103 However, if both
questions cannot be answered in the affirmative, then the underwriter may not avoid the policy. Where there
are co-insurers of a risk, which is normal in the London market, and because those co-insurers are each sev-
erally and not jointly liable, some of those co-insurers may avoid the policy while others must pay the claim.
The reason for this is that the fact that was not disclosed would have influenced the decision of some under-
writers but not others. However, where a full disclosure has not been made to the [*1092] leading under-
writer, then the following underwriters may be able to avoid the policy unless the insured advises the follow-
ing underwriters that there has not been a full and fair presentation to the leading underwriter. n104
In the absence of enquiry, the insured need not disclose any circumstance:
. "which diminishes the risk," n105
. "is known or presumed to be known to the insurer," n106
. "as to which information is waived by the insurer," n107 and
. which is the subject of a warranty. n108
b. Remedy for Breach of Duty To Disclose

The remedy available to the insurer of avoiding the policy is one that the insurer must elect, otherwise the
policy remains in force. n109 Thus, the right is one that the insurer may lose by waiving it or by affirming the
contract (for example, by paying the claim or continuing to receive premium after the underwriter has knowl-
edge of the concealed circumstance). n110
c. Disclosure by Agent Affecting Insurance

Where the insurance is placed through an agent, such as a broker, section 19 provides that the agent must
disclose

a) every material circumstance which is known to himself, and an agent to insure is deemed to know every
circumstance which in the ordinary course of business ought to be known by, or to have been communicated
to, him; and
b)every material circumstance which the [insured] is bound to disclose, unless it come to his knowledge
too late to communicate it to the agent. n111

The duty to disclose personal knowledge applies only to the agent that actually deals with the insurers con-
cerned and makes the contract in [*1093] question. n112 It seems it does not apply to other agents, including
those in a chain of brokers. However, the agent that deals directly with the insurers is deemed to know every
circumstance that in the ordinary course of business ought to be communicated to them. Thus, in effect, the
information that is passed along a chain of brokers is something that the broker that deals directly with the in-
surer is deemed to know. n113 Insurers cannot avoid a policy where the agent (including an agent to insure)
fails to communicate the fact that it is defrauding its principal, the insured. n114 The same considerations apply
to the remedy available to the insurer for a breach of the duty of disclosure, the test for determining whether
there has been a breach, and those items that need not be disclosed. n115
Section 20 sets out the nature of representations where negotiation of the contract is pending. n116 Repre-
sentations during negotiations for effecting an insurance agreement are verbal or written statements to the
 9

underwriter by the insured or by the broker that may influence the judgment of a prudent insurer as to the de-
sirability of the risk or the rate of premium they would charge. Representations are either representations of
fact or representations of expectation or belief. Representations of fact must be substantially true - that is,
"the difference between what is represented and what is actually correct [must] not be considered material by
a prudent insurer." n117 Representations of expectation or belief must be made in good faith. n118 A representa-
tion differs from a warranty in that while a warranty must be complied with exactly, it is sufficient that repre-
sentation of fact is substantially correct or that representations of expectation or belief are made in good
faith. n119 Any representation made during negotiations may be withdrawn or corrected before the slip is ini-
tialled by the underwriter concluding the acceptance of the risk. n120
In certain classes of insurance (for example, the insurance of yachts), it is a common practice for pro-
posal forms to be completed, and there is a presumption that the questions on the printed form [*1094]
supplied by the insurer relate to material circumstances, but there is no presumption that matters not dealt
with therein are not material. The fact that a proposal form is used does not relieve the insured (the proposer)
or its agent of the duty to disclose all matters required under sections 18, 19, and 20 of the Marine Insurance
Act, n121 but if the yacht policy is taken out by a consumer, then this situation will be altered by the new Con-
sumer Insurance (Disclosure and Representations) Act 2012. n122
2. Law Commissions' Concerns with the Law of Disclosure

The Law Commissions' main concerns about the current state of the law of disclosure may be summarised
as follows:

. Businesses are said not to be clear on what needs to be disclosed because it is counter-intuitive for them to
have to disclose what the insurer wants to know. Much reliance is placed on a report by the Mactavish Group
in 2011, n123 which found, based on interviews of over 600 policyholders and 100 senior insurance executives,
that companies have a poor understanding of the law of disclosure, that their presentations are poor, and that
brokers are devoting less time to assisting with these presentations because their fees have fallen over the
last few years. On the other hand, an Association of Insurance and Risk Managers in Industry and Com-
merce (AIRMIC) survey found that most insureds spent two to six months in preparing information for their in-
surance renewals and that nearly one third of members claimed that disclosure issues had been raised
against them in the last five years. n124
. It is not clear whose knowledge within the insured is relevant, so those placing insurance are not clear
as to how to gather the information for the insured's placement. n125
. Insurers have insufficient incentives to ask questions at the time of underwriting the risk as opposed to
the time of claim.

[*1095] The Law Commissions quote a judgment in which the court stated,

I have always understood the proper line that an underwriter should take, except in matters that he is bound
to know, is absolutely to abstain from asking any questions, and leave the [insured] to fulfil his duty of good
faith, and to make full disclosure of all material facts without being asked. n126
The Law Commissions claim that this attitude gives rise to widespread complaints that the law encour-
ages passive underwriting only to re-open the question of adequate information at the claims stage. n127 How-
ever, at the same time, the Law Commissions maintain that the law does require the insurer to ask questions
when the information disclosed would lead a reasonable insurer to ask those questions. n128 If that require-
ment exists, then insurers have such an incentive.
. The remedy for disclosure is too harsh. If a non-disclosed fact would have resulted in a small increase
in premium, the insurer may avoid the whole policy. n129
 10

The Law Commissions summarised their position, stating: "Good disclosure requires co-operation between
both parties... . Our starting point is that the policyholder should make a fair presentation of the risk, and the
insurer should ask appropriate questions." n130
3. Reasons for the Strictness of the Existing Law

The immediate reason for the duty of disclosure is that the insured knows the facts material to the particular
risk, so it should disclose them to the underwriter who has no such knowledge. Insurance is one of the few
areas of contract law where, despite there being no fiduciary relationship between the insured and the in-
surer, the [*1096] contract is nevertheless subject to the duty of utmost good faith. n131 Moreover, the duty
of disclosure is recognised by the Law Commissions and others as underpinning the market's strength in
covering a huge variety of risks competitively and effectively. n132 The City of London Law Society correctly
noted that because of the duty of disclosure, major insurance transactions are routinely written without "an
enormous amount of due diligence being carried out with underwriters relying on insureds and their profes-
sional advisors to provide material information." n133
The Law Commissions have also taken on board the following point:

Insurance provides firms with access to contingent capital - that is access to funds in circumstances when
they most need it. Compared with the costs of accessing other capital, such as bank loans, insurance is a
cheap option, with lower administrative costs or arrangement fees. Insurance is a cost-effective way to ac-
cess capital and we would not wish to hinder that. n134

In essence, these statements summarise the reasons for the duty of disclosure and the requirement that the
insured make a fair presentation of the risk. n135 The overwhelming majority of respondents to the Law Com-
missions supported retaining the duty of disclosure. n136
In the event that the insured has failed to disclose or has misrepresented a material fact, the insurer's
remedy is to avoid the policy and return the premium. n137 The remedy of avoidance for an innocent or negli-
gent non-disclosure or misrepresentation may be seen as harsh, particularly if the insurer would only have
charged a slightly higher premium or required the insured to bear a slightly higher excess. n138 Nevertheless,
this "harsh" remedy provides a strong incentive to the insured to be careful and diligent in its presentation of
the risk to the underwriters. Despite concerns by the Law Commissions that the remedy of avoidance is
overly harsh, they note that "non-disclosure is widespread." n139
[*1097] So why should the remedy for non-disclosure and misrepre-sentation have this policing func-
tion? In short, the insured that diligently and carefully discloses all facts in a fair presentation of the risks pays
the "correct" rate for laying off that risk. The careless insured that fails to make a full disclosure is likely to pay
a lower rate for laying off the risk. Chronic under-declaration results in a depletion of the fund of premiums on
which all insureds depend, to the detriment of all. That shortfall can only be rectified by pushing up premiums
for all concerned. In turn, this corrodes the benefits for which the Law Commissions elsewhere have ac-
cepted that insurance provides - namely, the benefit of a significantly lower cost support for business capital
than any of the alternatives currently available. Clearly, the interest of the occasional careless insured should
be secondary to the interests of all insureds if a lean and cost-effective insurance product is to remain avail-
able. Careful insureds subsidizing careless insureds is neither a fair result nor one that the law should en-
courage.
4. Law Commission's Provisional Approach

As we have seen, not only have the scope of the duty of disclosure and the remedies for breach thereof at-
tracted the attention of the English Law Commission in the current round of proposed insurance law reform,
but they have also been at the heart of the criticisms of the law in the English Law Commission's 1957 and
1980 reports. n140 Nevertheless, reforming such a key part of insurance law is fraught with difficulty. This is
why the English and Scottish Law Commissions' 2012 proposals differ significantly from their 2007 proposals
that sought more radical changes. n141 The Law Commissions now propose that the duty of disclosure be re-
formulated:
 11

5.78 ... .
(1) [An insured] should disclose every material circumstance which it knows or ought to know. n142
... .
5.79 ... .
(1) [A] material circumstance is ... required to provide a fair presentation of the risk[;]
[*1098] (2) A fair presentation of the risk should include:
(a) Any unusual or special circumstances which increase the risk;
(b) Any particular concerns about the risk which led the policyholder to seek insurance; [and]
(c) Standard information which market participants generally understand should be disclosed[.]
(3) Where the insurer receives information which would prompt a reasonably careful insurer to make fur-
ther enquiries, an insurer who fails to make appropriate enquiries should not have a remedy for non-disclo-
sure of any fact which those enquiries would have revealed[.] n143
... .
6.78 ... .
(1) [Information] a business policyholder should disclose to an insurer ... .
(2) Should include information known to:
(a) The directing mind and will of the organisation; and
(b) [Those] who arranged the insurance on behalf of the organisation[.]
... .
(4) A business policyholder should also ... disclose information that would have been discovered by rea-
sonable enquiries, which are proportionate to the type of insurance and to the size, nature and complexity of
the business[.] n144
... .
8.50 In the absence of inquiry, a business policyholder need not disclose:
(1) Matters of common knowledge[;]
(2) Information relating to the practices and risks of the trade which a well-informed insurer writing that
particular class of business ought to know[; and]
(3) Information ... known to:
(a) The directing mind and will of the insurers; or to
(b) The persons who make the underwriting decision[.]" n145

With respect to the remedy for non-disclosure or misrepresentation, the Law Commissions provisionally pro-
pose that

. the remedy of avoidance be retained where the policyholder's conduct is dishonest[;] n146
[*1099] . where the policyholder's conduct is not dishonest, then the remedy be proportionate so that
(1) If the insurer would not have entered into the insurance contract at all, [then the policy may be
avoided and all premium returned;]
 12

(2) If the insurer would have entered into the contract on different terms ... the contract [shall] be treated
as if it included those terms[;]
(3) If the insurer would have [entered into the contract but] charged a higher premium, the insurer may
reduce proportionately the amount to be paid on a claim ... . n147
. both the insured and the insurer would then be able to cancel the contract prospectively on reasonable
notice. n148
. in respect of business insurance, the Law Commissions propose that the parties be able to provide
that the insurer be entitled to avoid for all non-disclosures and misrepresenta-tions. n149

5. U.S. Law and European Law

The Law Commissions have borrowed the concept of proportionate remedies from the insurance law in
many European countries. n150 In their report, the Law Commissions provide a brief overview of German non-
marine insurance law and of the French Code des assurances. n151 There are different rules for MAT risks in
Germany. n152 The other major European market that competes with London for marine and energy risks is
Norway, and there too different rules apply to these classes of insurance. n153
Moreover, the Law Commissions have lifted the proportionate concept out of its wider legal matrix. Under
the continental approach, the duty of disclosure continues after the contract is agreed upon so that the in-
sured must disclose those factors that during the policy [*1100] period, increase the risk. n154 The premium
is then (under some provisions) altered to reflect that increased risk. n155 In English law, the duty of disclosure
ceases when the contract is agreed. n156 The Law Commissions reject importing the continental approach into
English law n157 even though it would seem that the continental continuing duty of disclosure is part of the quid
pro quo for pro rata remedies. n158
In the United States, disclosure requirements vary. For instance, for marine insurance and reinsurance
subject to New York law, an insured must disclose all information that materially affects the risk being in-
sured. n159 If the insured fails to make such disclosure, the policy may be avoided ab initio. n160 For other types
of insurance, whether consumer or business, the insured is under no duty to disclose facts material to the
risk unless such failure to disclose amounts to wilful concealment. n161 Rather, the insured's duty is to not
make any material misrepresentation in the proposal. n162 This rule is followed in some states, while others do
not require that the non-disclosure amount to wilful concealment. n163
6. Comments on the Law Commissions' Approach to Disclosure

The Law Commissions have not made a case that the law of disclosure, as applied to business insureds,
needs reform. They can point to insureds not understanding the duty sufficiently well, but [*1101] brokers
have a duty to advise their clients, n164 and as we will see, the market of commercial insurance is dominated
by brokered business. The findings by a risk managers' association that its members are frequently faced
with attempts by insurers to question disclosure tells one very little. There is a great deal of difference be-
tween an insurer verifying, as part of the claims process, the accuracy of disclosure and then proceeding to
pay the claim and a full-blown dispute about the adequacy of disclosure. It appears that only 5% of AIRMIC
members actually have had any litigation in the last two years about the quality of disclosure, which suggests
that 95% of its members have not and therefore do not suffer from the supposed difficulties in complying with
the current law. n165 As for the theoretical ability of an insurer to simply sit back during the presentation and not
ask any questions, that is questionable and risky as we have seen. None of these findings or results seems
sufficient to justify a change to the primary insurance law. In particular, neither the failings of risk managers
to understand the law nor the failings of brokers to assist their clients adequately in preparing presentations
would appear to be a sufficient reason to reform the law in this area. Simpler and less disruptive solutions ex-
ist that will not lead to an inevitable deluge of litigation and uncertainty. These solutions include insureds pay-
ing their brokers enough to assist them in preparing the information and risk managers receiving training on
the law of disclosure, and even negotiating (if necessary) a limitation on the duty of disclosure regarding a
given risk (as is permitted by the current law).
 13

Primary legislation is rarely effective at enforcing more co-operation between contracting parties. In a
firmly regulated industry where most business insureds are supported by sophisticated brokers, there are
other, more flexible ways to achieve the Law Commissions' aim. Insurers are concerned about their reputa-
tion as to how they pay claims and are increasingly measured by brokers and associations of risk managers
for their attitude towards paying claims and for their speed of settlement. Insurers who score poorly on such
measures will suffer. n166 Brokers are unlikely to place their better business with them and insureds will likely
look to move their business to other insurers. [*1102] Additionally, regulators are able to respond speedily
with regulations to enforce actions against insurers. The FSA and its successor, the FCA, have rules on
claims handling n167 against which regulated firms are measured. If they fall short, then the regulator may re-
quire that remedial measures are taken. n168
The proposed changes to the duty are intended to be evolutionary and incorporate current judicial devel-
opments into a new statute. n169 While it may be presented as not intended to change the current law signifi-
cantly, a new statute following the Law Commissions' thinking will undoubtedly introduce new concepts, each
of which will require judicial consideration, likely more than once.
With regard to the proposal to change the remedy from avoidance alone to a proportionate approach
would give rise to more difficulties. For example, the proposal to change the remedy from avoidance alone to
a proportionate approach will usher in a new area of dispute in most cases. Currently the underwriter must
show that the information that was not disclosed should have been disclosed by the insured and was mate-
rial to both a prudent underwriter and the actual underwriter. n170 With a case-by-case focus only on what is
proportionate for the particular transaction, there will be an additional dispute as to precisely what the under-
writer would have done had the information been disclosed.
The proposed changes to the remedy for avoidance also do not require the insured to pay the correct
premium. In the absence of an explicit policy provision, it appears that if, in the absence of a claim, the in-
surer discovers that there is careless misrepresentation or non-disclosure (such as an under-declaration of
insured values), which would have affected the premium charged, then the insurer may have no remedy
against the insured other than to cancel the policy prospectively. n171 That is a very curious omission. Whether
the insurer has a remedy against the insured for the premium as damages for breach of contract is unknow-
able at this stage.
[*1103] Any new law is likely to lead to a great deal of uncertainty and litigation. Examples of new con-
cepts that the Law Commissions intend to introduce are:

. Replacing the prudent insurer with the reasonably careful insurer. n172 If this change is other than cosmetic, it
will result in the old case law setting the standard for materiality by reference to the conduct of prudent insur-
ers being rendered obsolete, with little indication of what the new concept is meant to imply. The alternative
view is that this proposed standard of materiality is simply updated terminology. If that is what is intended,
then the case law should be retained in order that the certainty of the current standard is preserved rather
than discarded, which would produce a significant increase in uncertainty and litigation.
. Introducing a new test that the business policyholder must disclose information that would have been
discovered by reasonable enquiries, which are proportionate to the type of insurance and to the size, nature,
and complexity of the business. n173 This will need a great deal of clarification and is a factual test that will re-
quire application on a case-by-case basis.
. Introducing new fact-intensive limitations on what a business insured need not disclose prior to the con-
clusion of the contract. n174 One can fairly wonder what information relating to the practices and risks of the
trade a well-informed insurer writing that particular class of business ought to know. This new test should
give rise to plenty of work for underwriting experts and coverage litigators.

The Law Commissions maintain that the current law generates a high volume of disputes and litigation, al-
though they only identified twenty-six High Court cases in the last decade. n175 To rely on that very modest vol-
ume of litigation as sanctioning a reform that will invariably require repeated judicial clarification is not sound.
 14

Why is the information known by the directing mind and will of the insurer (which the author assumes
means the main executive directors) relevant to the underwriting process? With an increased [*1104] spe-
cialization in the insurance market at the underwriter level, what the actual underwriter writing this class
ought to know is far more relevant than the knowledge of the directors of the company. That is what the cur-
rent law requires the court to consider, n176 and the fact that the Law Commissions are proposing something
that is, in the author's view, entirely off the point is troubling. As a practical matter, will this not tie executive
directors to disputes concerning policies with which they had no involvement in underwriting?
While some element of deterrence has been retained, is it enough? The Law Commissions themselves
have acknowledged that there may be many instances of non-disclosure, despite the apparently robust cur-
rent law. n177 Is there not a real risk that there will be more disclosure problems when the deterrence aspects
of the current law are reduced?
The proposed ability of parties to contract out of the default law is not an appropriate response to the crit-
icisms above because contracting out will likely be done in a myriad of different ways, thereby again giving
rise to uncertainty. Moreover, contracting out of the law is not something that has been embraced on any sig-
nificant scale by the market, and there is little evidence to suggest that this will change. n178 If all those in the
market seek certainty, contracting out of the law does not provide that certainty.
The certainty of English law is being attacked. If it is accepted that business people want a certain and
straightforward law under which to frame their commercial transactions, then upsetting the certainty of the
law is likely to lead businesspersons to look for an alternative law for their contracts, which will be damaging
to English interests.
C. Warranties
1. Existing Law

A detailed review of the law of warranties in England is addressed elsewhere. This Part therefore dispenses
with a review of the current state of English law and proceeds to examine the Law Commissions' proposed
approach to reforms, note the reasons for the [*1105] approach, and comment on it. From the earlier re-
view it is apparent that the law is strict.
The Law Commissions' main concerns about the current state of the law of warranties may be sum-
marised as follows: n179

. Basis-of-contract clauses n180 - these clauses have been criticised by judges and academic commentators
for some years as "trapping" the policyholder and providing the insurer with warranty remedies in what would
otherwise be disclosure cases. n181 Their effect of contractually converting statements made in the disclosure
into warranties enables the insurer to avoid paying claims when the non-disclosed or misrepresented fact
was not material to the risk. In contrast, under section 20 of the Marine Insurance Act and the relevant case
law an insurer may not avoid a policy unless those facts were material to the risk. n182
. Alleged increasing indiscriminate use of warranties - applied to terms dealing with minor matters. n183
. Effects of breach are automatic, complete (all risks discharged), and severe - resulting in the policy-
holder being without cover without realising it. n184
. Remedy for breach prior to loss is irrelevant - even for the most minor of breaches. The fact that the in-
surer is discharged from liability despite the breach of warranty being remedied prior to the loss is seen to be
very harsh. The example given is the case of De Hahn v. Hartley n185 in which the vessel's policy contained a
warranty that the ship have a crew of at least fifty. The vessel left Liverpool with a crew of forty-six at which
point there was a breach of warranty. At the next port it picked up six additional crew, [*1106] and some
time thereafter the vessel suffered a casualty. The insurer was discharged from liability for the claim. n186
. Waiver - upon breach the contract is dead, but the insurer can still "waive" it back to life. n187
. Uncertainty - the courts' use of construction to moderate the harshness of law is leading, it is said, to in-
creased uncertainty. Warranties must be construed strictly, n188 albeit in light of the other terms and the com-
 15

mercial context of the contract. n189 The Law Commissions maintain that the cases go beyond this principle
and use other techniques, such as interpreting the warranty as a suspensive condition, resolving ambiguities
against the insurer, construing the warranty as only applying to some of the risks covered by the policy, or
simply finding that the terms are not warranties at all. n190

2. Reason for the Strictness of Existing Law

There is no doubt that the existing law on warranties is strict. However, it should be recognised that the law
on warranties dovetails with the law relating to disclosure in a number of respects. First, facts that are war-
ranted do not need to be disclosed. n191 Second, the duty of disclosure (but not that of good faith) ceases at
the time that the parties enter into the contract of insurance. n192 Therefore, if it is important to the insurer that
the risk being assumed by the insurer that a fact or state of affairs remains in existence throughout the dura-
tion of the risk, then the insured must either warrant that fact or the results of such a breach must be ex-
cluded.
It does appear that in certain types of domestic insurance, policies contain warranties when exclusions
might be a simpler and clearer way of ensuring that certain losses are not covered. The Law Commissions
are clearly exercised by a state of affairs that could be seen as a temporary market failure, and it is sug-
gested that this has [*1107] given rise to the Law Commissions' third proposal as set out below. n193 How-
ever, in the author's view, a failure in one part of the domestic market is not a reason for reform of primary in-
surance legislation, for the reasons set out above, and there are more effective and less disruptive ways to
deal with a perceived market failure. If there is a real market demand for policies in which such warranties
are drafted as exclusions, it is very surprising that no insurer or broker is offering such a product.
3. Law Commissions' Provisional Approach

To remedy these concerns and apparent problems, the Law Commissions propose the following changes:

. Abolish basis-of-contract clauses for business insurance (this has already been done for consumer insur-
ance, as discussed below). n194
. The effect of a breach of warranty will only suspend the insurer's liability for the duration of the breach,
so if a breach is remedied, then cover will be restored. n195
. Where the warranty is designed to reduce the risk of a particular type of loss, then a breach only sus-
pends liability for that type of loss, and that loss is only suspended for the duration of the breach. n196

It is proposed that the new regime will be mandatory for consumer insurance and that for business insur-
ance the parties can contract out of the new regime, but only if the policy contains a term to that effect that is
written in "clear, unambiguous terms and specifically brought to the attention of the other party" before the
contract is formed. n197
With regard to MAT insurance as well as reinsurance, the Law Commissions propose that the same law
applies to these classes as applies to any other class of business or consumer insurance. n198 They also pro-
pose retaining the implied warranties contained in sections 39 through 41 of the Marine Insurance Act as well
as the implied voyage conditions contained in sections 43 through 46. n199
[*1108] As previously mentioned, the 2012 proposals of the Law Commissions are the second set of
proposals on this subject. In their 2007 paper, they proposed a complex structure that distinguished between
warranties as to past or current facts on the one hand and as to future conduct on the other. n200 In both cases
the insurer could only decline a claim if the breach contributed to the loss. n201 Following concerns expressed
about these proposals, the Law Commissions accept that the causal connection test is unsuited to many
terms and does not propose using it explicitly. n202
4. U.S. Law and European Law
 16

U.S. law regarding warranties in insurance policies has been described as "utter chaos," n203 with some state
laws requiring strict compliance with the warranty, breach of which suspends coverage, while others require
that the loss be caused by the breach, and still others require that the breach increased the hazard. n204 Some
states, such as New York, apply different rules to warranties depending upon whether the insurance is ma-
rine or non-marine. n205 As we have seen, in certain European countries, the duty of disclosure continues dur-
ing the policy period. n206 There is, therefore, no need for a common law approach to warranties because the
insured must disclose any change in facts that increase the risk during the period of the policy, after which
the parties will agree to an additional premium. n207
[*1109]
5. Comments on the Law Commissions' Approach to Warranties
a. Abolition of Basis-of-Contract Clauses

The author agrees with this proposed reform. It is unlikely that many insureds understand the effect of a ba-
sis-of-contract clause, and it seems to the author that insurers should not be able to avoid coverage for non-
disclosure or misrepresentation of non-material facts disclosed prior to inception. This author and most con-
sultees agreed that these clauses should be abolished. n208
b. Allowing the Remedying of Breach Before the Loss to Reinstate Coverage

The author accepts that this change removes what appears to be unnecessary harshness of the current law.
Any change should, however, explicitly recognise that it can only apply to those warranties where the breach
is capable of remedy prior to loss. For instance, where a policy contains a confidentiality warranty because
knowledge of the policy would increase the risk of loss, publication of the detail of the policy is never capable
of remedy.
c. Distinguishing Between Warranties Designed To Reduce Risk of a Particular Type of Loss and Those
with a More General Effect

The proposal is that where the warranty is designed to reduce the risk of a particular type of loss, a breach
only removes liability for that type of loss and the policy is only suspended for that loss and for the duration of
the breach. n209 With respect to the Law Commissions, this third proposal is fundamentally flawed.
First, it requires a distinction between warranties designed to reduce the risk of a particular type of loss
and those that are not, such as those that go to moral hazard or to the scope of the risks that the insurer is
willing to underwrite. Many insureds in dispute with their insurers will contend that the warranty is designed to
reduce only a particular type of loss, and the author dares say that many insurers will contend that the war-
ranty is not so designed. This is, therefore, ground that is fertile for disputes. Consider a warranty that the
vessel remains at all times classed with a particular society. This warranty would, in the insurer's eyes, go to
a definition of the risk, and breach of that [*1110] warranty should, if the second proposal is enacted, sus-
pend all coverage for the duration of the breach. An insured faced with a grounding claim would contend that
remaining in class might only relate to the seaworthiness of the vessel, thereby relating to perhaps the perils
of the sea, fire, and other engine and machinery claims. The grounding caused by the fault of the crew would
have occurred whether the vessel was in class or not. Which type of warranty is it? Or consider the locks
warranty on a property. The Law Commissions state with confidence that this goes to the risk of theft and
therefore would not discharge the insurer for a fire claim. n210 What if the fire was caused by intruders who had
ignited highly flammable material in the inadequately protected premises? Can it really be said that the lock
warranty did not go to that risk?
Second, the suspension of coverage for only those risks that the warranty is said to be designed to pre-
vent is introducing causation through the back door. The Law Commissions have accepted that introducing a
causal link between the breach of warranty and the loss is flawed, n211 and yet it is being reintroduced in this
manner. It appears that far too little attention is being paid to the practical impact, particularly in terms of liti-
gation costs, of introducing such considerations into the equation.
For these reasons, as regards business insurance, the author advocates acceptance of the first two pro-
posals of the Law Commissions, but the removal of the third.
 17

With regard to the contracting-out proposals for business insurance, some modification of the proposal is
required. While it seems reasonable that the warranty should be clearly and unambiguously stated in the
contract, this requirement that the warranty be specifically brought to the attention of the insured in a bro-
kered market (where the insurer and insured rarely meet) requires clarification that bringing it to the attention
of the broker would be adequate. It will also likely give rise to disputes as to who said what to whom at the
time that the risk was brokered.
Finally, with regard to the proposal to leave intact the law relating to implied warranties and voyage con-
ditions, this seems to be a case of the Law Commissions' agreeing with the proposal that "if it ain't broke,
don't fix it." That seems eminently sensible, although the same response could have been given in many
other areas.
[*1111]
D. Damages for Late Payment
1. Existing Law

The Law Commissions are looking at post-contract duties and other issues including damages for late pay-
ment. n212 The current law is that an insured cannot recover damages for late payment of an insurance claim
because an insurance policy is a promise to keep the insured item free from damage and to indemnify the in-
sured for its loss if that promise is broken; it is not a promise to compensate for the loss. n213 Therefore, claims
under insurance policies are claims for damages, not for debts. n214 Under English law, a claimant cannot ob-
tain damages for non-payment of damages. n215 Nor can an insured recover for hardship, inconvenience, or
mental distress caused by the insurer's failure to pay the claim. n216 The FOS may award such damages to an
insured whose claim falls within its jurisdiction. n217 Furthermore, the only remedy for the insurer's breach of
duty of utmost good faith in failing to pay the claim is avoidance of the policy, n218 which is of little use if an in-
sured wants its claim paid. All of this is reinforced in the marine context by sections 67 and 68 of the Marine
Insurance Act, which state that in the case of a valued policy, the insured cannot recover more than the
agreed value and that in the case of an unvalued policy, the maximum amount recoverable is the insurable
value of the thing insured. n219
The potential hardship that this can give rise to is said to be demonstrated by the case of Sprung v.
Royal Insurance (UK) Ltd., n220 which the Law Commissions rely on heavily to argue that this area of [*1112]
insurance law should be reformed. Sprung ran a small family business that processed animal waste. In
early April 1986, his factory and plant were badly vandalised resulting in £ 30,000 worth of damage. At the
time of the loss, the market in which Sprung operated was at a low ebb. His business was under very consid-
erable financial pressure. There was a dominant competitor in the market that was described as a predator.
The insurer denied the claim on the basis that the policy did not cover wilful damage. Sprung could not afford
to make the repairs and was unable to raise a loan, so in September the business collapsed. The court held
that the insurer should have paid the claim by the end of October. Sprung commenced proceedings against
the insurer. Four years later the insurer abandoned its defence and judgment was entered in favour of
Sprung for £ 30,000 plus simple interest and costs. When he pursued a claim for his consequential loss of £
75,000, the Court of Appeal held that he was not entitled to recover this loss for the reasons set out above.
The House of Lords declined to take up this issue despite the explicit invitation of the Court of Appeal. n221
There is no doubt that Sprung suffered, and from the facts of the case, it appears that the insurer should
never have declined the claim. However, despite the characterisation of the case by the Law Commissions, it
appears that the cause of the collapse of the business was not the failure of the insurer to pay the claim in a
timely manner because it collapsed before the date that the indemnity should have been paid. Also, in the
author's experience, these cases are extremely rare, and extremely rare cases should not form the basis of
law reform. Today, Sprung would have taken his case to the FOS and obtained the appropriate relief.
Bizarrely, as we will see below, the Law Commissions' approach would not have saved Sprung's business.
n222

2. Penalties for Not Paying Claims in a Timely Fashion

Well-informed lawyers in the United States might well ask themselves at this point, "Why do English insurers
ever pay claims under insurance policies subject to English law if there is no apparent penalty for wrongful
 18

denial or late payment?" The answer is that the Law Commissions have set out a very unbalanced view of
the reality [*1113] of insurance law and practice and that there are many ways in which insurers are pe-
nalised for wrongful denial or late payment.
The penalties for wrongful denial or late payment of claims include:

. Paying the other side's costs - England operates a cost-shifting system in litigation in which the prevailing
party generally recovers 60% to 70% of its fees from the other side. If the court finds that the behaviour of the
losing party was particularly unacceptable, then it may award costs on an indemnity basis that are generally
80% to 90% of the other side's costs. Of course, the losing party also has to pay its own costs. n223
. Interest - although simple interest is usually the basis for recompensing a party for the time it has been
out of funds, as a result of a recent decision, a court may award compound interest, which it is more likely to
do in a case in which it disapproves of the defendant's conduct. n224
. Reputational - insurers are increasingly measured by brokers on their attitude towards paying claims
and on their speed of settlement. Insurers that score poorly on such measures will suffer. Brokers are un-
likely to place their better business with them, and insureds will likely look to move their business to other in-
surers. n225
. Regulatory - the FCA has rules on claims handling n226 against which regulated firms are measured. If
they fall short, then the regulator may require that remedial measures are taken. Moreover, under section
150(1) of the Financial Services and Markets Act 2000, a contravention by an authorised person is actionable
in the suit of a private person who suffers loss as a result of that contravention. n227
[*1114] . Consumers and micro-enterprises - these persons can seek redress from the FOS. n228

So insurers face very real pressure to pay claims in a timely manner even if that pressure does not result
from the threat of consequential damages.
3. Law Commissions' Provisional Approach

The Law Commissions are "persuaded that there is a compelling case for reform" n229 and propose legislative
reform to re-characterise the insurer's obligation as a duty to pay a valid claim within a reasonable time. n230
That would give rise to damages for foreseeable losses in the event of late payment of an insurance claim,
because business insurance liability for consequential losses could be excluded unless the decision to reject
or delay a valid claim was not made in good faith. n231
4. Consequential Loss Under English Law

Under English law, where one party breaches a contract, the innocent party may claim damages for the loss
suffered. That amount may be fixed in the contract (liquidated damages) or be left for the courts to determine
(unliquidated damages). The claimant must prove that actual, financial loss was incurred and establish that
the loss was not too remote in that it either:

. arose naturally from the breach as per the reasonable contemplation of the parties at the time of contract, or
. derived from special circumstances that were outside the ordinary course of events not within the rea-
sonable contemplation of the parties and that were recoverable only if specifically made known to the parties
at the time of contract. n232

The law books are full of cases that examine, in the charter party context, the foreseeability of damages, n233
demonstrating the amount of litigation that arises out of this test. This volume of cases is not [*1115] sur-
prising as the test is essentially a factual one depending on the facts of each case, so that volume can be ex-
pected to continue. Moreover, the current leading authority n234 is criticized as having left the law unclear as to
how remoteness is evaluated n235 and has spawned further litigation on this subject. n236 It seems curious that
 19

the Law Commissions (one of their duties is to simplify the law) are proposing to change to the law from one
that is certain to one where it is anything but.
The injured party must also show that reasonable steps were taken to mitigate that loss. In the insurance
context this would likely mean that the insured should use its own funds or borrow funds to repair or replace
the damaged property. Where this is done, the consequential loss would likely be the cost of that loan, which
is one of the reasons that interest is awarded. n237 The level of damages may be limited by express provisions
of the contract, but in the case of ambiguity, such limitations are narrowly construed against the party that
drafted the clause. n238
Since 2007, the courts have been able to award compound interest for late payment of a debt, n239 and
the courts use the interest mechanism with flexibility (often together with a large cost award) to provide jus-
tice in harsh cases. n240 Where the insured is unable to effect a loan, the Law Commissions suggest that the
foreseeable losses will include loss of business and the like. n241 Applied to marine insurance, one can easily
anticipate a raft of further questions. For example, where most vessels are owned by one-ship companies,
how much examination will the court undertake of the owner's corporate structure to determine whether the
owner's group of companies was in fact able to raise the funds even though the single-shipowning company
could not on its own raise the funds?
[*1116]
5. Consequential Loss Under U.S. Law

It might be expected that U.S. law would be significantly more policyholder-friendly than English law with re-
gard to allowing insureds to claim for consequential loss incurred by the non-payment or late payment of a
claim. However, this is not as clearly the case as one might expect. It was not until 2008 that the New York
Court of Appeals "expanded the law" n242 in New York n243 to permit such damages. Even though at least nine
cases since 2008 have considered the issue of consequential damages against insurers, n244 it is not clear
whether such damages can only be awarded if the insurer has breached its duty of good faith and fair deal-
ing. It appears that under state law, consequential losses are only recoverable if there has been a breach of
the duty of good faith and fair dealing by the insurer. n245
Therefore, under the laws of major maritime jurisdictions in the United States, the insurer may be liable
for consequential loss caused by the failure to settle the claim in a timely manner, but only where its dealings
were in breach of the duties of good faith and fair dealing. n246 This author finds it extraordinary that by es-
chewing any consideration of fault on the insurers' part beyond simple non-payment, the Law Commissions
are proposing to launch a legal experiment exposing insurers to a degree that even some states have re-
sisted.
[*1117]
6. Problems with the Law Commissions' Approach to Damages for Late Payment

In respect of business insurance, there are a number of further problems with the Law Commissions' pro-
posals regarding damages for late payment:

. They do not reflect any real need for a change in the law. It is interesting that outside the area of consumer
law (where such change is unnecessary because the FOS can and does award such damages), the respon-
dents to the Law Commissions' paper supporting such a change were those representing large corporate in-
sureds. n247 They have no need for such protection, being perfectly capable of securing alternative finance in
the event of a disputed claim.
. The law on the remoteness of damages is far from clear and is the subject of a great deal of litigation.
n248

. Reforms will lead to satellite litigation. n249 As we have seen above, there are complex and fact-intensive
enquiries that need to be made in each case about whether an alleged loss was foreseeable or indeed
 20

caused by the alleged delayed or non-payment. There are also likely to be complex questions as to the
amount of the loss.
. If the insurer has been able to exclude or limit its liability for consequential loss, then there will have to
be an additional enquiry as to whether the insurer acted in good faith (because the exclusion does not apply
when the insurer acted in bad faith). n250
. This satellite litigation will lead to significantly increased cost, which inevitably will feed through into
higher premiums for all. Additionally, the threat of such satellite litigation may hinder the ability of insurers to
investigate properly claims, likely leading to more improper claims being paid, with the same result. n251
[*1118] . This satellite litigation will lead to greater uncertainty in business insurance in respect to in-
sureds who have no need for greater "protection" from a new and uncertain law. n252
. The flexible law on interest may give the courts power to craft a remedy commensurate with the in-
sured's loss. n253
. The London insurance market tends to insure larger and more difficult risks. n254 Bearing in mind the
types of insureds who purchase insurance in the London insurance market, the consequential damages may
hugely exceed the indemnity under the policy. It is the author's experience that the daily value of lost produc-
tion in the energy sector can easily exceed $ 10 million. An insurer faced with the threat of a suit for conse-
quential loss by an insured that is impatient with the pace of its claim adjustment process could face an ex-
cessive exposure, n255 which may be why the lawyers to and associations of businesses are so keen on this
proposal. They should be careful what they wish for; excessive exposure leads to insurers restricting capac-
ity and that may leave insureds without adequate cover.
. "Business interruption" (BI) or "loss of hire" insurance protects such insureds. The court in Sprung un-
derstandably described the argument that the insured could have bought BI insurance, which would have
protected the business from the financial effects of the insurer's delayed payments as particularly unattrac-
tive. Nevertheless, complex claims can take time to adjust and plants time to rebuild. BI insurance [*1119]
protects the insured during that down time. Not only could the proposed change lead some to argue that BI
insurance is less necessary, but it could also give rise to BI insurers subrogating against property damage in-
surers for the alleged slow payment of claims, giving rise to a longer downtime than would otherwise have
been necessary.
. It may require that insurers buy additional reinsurance or put aside additional capital to protect against
such liabilities, which will result in higher premiums. As was correctly stated by Judge Smith's dissent in Bi-
Economy Market, Inc. v. Harleysville Insurance Co. of New York, "The result of the uncertainty and error that
the majority's opinions will generate can only be an increase in insurance premiums. That is the real "conse-
quential damage' flowing from today's holdings." n256
. Bad facts make bad law reform as much as they make bad law. n257 In the author's view, it is inappropri-
ate to change the law to protect the very rare insured who was mistreated without giving due consideration to
the effect that such reform will have on the insurance market overall and the substantial likelihood of signifi-
cantly increased litigation leading to higher premiums for other insureds.
. The certainty of English law is being attacked. If it is accepted that business people want a certain and
straightforward law under which to frame their commercial transactions and on the basis of which to predict
the outcome of any dispute that they may have, then upsetting the certainty of the law is likely to lead busi-
nesspersons to look for an alternative law for their contracts, which will be damaging to English interests. n258

IV. Consumer Insurance Reform

A. Consumer Insurance (Disclosure and Representations) Act 2012

As we saw in Part II.D, the Law Commission drafted the Consumer Insurance (Disclosure and Representa-
tions) Act 2012 n259 that [*1120] was enacted in that year and came into force on April 6, 2013. n260 That Act
applies only to consumers n261 and is not applicable to micro-enterprises. Thus, the application of the Act is dif-
ferent to and narrower than the jurisdiction of the FOS. The new Act deals with two aspects of consumer in-
 21

surance law: disclosure and misrepresentation, and the conversion of representations into warranties. n262
The rest of consumer insurance law, including damages for late payment of claims, remains the subject of
the ongoing consultations.
The Act limits the duty of disclosure by a consumer to a "duty of the consumer to take reasonable care
not to make a misrepresentation to the insurer" n263 and provides, "A failure by the consumer to comply with
the insurer's request to confirm or amend particulars previously given is capable of being a misrepresentation
... ." n264 Reasonable care is assessed by the standard of care of the reasonable consumer, n265 with any partic-
ular characteristics or circumstances of the consumer of which the insurer was or ought to have been aware
being taken into account. n266 Misrepresentations made dishonestly are always to be taken as showing lack of
reasonable care. n267
The insurer's remedy for a misrepresentation depends upon whether it was made deliberately, recklessly,
or carelessly. n268 The insurer may avoid the contract and refuse to pay all claims without having to return any
premium if the misrepresentation is made deliberately or recklessly. n269 If the misrepresentation is made care-
lessly, then the remedy depends upon what the insurer would have done if the misrepresentation had not
been made, so that

. if the insurer would not have entered into the contract at all, then the policy may be avoided and the entire
premium returned; n270
[*1121] . if the insurer would have entered into the contract on different terms, then the contract shall
be treated as if those terms were included; n271 or
. if the insurer would have entered into the contract but charged a higher premium, then the claim may be
reduced in proportion to the amount of the under-charged premium. n272

This Act therefore effectively abolishes the duty of disclosure as far as consumers are concerned. The logic
for this was that consumer insurance is: (1) invariably applied for through proposal forms or online, and if the
insurer considers a factor relevant for underwriting the policy, then it must ask a question about that factor
rather than relying on the duty of disclosure; (2) unlike the insurance of business, which involves a multitude
of different factors peculiar to the business, whereas most consumer insurance is fairly standard; and (3) dif-
ferent in that the insurer through its use of large databases often knows more about the factors relevant to
the insurer than the insured does. n273
The Act introduces the concept of proportional remedies, which is largely borrowed from European law,
into the law of representa-tion. n274 As we saw in Part III, basis-of-contract clauses in insurance policies sub-
ject to English law have the effect of converting all representations made in a proposal form into warranties.
n275
These were seen as a trap for the policyholder. The Act therefore provides that representations are not ca-
pable of being converted into warranties by means of any provision in the insurance contract or any other
contract. n276 It is assumed that individual warranties may still be imposed in the contract and that this is only
intended to abolish wholesale conversion, but while this was stated in the explanatory notes to the bill, n277 it is
not clear from the language of the Act itself. n278
[*1122] While the Act represents a theoretically significant change in English insurance law, in prac-
tice it will not change the rights of insurance consumers significantly because it brings consumer law in line
with the practice of the FOS.
B. Reform of the Consumer Insurance Law Relating to Warranties and Damages for Late Payment of
Claims

To date there has been no change to consumer insurance law relating to warranties (other than basis-of-
contract clauses) or to damages for late payment of claims. As we have seen, the FOS does not enforce war-
ranties where the breach is unconnected to the loss, and the FOS can and does award sums for late pay-
ment of claims.
The Law Commissions' proposals relating to warranties in consumer insurance are currently the same as
those for business insurance but subject to their caveat that the parties should not be able to contract out of
 22

the proposed law. n279 Similarly, with regard to the proposals relating to damages for late payment of claims,
the proposals for consumer insurance are the same as those for business insurance except that the Law
Commissions recommend that consumer insurance damages for late payment should not be excludable. n280
In consumer insurance, the Law Commissions also propose that damages be available for distress and in-
convenience. n281
Whether, if enacted, these proposals will cause the FOS to change its practice to bring it into line with
any new law remains to be seen.
V. Insurance Law Reform in Its Economic Context
A. London Insurance Market as Part of the U.K. Insurance Market

The U.K. insurance market is unusual in that it is out of proportion to the size of the U.K. economy. The U.K.
economy has the seventh largest gross domestic product (GDP) in the world, n282 but it has the third largest
insurance market in the world and the largest in [*1123] Europe, with premiums of $ 310 billion in 2010, of
which some £ 69.9 billion relates to general insurance. n283
The reason for this outsized insurance market is that the London insurance market consists of Lloyd's
syndicates, international insurance and reinsurance companies, and a large number of protection and indem-
nity (P&I) clubs. Most of the business underwritten by these insurers and reinsurers is located or domiciled
outside the United Kingdom. n284
The London insurance market's role is summarized succinctly by a report of TheCityUK:

The London Market is a distinct, separate part of the UK insurance and reinsurance industry centred in the
City of London. It consists mostly of general insurance and reinsurance, and predominantly involves high-ex-
posure risks. It is also the only place where all of the world's twenty largest international insurance and rein-
surance companies are active. n285

The London insurance market's gross premium per year is estimated at £ 36.9 billion (approximately $ 56
billion), n286 and it employs 50,000 people. n287 In the marine context, the London insurance market is the single
largest marine insurance market in the world with some 20% of the global marine insurance premium in-
come. n288
Policies written in the London insurance market are almost exclusively placed by brokers representing
the insured. A proposal for insurance is prepared by the brokers that incorporate it into a slip and then seek
quotes from leading insurers participating in the relevant part of the market. The slip contains the key con-
tract terms and may refer to standard sets of clauses. The London insurance market is known for its willing-
ness to underwrite bespoke policies prepared by brokers on behalf of their clients. n289 Therefore, this is a
market where well-represented insureds prepare insurance proposals that are then [*1124] presented to a
market with a large number of participants competing to underwrite the business.
This context is important when combined with a further fact - many of the marine policies written in the
London insurance market are subject to English law. While the insurance market can and does write insur-
ance subject to a wide variety of foreign insurance laws, English law is clearly the single most favoured ap-
plicable law. n290 So, English law plays a significant role in the large number of U.K. insurance exports.
One might wonder why it is that insurers and their clients prefer English law to apply to their policies and
subject them to English jurisdiction or arbitration. The author believes that it is a combination of the following
factors:
. freedom of contract,
. extensive precedent, which with
. experienced marine lawyers and judges lead to
. certainty of outcome.
 23

It is the author's view that Lord Mansfield had it right: certainty of outcome is what parties to a commer-
cial contract want, and that includes parties to an insurance policy. n291
Change to the law will by necessity decrease the certainty of outcome as time is taken for the new law to
be applied and interpreted. n292 That is not to say that no change should be undertaken, but only that when ad-
vocating change to commercial law, it should be considered whether the unwanted dislocation caused by
such change is outweighed by the benefits from such change.
The marine market's desire for change in policies, or otherwise, can be seen from the collective reaction
to the various policy reforms introduced by the London insurance market over the last thirty years. The inter-
national shipowning community shunned the International Hull Clauses 1/11/03 even though those removed
features that the Law Commissions now believe are anathema to insureds. There has been limited take-up of
the 2009 American Institute Hull Clauses despite the limited changes contained in that set of clauses. The
author has [*1125] seen no evidence that the shipowning community generally feels a need for significant
reform of English insurance law.
A number of the Law Commissions' proposals deal with detail apparently designed to produce greater
transparency and clarity in both insurance documentation and the placing process. It is submitted that this
aim is more effectively achieved by market initiatives or regulation rather than by primary legislation dealing
with contract interpretation. A good example of how such reform occurs is the Market Reform Contract intro-
duced by the London insurance market in 2001 for all slips, which, for example, requires that all subjectivities
are separately highlighted on the slip and that the remedies for breach thereof are clearly stated. n293
B. U.K. Domestic Insurance Market

The U.K. domestic general insurance market is quite different from the London insurance market, both in
how business is written and in the relative power of buyers and sellers. The net written premium of the U.K.
domestic general insurance was £ 32.2 billion in 2010 n294 - over £ 4 billion smaller than the London insurance
market. n295 Most of this business consists of consumer insurance, with the largest classes of business being
motor insurance with premiums of £ 11.8 billion, property insurance with premiums of £ 9.6 billion, and acci-
dent and health insurance with premiums of £ 5 billion. n296
It is difficult to determine how large the U.K. commercial insured market is from the statistics available,
and it is likely that this wide variety of companies buys insurance in both the domestic and London markets.
n297
However, it does appear that the U.K. business insured market is small in relation to both the London in-
surance market and the U.K. domestic consumer insurance market, particularly if micro-enterprises whose
disputes may be dealt with by the FOS are removed. n298
The markets also differ in how business is introduced to the insurer. In the U.K. domestic commercial
market, independent [*1126] intermediaries bring some 80% of business to insurers while only 40% of
consumer business is brokered to insurers. n299 Nearly one-third of consumers access the insurance market
directly - much of it online. n300
These statistics support the Law Commissions' approach of treating consumers and business insureds
differently. They do, however, make some of the Law Commissions' arguments regarding the supposed pro-
tection required for businesses difficult to sustain. By far the largest proportion of business insurance is pre-
pared and introduced by the insured's agent, the broker. n301
VI. Conclusion

The public policy consideration behind consumer insurance is the protection of consumers who are not able
to negotiate the terms of a "specialist" type of contract, but rather are presented with a "take it or leave it" op-
tion in a situation where the parties' respective bargaining positions are very unequal. The principle behind
business insurance is not the same. The business insured has access to specialist advice, either from bro-
kers or increasingly from in-house risk personnel. The goal there should be the promotion of certainty of
meaning, so that when businesspersons enter into transactions the courts will enforce the terms of those
contracts. These very different considerations ought to give rise to different legal regimes. In the United
States, these already exist to some degree, with a highly regulated admitted market and much less-regulated
surplus lines, marine, and exempt markets. The principles of protecting consumers and leaving business-to-
 24

business contracts less regulated give rise to the sensible solution of ensuring that both types of insureds
have what they need from the insurance market. In the United Kingdom, that solution has to some extent ex-
isted for many years in practice, if not in law, with the FOS and the codes and regulations relating to con-
sumer insurance on the one hand and a well-established law for business insurance on the other hand. To
the extent that the Law Commissions' project continues to reform consumer insurance law to bring it into
line with consumer practice, that may be worthwhile.
The United Kingdom has a very large international business insurance market, the London insurance
market, that thrives in part because of the substantial body of insurance law, which together with a [*1127]
specialised commercial court and specialised arbitrators gives rise to predictable dispute outcome. This in
turn makes contracts more certain and disputes easier to settle.
The approach to reform of the primary law of insurance should start from the premises that the case for
reform must be driven by a very real need for law reform (as opposed to say regulatory or other reforms),
and if there is no such need, then that reform should not be undertaken because of the inevitable uncertainty
and litigation that follows the introduction of any new law.
The case for the reform of most areas of business insurance law has not been made. There are many
indicators that the law is at least satisfactory. The surveys on which the Law Commissions rely as evidence
of the need for reform do not provide it. For instance, the fact that risk managers of large companies do not
understand insurance law, when one of their main jobs is to buy insurance, n302 is an indicator of a problem
of training or the like. It is not an indicator of the need to reform the law. There are discrete areas of the law
where small reforms could perhaps remove areas of perceived unfairness. For instance, the abolition of ba-
sis-of-contract clauses would remove a defence for insurers that is not perceived as being transparent or
clear. Similarly, changing the effect of a breach of warranty from terminating the coverage to suspending cov-
erage would largely preserve the effect of a warranty and may merit further consideration.
With respect to the law on disclosure and that on late payment of claims, there is no convincing reason
for reform of insurance contract law, and the proposed changes are so substantial that they will create an
enormous amount of uncertainty and hence litigation. It is not an answer to say that the parties can contract
out of the default law because this will likely be done in a myriad of different ways, thereby again giving rise
to uncertainty.
The Law Commissions have consulted extensively, have looked at the insurance law of other countries,
and have taken comments into account. Their 2012 proposals regarding disclosure and warranties are cer-
tainly an improvement over their 2006 proposals, which were wholly unworkable. n303 Nevertheless, it is very
much hoped that in this last phase of its project, the Law Commissions will reconsider their [*1128] busi-
ness insurance proposals bearing in mind the economic importance of the London insurance market and the
risky sacrifice of the current prized certainty of business insurance law.

Legal Topics:

For related research and practice materials, see the following legal topics:
Insurance LawBusiness InsuranceMarine InsuranceDefinitionsInsurance LawClaims & ContractsDisclosure
ObligationsMaterialityInsurance LawClaims & ContractsPolicy InterpretationReasonable ExpectationsNon-
commercial Insureds

FOOTNOTES:

n1. Vallejo v. Wheeler, (1774) 98 Eng. Rep. 1012 (K.B.) 1017; 1 Cowp 143, 153 (Eng.).

n2. Medcalf v. Hall, (1782) 99 Eng. Rep. 566 (K.B.) 567; 3 Doug. 113, 115 (Eng.).

n3. Marine Insurance Act, 1906, 6 Edw. 7, c. 41 (U.K.).

 25

n4. The review began with a Joint Scoping Paper issued in January 2006. Law Comm'n & Scottish Law Comm'n, Insurance
Contract Law: A Joint Scoping Paper (2006) [hereinafter Joint Scoping Paper], available at http://www.lawcommission.justice.
gov.uk/docs/ICL_Scoping_Paper.pdf.

n5. See Insurance Contract Law, Law Comm'n, http://lawcommission.justice.gov.uk/ areas/insurance-contract-law.htm (last
visited May 15, 2013).

n6. See, e.g., Marine Insurance Act, S.C. 1993, c. 22 (Can.); India Marine Insurance Act, No. 11 of 1963, India Code (2012)
(accessible via http://www.indiacode.nic.in); Marine Insurance Act 1909 (Cth) (Austl.). But also see the amendments proposed
by the Australian Law Reform Commission that resulted in the drafting of a bill to amend Australia's Marine Insurance Act in
2001, which has not been enacted. Austl. Law Reform Comm'n, ALRC Report 91, Review of the Marine Insurance Act 1909
(2001), available at http://www.alrc.gov.au/sites/default/files/pdfs/publications/al rc91.pdf.

n7. See infra Part V.

n8. See Sir Richard Aikens, The Law Commissions' Proposed Reforms of the Law of "Warranties" in Marine and Commercial
Insurance: Will the Cure Be Better Than the Disease?, in Reforming Marine and Commercial Insurance Law 113, 113-26 (Baris
Soyer ed., 2008).

n9. See, e.g., Law Comm'n, Insurance Law: Non-Disclosure and Breach of Warranty, 1980, Cmnd. 8064, PP 3.20-.22 (U.K.),
available at http://www.bailii.org/ew/ other/EWLC/1980/104.pdf.

n10. Law Reform Comm., Fifth Report: Conditions and Exceptions in Insurance Policies, 1957, Cmnd. 62 (U.K.), available at
http://www.peterjtyldesley.com/ files/Cmnd_62_Law_Reform_Committee _Conditions_and_Exceptions_in_ Insurance_Poli-
cies.pdf.

n11. Id. P 3.

n12. Law Comm'n, supra note 9, P 1.21(a). The 1980 report by the English Law Commission, including its draft bill, excluded
marine, aviation, and transport (MAT) insurance from the scope of its reforms on the basis that such insurance contracts are
largely between sophisticated commercial parties. Id.

n13. Ass'n of British Insurers, Statement of General Insurance Practice (1986), available at
http://www.peterjtyldesley.com/fos/insurance/pages/files/ABI%20 SGIP.pdf.

n14. Id. The next sentence of the statement provided that this paragraph did not apply to marine and aviation policies. Id.

n15. The FSA was a corporate body given powers under the Financial Services and Markets Act 2000 to, inter alia, protect
consumers. See Financial Services and Markets Act, 2000, c. 8, § 2(2)(c) (U.K.).
 26

n16. For the current language, see Fin. Conduct Auth., FSA Handbook, at Insurance: New Conduct of Business [ICOBS], ch. 8
(136th release, 2013), available at http://media.fsahandbook.info/content/full/ICOBS/8.pdf.

n17. Financial Services Act, 2012, c. 21 (U.K.). The FCA is the new regulator responsible for regulating conduct in retail and
wholesale markets. See Financial Services Bill Receives Royal Assent, HM Treasury (Dec. 19, 2012), http://www.hm-
treasury.gov.uk/ press_126_12.htm.

n18. In 2001, the Insurance Ombudsman Bureau was replaced by the Financial Ombudsman Service (FOS), which was set up
pursuant to the authority in part XVI of the Financial Services and Markets Act 2000 and deals with insurance and a number of
other financial services complaints. See Financial Services and Markets Act, 2000, c. 8,§§225-234 (U.K.).

n19. Peter J. Tyldesley, The Insurance Ombudsman Bureau - The Early History, 18 J. Ins. Res. & Prac. 34, 34 (2003), avail-
able at http://www.peterjtyldesley.com/files/2003%20 The_Insurance_Ombudsman_Bureau_-_the_early_history.pdf.

n20. A "micro-enterprise" is an enterprise that both "employs fewer than 10 persons" and "has a turnover or annual balance
sheet" of .2 million or less. Fin. Conduct Auth., supra note 16, Glossary, available at
http://media.fshandbook.info/content/FCA/Glossary.pdf (last visited May 15, 2013).

n21. FSA Handbook, supra note 16, Dispute Resolution: Complaints [DISP], r. 2.7.3, available at
http://media.fshandbook.info/content/full/DISP.pdf

n22. Id., Dispute Resolution: Complaints [DISP], r. 3.7.4.

n23. Law Comm'n & Scottish Law Comm'n, Insurance Contract Law: The Business Insured's Duty of Disclosure and the Law
of Warranties para. 14.13 (2012) [hereinafter Duty of Disclosure and the Law of Warranties], available at
http://lawcommission.justice.gov.uk/docs/ cp204_ICL_business-disclosure.pdf.

n24. Nat'l Consumer Council, Insurance Law Reform: The Consumer Case for a Review of Insurance Law 9-10 (1997).

n25. See Joint Scoping Paper, supra note 4, para. 1.6.

n26. British Ins. Law Ass'n, Insurance Contract Law Reform: Recommenda-tions to the Law Commission para. 1 (2002).

n27. See id. paras. 27-31.

n28. Id. para. 28.

n29. Lord Justice Longmore, Pat Saxton Memorial Lecture at the British Insurance Law Association: An Insurance Contracts
Act for a New Century? (Mar. 5, 2001), in British Ins. Law Ass'n, supra note 26, app. A.
 27

n30. See Law Comm'n, supra note 9; British Ins. Law Ass'n, supra note 26.

n31. Law Comm'n & Scottish Law Comm'n, Issues Paper 1, Insurance Contract Law: Misrepresentation and Non-Disclosure
para. 7.86 (2006) [hereinafter Misrepre-sentation and Non-Disclosure], available at http://lawcommission.justice.gov.uk/docs/
ICL1_Misrepresentation_and_Non-disclosure.pdf.

n32. Id.

n33. Id.

n34. Id. para. 7.84 (quoting Law Comm'n, supra note 9, P 2.8).

n35. Id. para. 7.86.

n36. Law Comm'n & Scottish Law Comm'n, Reforming Insurance Contract Law: A Summary of Responses to Consultation
paras. 3.115-.128 (2008), available at http://www.scotlawcom.gov.uk/download_file/view/218/107/ . Over 90% of respondents
are said to agree with the proposition that business insurance law applies equally to MAT insurance and reinsurance. Id.

n37. See, e.g., Lozman v. City of Riviera Beach, 133 S. Ct. 735, 739-40, 2013 AMC 1, 1-3 (2013); Stewart v. Dutra Constr.
Co., 543 U.S. 481, 488-97, 2005 AMC 609, 612-19 (2005); Holmes v. Atl. Sounding Co., 437 F.3d 441, 445, 2006 AMC 182,
185-86 (5th Cir. 2006); Washington v. BP Am., Inc., No. 6:10 CV 1486, 2012 U.S. Dist. LEXIS 164371, at 5-15 (W.D. La. Nov.
16, 2012).

n38. Weir is former partner of Ince & Co. and current colleague to whom I am indebted for providing me with his insight and
experience in preparing this Article.

n39. Lord Mansfield was chief justice of the King's Bench from 1756 to 1788. Bernard L. Shientag, Lord Mansfield Revisited -
A Modern Assessment, 10 Fordham L. Rev. 345, 349 (1941).

n40. See, e.g., Howard Bennett, The Law of Marine Insurance para. 1.42 (2d ed. 2006); Jonathan Gilman et al., Arnould's Law
of Marine Insurance and Average (17th ed. 2008); Donald O'May, Marine Insurance Law and Policy (Julian Hill ed., 1993).

n41. See, e.g., Carter v. Boehm, (1766) 97 Eng. Rep. 1162 (K.B.) 1169; 3 Burr. 1905, 1918-19 (Eng.) (establishing the duty of
utmost good faith).

n42. See Gilman et al., supra note 40, para. 15-18.

n43. M.D. Chalmers, Introduction to M.D. Chalmers & Douglas Owen, A Digest of the Law Relating to Marine Insurance, at v,
v-ix (1901).
 28

n44. " An Act to Codify the Law relating to Marine Insurance" are the opening words to the Marine Insurance Act, 1906, 6 Edw.
7, c. 41 (U.K.).

n45. Id.

n46. Id.; see, e.g., id.§§17-21 (discussing the duty of disclosure); id. § 32 (outlining the law on double insurance); id. §§33-40
(discussing the law on warranties); id.§§79-80 (stating the law on subrogation and contribution).

n47. One of the leading cases on sections 18 and 20 of the Marine Insurance Act is Pan Atlantic Insurance Co. v. Pine Top In-
surance Co., [1995] 1 A.C. 501 (H.L.) (appeal taken from Eng.).

n48. See Robert Merkin & Raoul Colinvaux, Insurance Contract Law para. A-0138 (2012) (listing suggested differences).

n49. Id.

n50. See Gilman et al., supra note 40, para. 19-06.

n51. See Grant Gilmore & Charles L. Black, Jr., The Law of Admiralty 55-56 (2d ed. 1975).

n52. Congress has provided that federal district courts have exclusive jurisdiction over admiralty and maritime matters. 28
U.S.C. § 1333 (2006); see De Lovio v. Boit, 7 F. Cas. 418, 418, 1997 AMC 550, 550 (C.C.D. Mass. 1815) (holding that marine
insurance disputes fall within the admiralty jurisdiction of the federal courts); see also Ins. Co. v. Dunham, 78 U.S. (11 Wall.) 1,
31 (1871) (holding that admiralty and maritime jurisdiction extends to cases arising out of marine insurance).

n53. Dunham, 78 U.S. at 31.

n54. U.S. Const. amend. X; McCarran-Ferguson Act, 15 U.S.C. §§1011-1015 (2006).

n55. For a discussion of the history of insurance regulation, see U.S. Dep't of the Treasury, The Department of the Treasury
Blueprint for a Modernized Financial Regulatory Structure 61-71 (2008), available at http://www.treasury.gov/press-center/
press-releases/Documents/Blueprint.pdf.

n56. Id. at 3-5; see also D.J. McDuffie, Inc. v. Old Reliable Fire Ins. Co., 608 F.2d 145, 1980 AMC 1886 (5th Cir. 1979) (holding
that because federal maritime law exists, state law need not be applied).

n57. 348 U.S. 310, 317 (1955).

n58. See Gilmore & Black, supra note 51, at 68-69.

 29

n59. 348 U.S. at 311.

n60. See Gilman et al., supra note 40, ch. 4.

n61. Unfair Terms in Consumer Contracts Regulations, 1999, S.I. 1999/2083 (U.K.), available at
http://www.legislation.gov.uk/uksi/1999/2083/pdfs/uksi_ 19992083_en.pdf.

n62. Duty of Disclosure and the Law of Warranties, supra note 23, paras. 12.72-.75.

n63. See Joint Scoping Paper, supra note 4.

n64. Misrepresentation and Non-Disclosure, supra note 31.

n65. Law Comm'n & Scottish Law Comm'n, Issues Paper 2, Insurance Contract Law: Warranties (2006), available at
http://lawcommission.justice.gov.uk/docs/ICL2_Warranties.pdf.

n66. Law Comm'n & Scottish Law Comm'n, Issues Paper 3, Insurance Contract Law: Intermediaries and Pre-Contract Infor-
mation (2007), available at http://law commission.justice.gov.uk/docs/ICL3_Intermediaries_ and_Pre-contract_Information.pdf.

n67. Law Comm'n & Scottish Law Comm'n, Issues Paper 4, Insurance Contract Law: Insurable Interest (2008), available at
http://lawcommission.justice.gov.uk/docs/ ICL4_Insurable_Interest.pdf.

n68. Law Comm'n & Scottish Law Comm'n, Issues Paper 5, Reforming Insurance Contract Law: Micro-Businesses (2009),
available at http://lawcommission.justice.gov. uk/docs/ICL5_Micro-businesses.pdf.

n69. The Law Comm'n & the Scottish Law Comm'n, Issues Paper 6, Insurance Contract Law: Damages for Late Payment
and the Insurer's Duty of Good Faith (2010) [hereinafter Damages for Late Payment], available at http://lawcommission.justice.
gov.uk/docs/ICL6_Damages_for_Late_Payment.pdf.

n70. Law Comm'n & Scottish Law Comm'n, Issues Paper 7, Reforming Insurance Contract Law: The Insured's Post-Contract
Duty of Good Faith (2010), available at http://lawcommission.justice.gov.uk/docs/ICL7_Insureds _Duty_of_Good_Faith.pdf.

n71. Law Comm'n & Scottish Law Comm'n, Issues Paper 8, Reforming Insurance Contract Law: The Broker's Liability for
Premiums: Should Section 53 Be Reformed? (2010), available at http://lawcommission.justice.gov.uk/docs/ICL8_Brokers_ Lia-
bility_for_Premiums.pdf.

n72. Law Comm'n & Scottish Law Comm'n, Issues Paper 9, Reforming Insurance Contract Law: The Requirement for a For-
mal Marine Policy: Should Section 22 Be Repealed? (2010), available at
http://lawcommission.justice.gov.uk/docs/ICL9_Requirement_ for_Formal_Marine_Policy.pdf.
 30

n73. Law Comm'n & Scottish Law Comm'n, Insurance Contract Law: Misrepresentation, Non-Disclosure and Breach of War-
ranty by the Insured (2007) [hereinafter Misrepresentation], available at http://lawcommission.justice.gov.uk/docs/cp
182_ICL_Misrep_Non-disclosure_Breach_of_Warranty.pdf.

n74. Law Comm'n & Scottish Law Comm'n, Insurance Contract Law: Post Contract Duties and Other Issues (2011) [here-
inafter Post Contract Duties], available at http://lawcommission.justice.gov.uk/docs/cp201_summary.pdf.

n75. Duty of Disclosure and the Law of Warranties, supra note 23.

n76. Law Comm'n & Scottish Law Comm'n, Consumer Insurance Law: Pre-Contract Disclosure and Misrepresentation
(2009), available at http://lawcommission. justice.gov.uk/docs/lc319_Consumer_Insurance _Law_Pre-
Contract_Disclosure_and_Misrepre sentation.pdf.

n77. Consumer Insurance (Disclosure and Representations) Act, 2012, c. 6 (U.K.).

n78. Consumer Insurance (Disclosure and Representations) Act 2012 (Commence-ment) Order, 2013 No. 450 (C. 18) (U.K.).

n79. See Joint Insurance Contract Law Review 2006-2013, Law Comm'n & Scottish Law Comm'n (Nov. 2012),
http://lawcommission.justice.gov.uk/docs/ICL_project _flowchart.pdf.

n80. See, e.g., Bennett, supra note 40, chs. 4-5; Gilman et al., supra note 40; O'May, supra note 40; John Birds et al.,
MacGillivray on Insurance Law (12th ed. 2012).

n81. Duty of Disclosure and the Law of Warranties, supra note 23, pt. 3.

n82. Pan Atl. Ins. Co. v. Pine Top Ins. Co., [1995] 1 A.C. 501 (H.L.) 518 (Lord Mustill) (appeal taken from Eng.).

n83. See Banque Keyser Ullmann S.A. v. Skandia (U.K.) Ins. Co., [1991] 2 A.C. 249 (H.L.) (appeal taken from Eng.) (allowing
a policy to be avoided due to a breach of the duty of good faith by the underwriters).

n84. Black King Shipping Corp. v. Massie (The "Litsion Pride"), [1985] 1 Lloyd's Rep. 437 (U.K.) (holding the duty of good faith
applies to the requirement to give notice to the insurers under the war risk trading warranties).

n85. HIH Cas. & Gen. Ins. Ltd. v. Chase Manhattan Bank, [2003] UKHL 6, [7]-[8] (appeal taken from Eng.).

n86. Id.
 31

n87. Id.; Gilman et al., supra note 40, para. 15-166.

n88. Gilman et al., supra note 40, para. 15-166.

n89. Id. para. 15-140.

n90. Id. para. 15-144.

n91. HIH Cas. & Gen. Ins. Ltd. v. Chase Manhattan Bank, [2003] UKHL 6, [42] (appeal taken from Eng.).

n92. Id. at [16]-[17].

n93. Id. at [16].

n94. Marine Insurance Act, 1906, 6 Edw. 7, c. 41, § 18 (U.K.).

n95. See Bates v. Hewitt, (1867) 2 L.R.Q.B. 595 (Eng.).

n96. See Brotherton v. Aseguradora Colseguros S.A., [2003] EWCA (Civ) 335 (Eng.).

n97. See Gilman et al., supra note 40, para. 7-12.

n98. Pan Atl. Ins. Co. v. Pine Top Ins. Co., [1995] 1 A.C. 501 (H.L.) 505 (appeal taken from Eng.).

n99. Id. For this purpose, evidence is given by those familiar with the practices of insurers in the relevant class at the time that
the policy was placed.

n100. Id.

n101. Id.

n102. See, e.g., Sugar Hut Grp. Ltd. v. Great Lakes Reinsurance (UK) PLC, [2010] EWHC (Comm) 2636 (Eng.); Synergy
Health (UK) Ltd. v. CGU Ins. PLC, [2010] EWHC (Comm) 2583 (Eng.); A.C. Ward & Son Ltd. v. Catlin (Five) Ltd., [2009] EWHC
(Comm) 3122 (Eng.).
 32

n103. Pan Atl. Ins., [1995] 1 A.C. 501 at 513.

n104. Int'l Lottery Mgmt. v. Dumas, [2002] Lloyd's Rep. I.R. 237 (Q.B.) (Eng.). This case arose in the context of a policy that
was placed at Lloyd's, where underwriters that follow rely particularly heavily on the leading underwriter's analysis of the risk.

n105. Marine Insurance Act, 1906, 6 Edw. 7, c. 41, § 18(3) (U.K.).

n106. Id.

n107. Id.

n108. Id.

n109. Id. § 18(1).

n110. Id. § 19.

n111. Id.

n112. See Gilman et al., supra note 40, para. 7-10.

n113. P.C.W. Syndicates v. P.C.W. Reinsurers, [1996] 1 W.L.R. 1136 (A.C.) 1141 (Eng.).

n114. Id.

n115. See id.

n116. Marine Insurance Act, 1906, 6 Edw. 7, c. 41, § 20 (U.K.).

n117. Id. § 20(4).

n118. Id. § 20(5).

n119. Compare id. § 33(3) (defining "warranties") with id. § 20 (defining "material misrepresentations").
 33

n120. Id. § 20(6).

n121. See March Cabaret Club & Casino Ltd. v. London Assurance, [1975] 1 Lloyd's Rep. 169 (Eng.) (addressing the non-dis-
closure of the criminal conviction of a director).

n122. See infra Part IV; Consumer Insurance (Disclosure and Representations) Act, 2012, c. 6 (U.K.).

n123. Duty of Disclosure and the Law of Warranties, supra note 23, paras. 4.29-.52.

n124. Id. para. 4.26.

n125. Id. paras. 6.11-.25.

n126. Id. para. 5.21 (citing Greenhill v. Fed. Ins. Co., [1927] 1 K.B. 65 (Eng.) (Scratton, L.J.)). The textbooks do not agree that
this case supports the proposition for which the Law Commissions cite it. Rather they suggest that the case is relevant for deter-
mining what the insurer should and could inquire about. Bennett, supra note 40, para. 4.101; Gilman et al., supra note 40,
paras. 16-177 to -180. The insurer that relies on this extract in order not to ask questions runs a high risk of being held to have
waived the requirement for further information.

n127. Duty of Disclosure and the Law of Warranties, supra note 23, para. 5.69.

n128. Id. paras. 5.44-.60.

n129. Id. para. 4.53.

n130. Id. para. 1.3.

n131. Marine Insurance Act, 1906, 6 Edw. 7, c. 41, § 17 (U.K.).

n132. Duty of Disclosure and the Law of Warranties, supra note 23, para. 4.12.

n133. Id. para. 4.9.

n134. Id. para. 4.10.

 34

n135. Id. para. 5.12.

n136. Id. para. 4.8.

n137. This is subject to the absence of fraud, in which case it is not returnable. Marine Insurance Act, 1906, 6 Edw. 7, c. 41, §
84(3)(a) (U.K.).

n138. Duty of Disclosure and the Law of Warranties, supra note 23, para. 9.2.

n139. Id. para. 9.28.

n140. See Law Reform Comm., supra note 10, PP 4, 8; Law Comm'n, supra note 9, P 122.

n141. Duty of Disclosure and the Law of Warranties, supra note 23, paras. 1.20-.21, 9.5-.9. This proposal was that the insured
only had to disclose that which a reasonable insured would think was relevant to an insurer and that an insurer should have no
remedy against an "innocent" non-disclosure. Misrepresentation, supra note 73, paras. 4.145-.152.

n142. Duty of Disclosure and the Law of Warranties, supra note 23, para. 5.78.

n143. Id. para. 5.79.

n144. Id. para. 6.78.

n145. Id. para. 8.50.

n146. The Law Commissions seek views on whether dishonest conduct should include only fraudulent conduct or whether it
should also include deliberate or reckless conduct. See id. paras. 9.63-.68, 9.74-.76.

n147. Id. para. 9.40.

n148. Id. para. 9.62.

n149. Id. paras. 9.82-.85.

n150. Id. para. 1.45.

 35

n151. Id. paras. 3.19-.28.

n152. See id. para. 3.19.

n153. Misrepresentation and Non-Disclosure, supra note 31, app. G, para. G.9.

n154. See, e.g., Section 2: Alteration of the Risk, Nordic Marine Ins. Plan of 2013, http://www.nordicplan.org/The-Plan/Part-
One/Chapter-3/Section-2/ (last visited May 15, 2013); German Marine Ins. Ass'n, German General Rules of Marine Insurance
(ADS) and DTV, Fortunes de Mer Mar. Law, http://www.fortunes-de-mer.com/documents%20pdf/ legislation/Etrangere/German
%20General%20Rules%20of%20Marine%20 Insurance.pdf (last visited May 15, 2013).

n155. See Comite Mar. Int'l, Yearbook 2000 Annuaire 325-411 (2000), available at
http://www.comitemaritime.org/Uploads/Yearbooks/Yearbook+2000.p df; German Marine Ins. Ass'n, supra note 154, cl. 23.

n156. Marine Insurance Act, 1906, 6 Edw. 7, c. 41,§§18(1), 20(1) (U.K.).

n157. Duty of Disclosure and the Law of Warranties, supra note 23, paras. 10.11-.13.

n158. See Misrepresentation and Non-Disclosure, supra note 31, app. G.

n159. N.Y. Marine & Gen. Ins. Co. v. Tradeline (L.L.C.), 266 F.3d 112, 123, 2002 AMC 149, 159-60 (2d Cir. 2001).

n160. See id.

n161. First Fin. Ins. Co. v. Allstate Interior Demolition Corp., 193 F.3d 109, 117-18 (2d Cir. 1999).

n162. Id.

n163. See generally 1 Barry R. Ostrager & Thomas R. Newman, Handbook on Insurance Coverage Disputes ch. 3 (16th ed.
2013) (detailing misrepresentations and omissions in applications for insurance).

n164. Duty of Disclosure and the Law of Warranties, supra note 23, para. 4.38.

n165. Id. para. 1.9.

 36

n166. See, e.g., Willis Quality Index, Willis, http://www.willis.com/About_Willis/ Willis_Quality_Index/ (last visited May 15,
2013) (discussing its benchmarking tool for analysing carriers' performance); About Gracechurch, Gracechurch,
http://www.grch.net/ about.html (last visited May 15, 2013) (conducting independent benchmarking studies that measure perfor-
mance of insurers).

n167. Fin. Conduct Auth., supra note 16, Insurance: New Conduct of Business [ICOBS], para. 8.1.

n168. Fin. Servs. Auth., Memorandum of Understanding Between the Claims Management Regulator and the Financial Ser-
vices Authority paras. 2.1-.8 (2011), available at http://www.fsa.gov.uk/pubs/mw/fsa_cmr.pdf.

n169. Duty of Disclosure and the Law of Warranties, supra note 23, paras. 1.22-.24.

n170. Pan Atl. Ins. Co. v. Pine Top Ins. Co., [1995] 1 A.C. 501 (H.L.) 505 (appeal taken from Eng.).

n171. Duty of Disclosure and the Law of Warranties, supra note 23, paras. 9.82-.85.

n172. See id. para. 1.26.

n173. Id. para. 1.31.

n174. Id.

n175. Id. para. 17.16.

n176. Marine Insurance Act, 1906, 6 Edw. 7, c. 41 § 18(3) (U.K.).

n177. See generally Duty of Disclosure and the Law of Warranties, supra note 23 (discussing non-disclosure in marine insur-
ance contracts).

n178. See id. para. 4.50.

n179. This information is taken from slides presented by the representatives of the English Law Commission at a joint British
Insurance Law Association, Law Commission, and University of Southampton conference on June 26, 2012, entitled "Whither
Insurance Contract Law Reform?"
 37

n180. A basis-of-contract clause is a clause in a proposal form or a policy that states that the answers given form the basis of
the contract and that this has the effect of converting all of the answers into warranties. For a recent application of the law, see
Genesis Hous. Ass'n v. Liberty Syndicate Mgmt. Ltd., [2012] EWHC (TCC) 3105 (Eng.).

n181. See British Ins. Law Ass'n, supra note 26, paras. 7.2-.4.

n182. Marine Insurance Act, 1906, 6 Edw. 7, c. 41, § 20 (U.K.).

n183. See Duty of Disclosure and the Law of Warranties, supra note 23, paras. 12.17-.18.

n184. Id. para. 12.27.

n185. ( 1786) 99 Eng. Rep. 1130 (K.B.) 1131; 1 T.R. 344, 345 (Eng.).

n186. Id.

n187. See Duty of Disclosure and the Law of Warranties, supra note 23, paras. 5.38-.60.

n188. P. Samuel & Co. v. Dumas, [1923] 1 K.B. 613 at 624 (Eng.).

n189. Gilman et al., supra note 40, para. 19-18.

n190. Duty of Disclosure and the Law of Warranties, supra note 23, paras. 12.44-.59.

n191. Bates v. Hewitt, [1867] 2 L.R.Q.B. 595 at 605 (Eng.).

n192. Marine Insurance Act, 1906, 6 Edw. 7, c. 41, § 18(1) (U.K.).

n193. Duty of Disclosure and the Law of Warranties, supra note 23, para. A.116.

n194. Id. para. 11.22; see infra Part IV.

n195. Duty of Disclosure and the Law of Warranties, supra note 23, para. 15.1.

n196. Id. paras. 15.1-.67.

 38

n197. Id. para. 15.3.

n198. Id. para. 16.2.

n199. Id. paras. 16.1-.18.

n200. Misrepresentation, supra note 73, paras. 8.1-.4.

n201. Id. para. 8.32.

n202. Duty of Disclosure and the Law of Warranties, supra note 23, paras. 14.50, .57.

n203. Steven E. Goldman, Litigating Marine Insurance Warranties: Once More into the Breach, 57 Fed'n Def. & Corp. Counsel
Q. 111, 125 (2007).

n204. See generally Edward F. LeBreton, III & Marc Thomas Summers, Express Warranties, in MLA Special Report: Marine
Protection & Indemnity Policy Annotations Project 142 (2001), http://www.mlaus.org/archives/library/530a.pdf (discussing how
different circuit courts have applied the varying state laws on warranties).

n205. See Duty of Disclosure and the Law of Warranties, supra note 23, para. 13.30.

n206. See supra Part III.B.5.

n207. A brief overview of some European law is provided in Duty of Disclosure and the Law of Warranties, supra note 23,
paras. 13.33-.53.

n208. See id. paras. 14.17-.19.

n209. Id. para. 15.1(3).

n210. See id. paras. 15.37, .51.

n211. Id. para. 14.57.

 39

n212. See Damages for Late Payment, supra note 69.

n213. Firma C-Trade S.A. v. Newcastle Prot. & Indem. Ass'n, [1991] 2 A.C. 1 (H.L.) 22 (appeal taken from Eng.).

n214. Id.

n215. President of India v. Lips Mar. Corp. (The Lips), [1988] 1 A.C. 395 (H.L.) 406 (Eng.).

n216. Ventouris v. Mountain (No. 2), [1992] 1 W.L.R. 887 (A.C.) (Eng.).

n217. For the jurisdiction of the FOS, see supra note 18 and accompanying text. For the awards that the FOS may make, see
Fin. Conduct Auth., supra note 16, Dispute Resolution: Complaints [DISP], r. 3.7.4. For the FOS approach to paying claims over
the sum insured, see Ombudsman News, Fin. Ombudsman Serv. (Apr./May 2011),
http://www.financial-ombudsman.org.uk/publications/ombudsman-news/93/93-distressandinconvenience.html. The Web site
also contains examples of such awards. Id.

n218. Banque Keyser Ullmann S.A. v. Skandia (UK) Insurance Co., [1990] 1 Q.B. 665, 706 (Eng.), was later approved by the
House of Lords in Banque Financiere de la Cite S.A. v. Westgate Insurance Co., [1991] 2 A.C. 249 (H.L.) 257 (appeal taken
from Eng.) (U.K.).

n219. Marine Insurance Act, 1906, 6 Edw. 7, c. 41,§§67-68 (U.K.).

n220. Sprung v. Royal Ins. (UK) Ltd., [1999] Lloyds Rep. I.R. 111 (A.C.), [1997] C.L.C. 70 (Eng.).

n221. See 239 H.L. Jour. (2005) 323 (U.K.), available at http://www.publications. parliament.uk/pa/ld200506/ldjournal/239/
lords_journal_ 239.pdf (refusing leave to appeal in Mandrake Holdings Ltd. v. Countrywide Assured Group Plc, [2005] EWCA
(Civ) 638 (Eng.), which followed Sprung).

n222. See infra Part III.D.3.

n223. See Herbert M. Kritzer, The English Rule, 78 A.B.A. J. 54, 55-57 (1992).

n224. Sempra Metals Ltd. v. Inland Revenue Comm'rs, [2007] UKHL 34, [49], [2008] 1 A.C. 561, 591-92 (appeal taken from
Eng.).

n225. See, e.g., Willis Quality Index, supra note 166; About Gracechurch, supra note 166.

n226. Fin. Conduct Auth., supra note 16, Insurance: New Conduct of Business Sourcebook [ICOBS], para. 8.1.
 40

n227. However, this action does not appear to be available to businesses. Titan Steel Wheels Ltd. v. Royal Bank of Scot. Plc.,
[2010] EWHC (Comm) 191, [55]-[58], [2010] 2 Lloyd's Rep. 92 at 104 (Eng.).

n228. See Fin. Conduct Auth., supra note 16, Glossary.

n229. Post Contract Duties, supra note 74, para. 4.14.

n230. Id. para. 5.2.

n231. Id. para. 5.26-.36.

n232. Hadley v. Baxendale, (1854) 156 Eng. Rep. 145 (Exch.) 151; 9 Ex. 341, 354-56.

n233. See Sir Bernard Eder et al., Scrutton on Charterparties and Bills of Lading paras. 19-003 to -005 (22d ed. 2011).

n234. Transfield Shipping Inc. v. Mercator Shipping Inc., [2008] UKHL 48, [2009] 1 A.C. 61 (appeal taken from Eng.).

n235. See, e.g., Harvey McGregor, McGregor on Damages paras. 6-165 to -173 (18th ed. 2009).

n236. See id. paras. 6-173A to -173I.

n237. Id. ch. 15.

n238. Id.

n239. Sempra Metals Ltd. v. Inland Revenue Comm'rs, [2007] UKHL 34, [50], [2008] 1 A.C. 561, 592 (appeal taken from Eng.).

n240. See id.

n241. Post Contract Duties, supra note 74, paras. 2.68-.69, 5.4.

n242. Recent Cases, Bi-Economy Market, Inc. v. Harleysville Ins. Co., 886 N.E.2d 127 (N.Y. 2008), 122 Harv. L. Rev. 998,
1005 (2009).
 41

n243. Bi-Econ. Mkt., Inc. v. Harleysville Ins. Co., 886 N.E.2d 127, 132 (N.Y. 2008); see Panasia Estates, Inc. v. Hudson Ins.
Co., 886 N.E.2d 135, 137 (N.Y. 2008).

n244. See Goldmark, Inc. v. Catlin Syndicate Ltd., No. 09-CV-3876 (RRM)(RER), 2011 WL 743568 (E.D.N.Y. Feb. 24, 2011);
Schlather, Stumbar, Parks & Salk, LLP v. One Beacon Ins. Co., No. 5:10-cv-0167 (NPM/DEP), 2011 U.S. Dist. LEXIS 5779
(N.D.N.Y. Jan. 21, 2011); Woodworth v. Erie Ins. Co., 743 F. Supp. 2d 201 (W.D.N.Y. 2010); O.K. Petroleum Distrib. Corp. v.
Travelers Indem. Co., No. 09 Civ. 10273 (LMM), 2010 U.S. Dist. LEXIS 71465 (S.D.N.Y. July 15, 2010); In re Axis Reinsurance
Co. Refco Related Ins. Litig., No. 07-CV-07924-JSR, 2010 U.S. Dist. LEXIS 33377 (S.D.N.Y. Mar. 7, 2010); Haym Salomon
Home for the Aged, LLC v. HSB Grp. Inc., No. 06-CV-3266 (JG) (JMA), 2010 U.S. Dist. LEXIS 4255 (E.D.N.Y. Jan. 20, 2010);
Augeri v. Fid. Nat'l Title Ins. Co., No. 5919/11, 2011 N.Y. Misc. LEXIS 5885 (App. Div. Dec. 5, 2011); Third Equities Corp. v.
Commonwealth Land Title Ins. Co., No. 010254-10, 2010 N.Y. Misc. LEXIS 6113 (App. Div. Dec. 7, 2010); Grinshpun v. Travel-
ers Cas. Co. of Conn., No. 6702/2008, 2009 WL 1025747 (N.Y. App. Div. Mar. 11, 2009).

n245. See Ostrager & Newman, supra note 163, ch. 12.

n246. Id.

n247. See, e.g., Covington & Burling, LLP, http://www.cov.com (last visited May 15, 2013); AIRMIC, http://www.airmic.com (last
visited May 15, 2013).

n248. See supra Part III.D.4.

n249. Note the response of the General Council of the Bar to Issues Paper 6: "We are regularly instructed in cases where
clients find it remarkable that they cannot seek damages for loss to their businesses occasioned by insurers unreasonably re-
fusing to pay insurance claims or delaying such payments." Post Contract Duties, supra note 74, para. 4.11.

n250. See id. para. 5.32.

n251. See id. paras. 4.17-.21.

n252. Curiously, the Law Commissions accept the fact that large insureds do not need such protection, yet they recommend
reforms that would provide it. See id. para. 2.30 ("The Lips reached a fair result. The litigants were sophisticated commercial
people who had allocated the risks of exceeding lay-days in their contract... . It was right that the parties should be bound by
their agreement and that the courts should not provide additional damages.").

n253. See supra Part III.D.3.

n254. For instance, Lloyd's insures 94% of the 100 companies on the FTSE index. Lloyd's, Lloyd's Annual Report 2011, at 5
(2011), available at http://www.lloyds.com/~/ media/Files/Lloyds/Investor%20Relations/2011/Annual%20results/D ocuments/
AR2011_Lloyds_2011_Annual_ Report.pdf. Further, "a significant proportion of global offshore energy premiums are written in
Lloyd's." Lloyd's, Energy: Drilling in Extreme Environments 5, 41 n.1 (2011), available at
http://www.lloyds.com/~/media/Lloyds/Reports/Emerging%20 Risk%20Reports/Lloyds%20Drilling%20in%20extreme%20envi-
ronments% 20FINAL3.pdf ("Lloyd's writes over 60% of global offshore energy premiums. This data does not include the Nordic
region, Russia, or Kazakhstan due to lack of data and is based on 2009 figures.").
 42

n255. Transfield Shipping Inc. v. Mercator Shipping Inc., [2008] UKHL 48, [21], [2009] 1 A.C. 61, 70 (appeal taken from Eng.)
("If losses of that type are foreseeable, damages will include compensation for those losses, however large.").

n256. Bi-Econ. Mkt., Inc. v. Harleysville Ins. Co., 886 N.E.2d 127, 135 (N.Y. 2008) (Smith, J., dissenting).

n257. This legal maxim was used in Northern Securities Co. v. United States, 193 U.S. 197, 400 (1904) (Holmes, J., dissent-
ing).

n258. See supra Parts II-III.

n259. Consumer Insurance (Disclosure and Representations) Act, 2012, c. 6 (U.K.).

n260. Consumer Insurance (Disclosure and Representations) Act 2012 (Commence-ment) Order, 2013 No. 450 (C. 18) (U.K.).

n261. " Consumer" is defined as "an individual who enters into the contract wholly or mainly for purposes unrelated to the indi-
vidual's trade, business or profession." Consumer Insurance (Disclosure and Representations) Act, 2012, c. 6, § 1.

n262. See id.

n263. Id. § 2(2).

n264. Id. § 2(3).

n265. Id. § 3(3).

n266. Id. § 3(4).

n267. Id. § 3(5).

n268. A careless misrepresentation is one that is not deliberate or reckless. Id. § 5(3).

n269. Id. sched. 1(2).

n270. Id. sched. 1(5).

 43

n271. Id. sched. 1(6).

n272. Id. sched. 1(7).

n273. Misrepresentation and Non-Disclosure, supra note 31, paras. 4.132-.133.

n274. Longmore, supra note 29, app. A, in British Ins. Law Ass'n, supra note 26, app. A.

n275. See Duty of Disclosure and the Law of Warranties, supra note 23, para. 11.5.

n276. Consumer Insurance (Disclosure and Representations) Bill [HL]: Explanatory Notes, www.ukparliament.uk, para. 42
(May 17, 2011), http://www.publications.parliament. uk/pa/bills/lbill/2010-2012/0068/en/2012068en.htm; see Consumer Insur-
ance (Disclosure and Representations) Act, 2012, c. 6, § 6(2).

n277. Consumer Insurance (Disclosure and Representations) Bill, 2010-12, H.C. Bill [68] (U.K.).

n278. Consumer Insurance (Disclosure and Representations) Act, 2012, c. 6.

n279. See Duty of Disclosure and the Law of Warranties, supra note 23, paras. 15.2-.3.

n280. Post Contract Duties, supra note 74, paras. 5.20-.37.

n281. Id. paras. 5.49-.56. As previously noted, this is already available through the FOS.

n282. World Economic and Financial Surveys: World Economic Outlook Database, Int'l Monetary Fund,
http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/index.a spx (last visited May 15, 2013).

n283. TheCityUK, Financial Market Series: Insurance 1 (2011) [hereinafter TheCityUK, Insurance]; TheCityUK, Economic
Trends Series: Trends in U.K. Financial and Professional Services 8 (2012) [hereinafter TheCityUK, Trends].

n284. See Gilman et al., supra note 40, paras. 4-01 to -18.

n285. TheCityUK, Trends, supra note 283, at 9.

 44

n286. Id.

n287. Id.

n288. Report on Marine Insurance Premium: Accounting Year 2011, Int'l Union of Marine Ins.,
http://www.iumi.com/images/stories/IUMI/Pictures/Committees/FactsFigures/ Statistics/2012/AutumnEdition/iumi2012_global_
premiums_by_country_2011_2010.pdf (last visited May 15, 2013).

n289. For a description of the London insurance market, see Edinburgh Assurance Co. v. R.L. Burns Corp., 479 F. Supp. 138,
144 (C.D. Cal. 1979), aff'd in part and rev'd in part, 669 F.2d 1259 (9th Cir. 1982).

n290. See Gilman et al., supra note 40, para. 5-05.

n291. See Medcalf v. Hall, (1782) 99 Eng. Rep. 566 (K.B.) 567; 3 Doug. 113, 115 (Eng.).

n292. The mass of litigation that followed reform of Australian insurance law is an obvious example.

n293. For this contract and an explanation, see Open Market, London Met. Grp., http://www.marketreform.co.uk/index.php?
option=com_conte nt&view=category&id=41&Itemid=144 (last visited May 15, 2013).

n294. TheCityUK, Insurance, supra note 283, tbl.7.

n295. Id.

n296. Id. at 8.

n297. Some 20% of Lloyds' premium income of £ 19.7 billion is from the United Kingdom (most of which will be commercial).
Id. charts 18, 25.

n298. Id. at 7-8.

n299. Id. ch. 15.

n300. Id.

n301. Id. at 11.

 45

n302. See Duty of Disclosure and the Law of Warranties, supra note 23, para. 15.49.

n303. See Joint Scoping Paper, supra note 4 (setting out the initial proposals regarding disclosure and warranty); Duty of Dis-
closure and the Law of Warranties, supra note 23 (updating proposals regarding disclosure and warranty).

n179 DeRose, 2011 WL 4738114, at *5.

n180 Id. at *5-6.

n181 Id. n.17.