For over 100 years property and liability insurance law has largely been governed by the Marine Insurance Act 1906, a product of careful thought and drafting that codified the previous 200 years of case law. Times have changed, however, particularly in the speed of communications, the availability of information and the development of the law. The asymmetry of the parties’ positions, whereby the insured knew everything about its affairs and the insurer knew nothing, is today very different. This has resulted in a great deal of activity in the review by trade bodies and the Law Commissions (of England and Scotland) of insurance law over the past ten years, culminating in two recent bills, the Third Parties (Rights against Insurers) Bill (the Third Parties Bill) and the Consumer Insurance (Disclosure and Representations) Bill (the Consumer Insurance Bill).
Third Parties Bill
The Third Parties Bill received its second reading in the House of Lords on 9 December 2009 and is intended to modernise the Third Parties (Rights against Insurers) Act 1930 (the 1930 Act), codify the current law, and make it quicker, easier and cheaper for a victim to recover compensation from an insurance company directly. The 1930 Act was intended to allow victims (especially of motor accidents) to receive insurance payments directly instead of their payment into the insolvent insured’s estate. The Third Parties Bill should enact the following changes:
- In circumstances where the insured is the subject of any insolvency event, there is a statutory transfer of their rights to any third party to whom a liability is owed by the insured. That third party can then issue proceedings against the insurers to establish both the insolvent insured’s liability and the potential liability of the insurers. The need for multiple proceedings (against the insured third party to establish their liability to the claimant and against the insurers) will be removed.
- The definition of an insured person is widened to take into account the immense changes in both the insurance and insolvency landscape since 1930. It will now include individuals, incorporated and unincorporated bodies, and certain trusts. The Third Parties Bill updates the current insolvency processes by including company and individual voluntary arrangements.
- Liabilities incurred voluntarily. such as legal expenses insurance, health insurance and car repair insurance, will now be covered.
- Currently, the worst scenario for a claimant is to bring proceedings to restore the insolvent insured to the Companies Register, then bring proceedings against the insolvent insured to obtain a judgment and establish their liability to the claimant, and then bring proceedings against the insurers to obtain a claim under the insurance policy. At this point the insurers could use any valid defence under the policy that they would have used against the insured, so that the claimant would have wasted large amounts of time and money in a search that could have been revealed as fruitless at the outset. Third parties may now write to several parties, such as the personal representatives or liquidator of an insolvent insured, its insurers (if they can be identified) and any other party able to provide information relating to the insurance, including brokers, adjustors and surveyors. This should reduce the number of fruitless claims against insurers, but of course may increase the claims that would at least have some prospect of success on the basis that there is some insurance in place that should respond to the loss.
As usual, the insurer is entitled to take any defence that it could have raised against the insured, subject to three exceptions:
- where the insured is required to take action under the policy, eg notifying the insurer of likely liability or of the event giving rise to the loss, then compliance by the third party with the relevant condition is sufficient to dischargethe term;
- where the policy contains a condition with which the insured cannot comply because it has been dissolved, then the statutory transfer of rights will occur without that condition, so effectively the third party simply need not comply; and
- a clause requiring the insured to pay the victim before the insurer can be liable to indemnify the insured will not apply to the statutory transfer.
The Third Parties Bill does not apply to reinsurers and therefore the current uncertainty in relation to the operation of cut-through clauses by an insured against a reinsurer will remain.
The Third Parties Bill is currently before the House of Commons but it still needs to complete several stages before it can receive royal assent and become law. Given the current uncertainty over the general election, it is unlikely that Parliament will be able to complete the process, but when considering the need for the Act and its general all-party support, it is likely that it will become law relatively soon.
Consumer Insurance Bill
The Consumer Insurance Bill relates only to consumer insurance, which involves contracts of insurance entered into by individuals wholly or mainly for the purposes unrelated to that individual’s trade, business or profession. The comprehensive code identified in 2006 as the goal of the Law Commissions has been reduced considerably, and now relates to pre-contract disclosure and misrepresentation and intermediaries, while warranties, post-contractual good faith and interest on late payment of claims have been deferred. In essence it codifies what the Financial Ombudsman Service already does for consumers. The position of non-consumers will be addressed later this year and it is likely that some of the current proposals will reappear, although perhaps watered down.
The most important reform is the abolition of the duty of disclosure, which is the bedrock of the insurers’ investigation of the moral hazard of the insured and the font of its draconian remedy of avoidance, which when applied means that the insurance contract simply never existed. It is designed to ensure that the potential insured reveals to the insurer all material aspects of the risk. It is not possible to oust these new rules by contract, which would include choosing another law as the applicable law of the policy. The duty of disclosure is replaced by a new duty to take reasonable care not to make a misrepresentation. Reasonable care is defined in very general terms and operates in the light of all relevant circumstances, of which the Consumer Insurance Bill provides some illustrations. For example:
- the type of consumer insurance policy;
- any explanatory material or publicity produced by the insurer;
- the clarity and focus of the insurer’s questions; and
- whether or not the agent was acting for the consumer.
The test of reasonableness is objective – the reasonable consumer – with a subjective element in that the consumer’s characteristics are to be taken into account if the insurer was or should have been aware of them. Any element of dishonesty on the part of the consumer will still have terminal consequences, even if the answer that they gave would also have been given by an honest insured. The test of reasonableness is explained by the Law Commissions in their report. An insured will have acted reasonably if:
- the question was general and a reasonable consumer would not understand that the insurer was asking about particular information;
- the consumer has reasonable grounds for believing what it said was true;
- a reasonable consumer would not have appreciated that the insurer would have wanted to know about that fact;
- it is reasonable for the consumer to assume that the insurer would obtain the information for itself; or
- the insurer indicated that it would obtain information from a third party.
A positive statement is required to found a misrepresentation, although this would be included by any failure of a consumer to comply with an insurer’s request to confirm particulars previously given. The insurer still has to prove that it was induced by the misrepresentation to enter into the contract.
If the misrepresentation is deliberate or reckless, the insurer may avoid the contract and retain the premium. If the misrepresentation is careless then a new concept is introduced, that of proportionality, where instead of a absolute remedy of avoidance, the insurer is simply placed in the position that it would have been in had it known the true facts, for example charging more premium. The insurer would still be entitled to avoid the contract if it (the insurer) would not have entered into the contract had the careless misrepresentation not been made, but must return the premium (which reflects the common law).
Who Acts for Whom?
It has always been a source of some dispute for whom and in what capacity an intermediary may be acting. During that last wave of contingent commissions paid by insurers to brokers for a more focused introduction of insurance business, the underlying documentation seeking to valorise such payments contained several ingenious rationales to justify the work carried out by brokers for the benefit of insurers. The courts have leaned gently towards the possibility of dual agency but the tenor of case law over the past 200 years is that an intermediary acts for one party only at any one time, unless it can obtain the informed consent of that party to act also for the other. The Consumer Insurance Bill looks at this and states that there are three cases in which the agent is to be treated as the agent of the insurer:
- when the agent is the appointed representative of the insurer;
- when the agent collects information from the insurer using the insurers expressed authority to do so; and
- when the agent enters into the contract as the insurer’s agent.
In all other cases the usual presumption applies to the effect that the agent is acting on behalf of the insured party. The Consumer Insurance Bill also provides three examples of factors tending to confirm that the agent acts for the consumer, namely that it undertakes to give impartial advice to the consumer, to conduct a fair analysis of the market, or to pay the agent a fee. Facts showing that the agent acts for the insurer are that it places insurance with only a small proportion of the insurers that could insure, the insurer provides insurance through only a limited number of agents, the insurer permits the agent to use the insurer’s name, the insurance is marketed under the name of the agent, or the insurer asks the agent to solicit the insurer’s custom. The Consumer Insurance Bill expressly preserves the general rule that the principal is responsible for the acts or omissions of its agent but fails to boldly go where it was once promised to go, namely installing the broker as the agent of the insurer for the purpose of the disclosure of material facts.
The Consumer Insurance Bill does not reform the law relating to warranties, although it does remove the possibility for insurers to rely on ‘basis’ clauses, which convert every answer in a proposal form into a warranty so that an insurer’s liability is automatically terminated at the date of breach of warranty whether or not it is relevant to the loss.
The Consumer Insurance Bill also looks at the position of the insureds under group insurance, in which any insured couldsuffer from the consequences of acts or omissions of another party where it is notin fact at fault.
The Law Commissions are planning a programme of future work for 2010, which includes issues papers on damages for late payment, the insured’s post-contractual duty of good faith, and a policy statement on non-disclosure, misrepresentation and warranties in business insurance. How far the changes proposed in the Consumer Insurance Bill will be effected similarly for businesses remains to be seen.
Other areas of reform
Three issues still in debate include the law on insurable interest, damages for late payment of claims and a redraft of the general principles of insurance law throughout Europe. Insurable interest has been characterised by the Law Commissions as complex and difficult to understand, but has socially desirable effects and is not just a legal technicality. Before the Gambling Act 2005 (the 2005 Act), anyone taking out property insurance needed to have a legal or equitable interest in the property or a right to it under a contract, without which the insurance contract was unenforceable. In England this requirement for insurable interest appears to have been removed by the 2005 Act, though more by accident than design. Under English law indemnity insurance contracts without insurable interest are now enforceable. But anomalies exist. Parents still cannot insure the lives of their children. Fiancés cannot insure fiancées, and vice versa. Group insurance and the relevant interest required remains unclear.
There is argument as to whether the 2005 Act has removed the requirement for insurable interest in a marine insurance contract, but either way it is still a criminal offence to take out a contract of marine insurance without interest. The quantum allowed for keyman insurance is not clear. In general, non-life non-indemnity insurance still requires an insurable interest, although there is little need for it. Australia has abolished this need, but its absence enables anyone to insure the life of another, taking us back to the days when the populace insured the lives of public figures, such as George II and Sir Robert Walpole (and newspapers published odds on their deaths), a feature that might cause discomfort or unease to some.
A claim under an insurance contract is technically a claim for damages for breach of the insurer’s indemnity and there is no right under English law to claim damages for late payment of damages. The courts have a discretion to award interest but these often do not reflect the insured’s true loss. The Law Commissions propose to review the area this year.
Finally, the Project Group on a Restatement of European Insurance Contract Law has been working for a decade on the relevant principles, which were launched in September 2009 and can be applied by the parties to an insurance contract in place of a national law. The work is not finished and will require some form of legislation to become binding, but it is likely that such legislation will be introduced to allow them to operate efficiently.