News In Focus
23 July 2007
Commissions seek consumer-friendly insurance law
Inadvertent errors in insurance proposal forms would no longer provide a get-out for insurers, on proposals by the Law Commissions now out for consultation.
A joint consultation paper by the Scottish Law Commission and the Law Commission of England & Wales focuses on misrepresentation and non-disclosure, and explores the issues around what happens when claimants have made such mistakes.
The Commissions observe that the statutory law, which dates from 1906, would operate harshly if applied, and that industry codes of practice together with regulation by the Financial Services Authority and Financial Ombudsman Service have mitigated its effects. However this leaves a confusing regime and one with gaps in the protection offered.
Business and consumer policyholders are considered separately in the Commissions' paper. For consumers, the proposals largely reflect existing FSA rules and FOS practice, and the Commissions predict minimal impact on insurers who already follow this guidance. They expect a more substantial impact on firms that currently ignore the guidelines, and are "particularly interested" in receiving evidence about the nature and extent of firms who fail to follow FOS practice.
Under the proposals, deliberate or reckless misrepresentation would continue to avoid a policy, but a policyholder who has acted reasonably would be protected. The test of reasonableness would take into account the type of policy, the way it was advertised and sold and the normal characteristics of consumers in the market.
Where a consumer acted negligently but not dishonestly, the insurer would be entitled to a "compensatory" remedy by being put in the position it would have been in had it known the true facts. This might involve a proportionate reduction in the payment under the policy, the application of an excess, or the avoidance of the entire policy.
The FOS now refuses to allow insurers to avoid a policy for non-disclosure where no question has been asked on application, and the Commissions propose that this should become the law. They also provisionally propose that an intermediary such as a broker should be regarded as acting for the insurer and not the insured, unless they are clearly independent of the insurer and acting on the insured's behalf. This would prevent insurers relying on mistakes by a broker rather than the insured as avoiding a policy.
The regime governing business policyholders would be similar but parties would be able to opt out.
Consultation on the paper, which can be viewed on the Commissions' websites http://www.scotlawcom.gov.uk and http://www.lawcom.gov.uk, runs until 16 November.