Insurance Contract Law: Business Disclosure, Warranties, Insurers’ Remedies for Fraudulent Claims, and Late Payment

Current project status

• Initiation: Could include discussing scope and terms of reference with lead Government Department
• Pre-consultation: Could include approaching interest groups and specialists, producing scoping and issues papers, finalising terms of project
• Consultation: Likely to include consultation events and paper, making provisional proposals for comment
• Policy development: Will include analysis of consultation responses. Could include further issues papers and consultation on draft Bill
• Reported: Usually recommendations for law reform but can be advice to government, scoping report or other recommendations

The majority of our recommendations in this project were implemented in the Insurance Act 2015, with most provisions coming into force on 12 August 2016. The Insurance Act 2015 now also includes our recommendations relating to late payment, which were added by the Enterprise Act 2016. These provisions came into force on 4 May 2017.

On 15 July 2014, the Law Commission and the Scottish Law Commission presented to Government recommendations for reform of the law in four areas of insurance law:

• The duty of disclosure in business and other non-consumer insurance
• The law of insurance warranties
• Insurer’s remedies for fraudulent claims
• Late payment of insurance claims

These reforms would be a default scheme for business insurance, leaving the parties free to agree alternative arrangements in their contracts provided they do so transparently.

The recommendations

A duty of fair presentation in non-consumer insurance

Much of the current law is governed by the Marine Insurance Act 1906. The 1906 Act imposes a duty on a prospective policyholder to disclose to the insurer “every material circumstance” which would “influence the judgment of a prudent insurer” in fixing the premium or deciding whether to take the risk.

Many businesses have little idea of what might influence a prudent insurer. Yet the penalties for failure to disclose information to insurers are harsh. If a policyholder fails to disclose material information, the insurer may treat the policy as if it does not exist and refuse all claims under it.

We recommended:

• replacing the duty of disclosure with a duty of fair presentation based on developments in case law, covering what should be disclosed and the form of disclosure
• encouraging insurers to take a more active role
• Setting out rules concerning attribution of knowledge, particularly to non-natural persons such as companies, and
• putting the common law “inducement test” on a statutory footing.
• providing a regime of proportionate remedies in the event of breach by the policyholder based on what the insurer would have done if it had received a fair presentation.

Warranties and other terms

An insurance warranty is a promise made by the policyholder to the insurer which, if broken, has harsh consequences for the policyholder. The general principles of insurance warranty law are founded on the rulings of Lord Mansfield in the eighteenth century, and codified in the 1906 Act.

A warranty “must be exactly complied with, whether material to the risk or not”. If not, then “the insurer is discharged from liability from the date of the breach of warranty”. Once a warranty is breached, the policyholder “cannot avail himself of the defence that the breach has been remedied, and the warranty complied with, before loss”.

We made three recommendations in this area:

• Abolish “basis of the contract” clauses in business insurance, having already done so for consumer insurance in CIDRA.
• Where a warranty has been breached, the insurer’s liability should be suspended, rather than discharged. Where a breach has been remedied before loss, the insurer should be brought back on risk.
• Where a term relating to a particular type of loss, or loss at a particular time or in a particular location, is breached, the insurer’s liability should only be suspended in relation to that type of loss or loss at that time or place.

Insurer’s remedies for fraudulent claims

The law should provide clear remedies for the insurer where a policyholder makes a fraudulent claim, yet the existing law was confused and contradictory. It was not clear whether the insurer was liable to pay other genuine claims, whether they arise before or after the fraud.

We recommended:

• Where an insured makes a fraudulent claim, the insurer should not be liable to pay the claim and should be able to recover any sums already paid in respect of it.
• In addition, the insurer should have the option to treat the contract as having been terminated at the time of the fraudulent act.
• The insurer should remain liable for genuine losses before the fraudulent act.

Damages for late payment

Where an insurer has unreasonably refused to pay a claim or paid it only after unreasonable delay, the current law in England and Wales does not provide a remedy for the insured. Notably, the insured is not entitled to damages for any loss suffered as a result of the insurer’s unreasonable actions.

We recommended:

• An implied term in every insurance contract that the insurer will pay sums due within a reasonable time. Breach of that term should give rise to contractual remedies, including damages. In Scotland, a statutory provision would serve to confirm and clarify the position already established at common law.
• Guidance as to factors to be taken into account when considering what constitutes a “reasonable time”.
• Insurers should not be liable for delays caused by genuine disputes.

Good faith

The law currently provides for avoidance of the insurance contract where either party breaches the duty of good faith. We recommended removing this remedy. Good faith should be retained as an interpretative principle.

Consultation

The report was informed by two consultations:

• The Business Insured’s Duty of Disclosure and the Law of Warranties
• Post-contract Duties and other Issues

The papers for both these consultations and the issues papers that preceded them are available on the Insurance Contract Law main project page.