Insurance contract laws proposed

18.07.2007

The Law Commission has launched a new consultation into insurance contract law.

Working with the Scottish Law Commission, the body is calling for comments on its proposals to modernise the law relating to misrepresentation, non-disclosure and breach of warranty by the insured.

The consultation paper states that the reform is necessary to "strike a fair balance between the interests of insurers and policyholders".

It adds that it does not believe that Financial Services Authority (FSA) rules or the Financial Ombudsman Service (FOS) are adequate substitutes for law reform.

The paper states: "The current position is needlessly complex, confusing and inaccessible, with the potential for cases of real injustice falling into the cracks in the system.

"The law should be brought into line with accepted good practice, and set out in a clear statutory statement of the obligations on both the insured and insurers."

Within consumer insurance, the Law Commission suggests a mandatory regime based largely on FOS guidelines, while in business insurance it proposes a 'default regime' based on good practice to apply in absence of an agreement to the contrary.

One major suggestion is the introduction of a five-year non-disclosure deadline for life insurance policies.

The consultation paper states: "A cut-off period would not benefit fraudsters directly as it would not apply where the misrepresentation was shown to be deliberate or reckless.

"It is possible that some people may deliberately give false answers in the hope that they will live five years and that any inaccuracies will then be viewed as careless rather than reckless. However, this would be a risky thing to do: they may die within five years, and even if they live longer, their dishonesty may be discovered."

The Law Commission predicts the costs of such a new system in the consumer insurance sector would be minimal as the proposals reflect FSA and FOS rules and practice, with the main impact being for firms that disregard these rules as they would not be able to circumvent the law.

Responding to the publication, Stephen Haddrill, director general of the Association of British Insurers (ABI), said: "The insurance industry is closely and effectively regulated by the FSA. The industry also set up and supports an ombudsman service that enables customers to settle disputes without going to court.

"More law is unlikely to provide a better deal for customers. The real challenge is for the industry and the FSA to make a success of principles-based regulation."

He went on to say that the ABI would scrutinise the Law Commission's proposals to ensure that they add real value to the regulatory system and do not distract from the efforts already underway to modernise regulation by being prescriptive.