Insurance traps for consumers should be abolished

The English and Scottish Law Commissions recommend new legislation covering the issue of what a consumer should tell an insurer before taking out insurance

On 15th December 2009, the two Commissions published a report and draft Bill designed to implement these recommendations.  In their report Consumer Insurance Law: Pre-Contract Disclosure and Misrepresentation the two Commissions recommend new legislation covering the issue of what a consumer should tell their insurer before taking out insurance.  The current law requires consumers to volunteer information about everything which a “prudent insurer” would consider relevant.  We think this duty should be abolished.  Instead, insurers should be required to ask questions about what they want to know.

Responses to earlier consultation showed strong support for reforming consumer law, not only from consumer groups, brokers, lawyers and the Financial Ombudsman Service, but also from insurers themselves. As one reinsurer put it, reform would “enhance the reputation of the industry by reducing the scope for insurers to rely on strict legal rights that are unfairly balanced in their favour”.

The draft Bill abolishes the duty currently imposed on consumers to volunteer material facts. Instead, consumers are required to take reasonable care not to make a misrepresentation. This new duty is central to the draft Bill. It means that consumers must take reasonable care to answer insurers’ questions fully and accurately. If consumers do volunteer information, they must take reasonable care to ensure that the information is not misleading.

Where an insurer has been induced by a misrepresentation to enter into an insurance contract, the insurer’s remedy will depend on the consumer’s state of mind:

• if honest and reasonable, the insurer must pay the claim
• if careless, the insurer has a compensatory remedy
• where the misrepresentation is deliberate or reckless, the insurer may “avoid the policy”.

Click here for a useful outline and flow chart.

Date Added: 16th December 2009