6 TH APRIL 2013: ALL CHANGE IN INSURANCE LAW? A GUIDE TO THE CONSUMER INSURANCE (DISCLOSURE AND REPRESENTATIONS) ACT 2012 BY 20 ESSEX STREET, LONDON WC2R 3AL 00 44 (0)207 842 1200 graham@charkham.biz -1-
Table of Contents OVERVIEW OF THE ACT.... 3 WHAT IS A CONSUMER INSURANCE CONTRACT?... 4 THE CONSUMER S DUTY OF REASONABLE CARE.... 8 WHAT IS REASONABLE CARE?... 8 CHECKING INFORMATION PROVIDED BY INSURERS.... 12 CONSEQUENCES IF CONSUMER FAILS TO USE REASONABLE CARE.... 13 GROUP POLICIES.... 16 LIFE INSURANCE UPON THE LIFE OF ANOTHER.... 16 INSURANCE INTERMEDIARIES.... 16 SUMMARY AND CONCLUSION.... 18-2-
OVERVIEW OF THE ACT. 1 On 6 th April 2013 sections 2 to 11 of the Consumer Insurance (Disclosure and Representations) Act 2012 1 come into force 2. The Act will apply to all consumer insurance contracts entered into on that date 3. In respect of these contracts, and variations of them, the Act abolishes the rules relating to pre-contract non-disclosure and misrepresentation set out in sections 18-20 of the Marine Insurance Act 1906. 2 From the 6 th April the applicant for a consumer insurance contract no longer has an obligation to volunteer information as was required when the duty of the utmost good faith applied. Instead, the applicant now has a statutory duty to take reasonable care not to make a misrepresentation. The Act creates new remedies for insurers if a consumer does not take such care 4. The remedies are proportionate to the culpability of the insured, see paragraph 24 and following below. 3 Proposal forms sometimes contain a basis of contract clause which converts representations made in the proposal form into a warranty, thus giving insurers the right to avoid the policy if it later emerges that the facts given were incorrect. Section 6 renders such clauses ineffective. 1 References to The Act are to this act. References to Section(s) are to sections in the Act. For copy of the Act see http://www.legislation.gov.uk/ukpga/2012/6/contents/enacted 2 See The Consumer Insurance (Disclosure and Representations) Act 2012 (Commencement) Order 2013 S.I. 2013 No. 450 (C.18). http://www.legislation.gov.uk/uksi/2013/450/made. 3 S. 12(4). 4 The Act is the fruit of the work of the Law Commission, see: http://lawcommission.justice.gov.uk/areas/insurance-contract-law.htm for history and December 2009 Law Commission report. -3-
4 The Act contains new rules in relation to misrepresentations in group insurance 5 and in respect of life insurance 6 and contains rules which may assist in determining on whose behalf an insurance intermediary is acting 7. 5 The provisions of the Act are mandatory. Any term of a policy which seeks to put the consumer in a worse position than the regime provided by the Act will be ineffective 8. WHAT IS A CONSUMER INSURANCE CONTRACT? 6 This is the key question, because the Act gives consumers protection which non-consumers do not have. The full rigour of the duty of the utmost good faith continues to apply to insurance contracts which are not deemed to be consumer insurance contracts with the result that Underwriters will remain entitled to avoid non consumer policies if there has been material non-disclosure or misrepresentation. 7 Section 1 provides:- In this Act consumer insurance contract means a contract of insurance between (a) an individual who enters into the contract wholly or mainly for purposes unrelated to the individual s trade, business or profession, and (b) a person who carries on the business of insurance and who becomes a party to the contract by way of that business (whether or 5 See paragraph 29 below. 6 See paragraph 30 below. 7 See paragraph 31 below. 8 Section 10(1). -4-
not in accordance with permission for the purposes of the Financial Services and Markets Act 2000); consumer means the individual who enters into a consumer insurance contract, or proposes to do so; insurer means the person who is, or would become, the other party to a consumer insurance contract. 8 It follows that if the party obtaining insurance is a limited company or other corporate body it will not be a consumer contract, since the insured party will not be an individual. 9 Someone buying building and contents insurance in respect of their home will be buying a consumer insurance contract even if a small part of the home or contents is used for business purposes since the insurance is mainly for a purpose unrelated to the individual s trade, business or profession. Likewise someone buying car insurance where the car is used mainly for pleasure but occasionally for work. So far so obvious. But it is not difficult to imagine examples which are far less clear. Consider:- (1) A full-time dentist who insures his luxury yacht on which he invites paying guests for holiday charters, during which time the yacht is staffed by a professional crew engaged by the dentist. (2) A full-time solicitor buying building and contents insurance in respect of a property he owns, which is to be let as a holiday cottage on commercial basis for about 26 weeks a year. 10 The Law Commission s Report, upon which the Act is based but which is not admissible as an aid to construction, suggests that one needs to look at the main purpose of the insurance 9. This does not assist one in ascertaining whether the examples given above are consumer insurance contracts within the meaning of this Act. In each case the 9 Paragraph 5.5 of Law Com No 319. -5-
main purpose is to insure the object (the yacht/ holiday cottage) but this tells one nothing significant. 11 The definition of consumer does not rule out the possibility that a person seeking insurance may have more than one trade, business or profession. In the examples given above it is arguable that the dentist is both dentist and holiday-yacht provider. It is instructive to ask how many weeks per year the yacht is intended to be let. If it is intended to be let for as much of the yachting season as possible (save for say two weeks in which the dentist wishes to sail with his family), this would suggest that the dentist is in the trade of yacht chartering as well as dentistry, and therefore this would not be a consumer insurance contract. If, however, the periods are reversed so that the dentist requires the yacht for his own use for all but a couple of weeks in which he lets it out commercially, this would more likely to be a consumer insurance contract. At some point between the two extremes there must be a point at which what would be a consumer insurance contract ceases to be so. Identifying where on the continuum that point might be is somewhat problematic 10. 12 The same principle could be applied to the example of the holiday cottage. It would be logical if the test of a consumer insurance contract was determined by reference to the facts as they are when the insurance contract is concluded. It follows that if the intention was to let the cottage for as long as possible, this would be a trade or business policy, whereas if it were only intended to let it for very occasional use it would not be. 10 This is the sorites paradox which may be illustrated by the following examples. How many grains of rice can you take from a heap before it ceases to be a heap? How many hairs can you keep on a person s head before he ceases to be bald? The problem has its root (sic.) in the conceptual vagueness of definition of heap and bald and in the Act s vagueness of definition of individual s trade/ business/ profession. -6-
13 Against the above construction it could be argued that the definition refers to trade, business or profession rather than trades, businesses or professions and therefore assumes that each individual will have only one trade, business or profession. I would argue against this construction because:- (1) It would lead to arbitrary results. The dentist taking out yacht insurance intending to let the yacht for the entire season would be entering a consumer insurance contract but if he retired from dentistry the renewal of the policy after retirement would not be a consumer insurance contract. (2) It should make no difference to the standard of disclosure required that a person has an additional trade or business. (3) It is probable that the draftsman used the singular because it is less awkward than using the plural or a mixture of both. Section 6 of The Interpretation Act 1978 provides that In any Act, unless the contrary intention appears,---(c) words in the singular include the plural and words in the plural include the singular It is therefore permissible to read the definition in Section 1 as (a) an individual who enters into the contract wholly or mainly for purposes unrelated to the individual s trade/trades, business/businesses or profession/professions 14 Given that so much hangs on whether a contract is a consumer insurance contract it is to be anticipated that the scope of the definition will be tested in Court and case law will clarify how the test is to be applied. At present there is no directly relevant case law 11. 11 The European Court in Benincasa v Dentalkit Srl Case C-269/95 [1997] ECR I-3767 considered the definition of consumer contract in the Brussels Regulation which refers to a purpose which can be regarded as being outside his trade or profession. See also Maple Leaf Macro Volatility Master Fund and another v Rouvroy and another [2009] 1 Lloyd s Rep in which Andrew Smith J declined to follows Longmore J s decision in Standard Bank London Ltd v Apostolakis [2001] Lloyd's Rep Bank 240. The Law Commission s 2012 report Consumer redress for misleading and aggressive practices (Law -7-
THE CONSUMER S DUTY OF REASONABLE CARE. 15 As from 6 th April 2013 a consumer has a duty...to take reasonable care not to make a misrepresentation to the insurer 12. If the consumer satisfies this duty before a consumer insurance contact is entered or varied he will have done all that the law requires: the requirements of the common law relating to disclosure and misrepresentation before the passage of the Act will no longer apply 13. WHAT IS REASONABLE CARE? 16 Reasonable care will be judged by an objective test: i.e. referring to the hypothetical reasonable applicant rather than by reference to the subjective characteristics (e.g. age, fluency in English etc) of the particular applicant unless the insurer was, or ought to have been, aware of any particular characteristics or circumstances of the actual consumer 14. The insurer will therefore have to prove that the consumer did not exercise reasonable care using the hypothetical reasonable applicant as the benchmark and the burden of proof would then pass to the individual consumer to show that the insurer was, or ought to have been, aware of a particular relevant characteristic or circumstances of the consumer. Com No 332) notes that the definition of consumer in Unfair Contract Terms Act 1977 is less restrictive than the definition used in European directives and suggests that The European definition is now to be preferred but criticises the European Court of Justice s judgment in Johann Gruber v Bay Wa AG [2005] Case C-464/01 that an individual does not act as a consumer if the element of business use was non-negligible. The Law commission regard this as too restrictive. 12 Section 2(2) 13 Section 2(4) 14 Section 3 (3) and (4). -8-
17 A misrepresentation made dishonestly is always to be taken as showing lack of reasonable care (Section 3(5)). The Law Commission report explains that this provision is intended to prevent an ingenious dishonest consumer claiming that his deliberately dishonest answer is not given in breach of the duty of reasonable care because an honest reasonable consumer could have given the same answer. 18 Section 3(1) provides Whether or not a consumer has taken reasonable care not to make a misrepresentation is to be determined in the light of all the relevant circumstances. 15 Section 3(2) gives examples of things which may need to be taken into account, namely :- (a) the type of consumer insurance contract in question, and its target market, (b) any relevant explanatory material or publicity produced or authorised by the insurer, (c) how clear, and how specific, the insurer's questions were, (d) in the case of a failure to respond to the insurer's questions in connection with the renewal or variation of a consumer insurance contract, how clearly the insurer communicated the importance of answering those questions (or the possible consequences of failing to do so), (e) whether or not an agent was acting for the consumer. 19 This list is not meant to be exhaustive. One can anticipate a period of uncertainty whilst a body of case law is built up demonstrating how much weight is to be give to each of these factors. (1) It is not clear why the type of consumer insurance contract should affect the standard of care. Once it is established that the contact is a consumer insurance contract the type of contract should be irrelevant to the level of care required. It would be 15 This provision is presumably intended to make it clear that the examples in Section 3(2) are not intended to be exhaustive. -9-
strange if a person who makes the same mis-statement on an application for car insurance and on another application form with a different insurer for household insurance should be held to have been sufficiently careful in one case but not the other on the grounds that one type of contract required more care than another. Section 3(2)(a) may be driving at a different question: namely whether it ought to have been apparent to the consumer that the information provided was material to the risk to be insured. However, the draftsman has been astute to avoid all mention of materiality since a major criticism of the common law was that it required the applicant to disclose material facts whether or not the applicant realised that the fact was or might be material. The relevance of the type of consumer insurance contract therefore remains a puzzle. (2) Section 3(3)(c) is likely, in practice, to place the burden of proof on the insurer to ask clear and unambiguous questions: something that insurers have found not always found easy, as the extensive case law on this subject shows. It has long been accepted that if an applicant reads an ambiguous question in a reasonable way and answers it accurately this will not be a misrepresentation notwithstanding that a different reading of the question would lead to a different answer 16. Underwriters have to strike a balance: asking too many questions is likely to deter applicants, whilst failing to ask a question may lead an applicant to believe that further information is not required. This subsection suggests that asking unspecific open questions such as is there 16 See e.g. Condogianis v Guardian Assurance [1921] 2 A.C. 125, 130; Revell v London General Ins Co (1934) 50 Lloyd s Rep 114, 116; Yorke v Yorkshire Ins Co [1918] 1 K.B. 662, 666 in which it was held that the question must understood as ordinary men of normal intelligence and average knowledge of the world would read it. -10-
anything else you think that insurers would want to know before they agree to insure you? are unlikely to be of much use to insurers as an honest No is unlikely to regarded as unreasonable. (3) Section 3(2)(d) addresses the issue of unanswered questions. It is unclear why the section refers only to a renewal or variation of a consumer contract rather than embracing proposal forms in general. At common law, the issuing of an insurance policy - notwithstanding that a question has been left entirely unanswered by the applicant - has been held to be a waiver of information by underwriters 17. The same principle will cover an answer which is obviously incomplete. However, an answer may be incomplete in another sense: it may only tell part of the story 18. In light of this subsection, insurers would be well advised to ensure that all application questionnaires contain a prominent warning that each and every question should be answered in full, and to encourage the applicant to write answers on a supplementary sheet of paper if further space is required. The application form should also state that a failure to answer all questions in full may result in the insurance being ineffective. 17 Armenia Fire v Paul 91 Pa. 520 (1879) and Roberts v Avon Insurance Plc [1956] 2 Lloyd s Rep 240 at 249 where Barry J approved the following statement Where a question in the proposal is left entirely unanswered, the issue of the policy, without further inquiry, has been held to be a waiver of information, and it would seem that the omission to answer a question cannot be regarded as a misstatement of fact, unless the obvious inference is that the applicant intended the blank to represent a negative answer. 18 Suppression veri, suggestio falsi. See Rix L.J. in HIH Casualty & General Insurance v Chase Manhattan Bank [2001] 2 Lloyd s Rep 483 at 494 in certain circumstances a combination of silence together with a positive representation may itself create a misrepresentation. Such a situation may be called partial non-disclosure, and such cases may be explained as either instances of actual misrepresentation or as cases where a duty to speak arises because of matters already stated. -11-
(4) Section 3(2)(e) must be read in conjunction with Schedule 2 of the Act which contains rules relevant to the issue whether an agent through whom a consumer insurance contract has been effected is acting as agent of the consumer or of the insurer: see paragraph 32 below. CHECKING INFORMATION PROVIDED BY INSURERS. 20 It is often the case that insurance will be arranged via the internet or via a telephone call and then an insurance company will send the details of the insurance to the applicant in writing and ask the applicant to check the information held. 21 Section 2(3) provides that where an insurer requests that the consumer confirm or amend information previously given, and the consumer fails to do so, then this is capable of being a misrepresentation for the purposes of the Act. Therefore if a consumer is sent an invitation to renew insurance and provided with information already on insurer s database and invited to notify any changes to the information held, a failure to do so will be a misrepresentation. The same would apply to information provided over a telephone. 22 If an applicant for insurance receives a letter from his insurers which bears a prominent statement such as Please check the information below is correct or your insurance will not be valid and the applicant throws the letter away without reading it, let alone checking it, and it turns out that the information was incorrect this is likely to be deliberate or reckless misrepresentation with the draconian consequences described below. This could have very harsh consequences which could be disproportionate. Given the level of junk mail received advertising insurance and insurers practice of automatically renewing a policy and taking premium by a direct debit it is probably only a matter -12-
of time before a case arises in which the law is seen to be harsh. It will then be said that these provisions of the Act re-introduce an obligation to volunteer information which are unfair to the consumer. CONSEQUENCES IF CONSUMER FAILS TO USE REASONABLE CARE. 23 Sections 4 and 5 and Schedule 1 set out the only remedies available to insurers if a consumer makes a misrepresentation before a consumer insurance contact is entered into or varied. Before being entitled to any remedy the insurer must prove:- (1) That the misrepresentation was caused by the consumer s failure to exercise reasonable care and (2) That without the misrepresentation..[he]..would not have entered into the contract (or agreed to the variation) at all, or would have done so only on different terms 19. 24 Misrepresentations falling within this definition are designated Qualifying Misrepresentations 20. The Act classifies Qualifying Misrepresentations into two categories: either a) Deliberate or Reckless or b) Careless. It further prescribes remedies proportionate to the consumer s culpability, which are considered below. Section 5(2) provides:- 19 Section 4(1)(b). In short, he must prove that the misrepresentation induced the contract. See Assicurazioni Generali v Arab Insurance Group [2002] EWCA Civ 1642 [2003] 1 W.L.R 577 (Court of Appeal) and Laker Vent Engineering Ltd v Templeton Insurance Ltd [2009] EWCA Civ62 [2009] Lloyd s Rep. I.R. 704 (Court of Appeal) 20 Section 5. -13-
A qualifying misrepresentation is deliberate or reckless if the consumer (a) knew that it was untrue or misleading, or did not care whether or not it was untrue or misleading, and (b) knew that the matter to which the misrepresentation related was relevant to the insurer, or did not care whether or not it was relevant to the insurer. 25 If, but only if, the Insurer can prove that the misrepresentation was deliberate or reckless he may avoid the contract and refuse all claims and need not return any of the premiums paid, except to the extent (if any) that it would be unfair to the consumer to retain them 21. 26 Section 5(5) provides:-...it is to be presumed, unless the contrary is shown (a) that the consumer had the knowledge of a reasonable consumer, and (b) that the consumer knew that a matter about which the insurer asked a clear and specific question was relevant to the insurer. These presumptions are in the insurer s favour, but it is open to the consumer to produce evidence of his particular knowledge. (Standby for cases which turn on whether the question asked by insurers are clear and specific.) 27 A Qualifying Misrepresentation which is not deliberate or reckless will be considered Careless. Insurers remedies for careless qualifying misrepresentations will depend upon what the insurer would have done had there been no such misrepresentation. 21 Schedule 1, part 1, clause 2. -14-
(1) If the insurer would not have entered the contract on any terms he may avoid the contract and refuse all claims, but must return the premium 22. (2) If the insurer would have entered the contract on different terms (excluding terms relating to premium) the contract is to be treated as if it had been entered into on those different terms if the insurer so requires 23. This would require the insurer to prove to the Court, on the balance of probability, the terms which would have been imposed and it is implicit that the Court is required to assume, for the purposes of this exercise, that the consumer would have accepted those terms. It is possible that the insurer might prove that he would have required a term excluding liability in the event which has occurred. If so, the end result would be that the insurer would neither be required to pay the claim nor to return the premium. (3) If the insurer proves that he would have entered into the contract but would have charged a higher premium the insurer may reduce proportionately the amount to be paid on a claim 24. Thus if insurers would have charged a premium of 1,250 but in fact charged 1,000 then the consumer would received 80% of his claim (i.e. 1000/1250 x 100). 28 The insurer can claim both remedy (2) and (3). 22 Schedule 1, part 1, clause 5. 23 See Section 5(4) and Schedule 1, part 1, clause 6. 24 Schedule 1, part 1, clause 8. -15-
GROUP POLICIES. 29 If a consumer insurance policy is entered for the benefit of a group of consumers and a qualifying misrepresentation is made by one member of the group, the cover granted to other members of the group is not affected. (See Section 7). LIFE INSURANCE UPON THE LIFE OF ANOTHER. 30 Contrary to the law prior to the Act, the person whose life is to be insured now owes a duty of care not to make a misrepresentation. If that person makes a qualifying misrepresentation the insurance company has the same remedies as it would have if the person taking out the life policy had made the misrepresentation. (See Section 8). INSURANCE INTERMEDIARIES. 31 Consumer Insurance contracts are often concluded via intermediaries. At common law a person is responsible for the acts of his agent, so that a careless or reckless misrepresentation by an agent is treated as if it had been made by the principal. This principle is maintained (Section 12(5)). It is often difficult to identify whose agent the intermediary is. This matters, for as the Law Commission reported:- 8.8 Problems involving intermediaries and the transmission of precontract information are fairly common. In our original survey of 190 ombudsman decisions involving disputes about pre-contract information, 25 (13%) involved allegations about what an intermediary did or said during the placing of insurance. The issue continues to be raised. In our recent survey of 47 decisions, nine (19%) involved an allegation about the intermediary s actions. 32 Schedule 2 of the Act is entitled Rules for determining the status of agents. An intermediary is to be considered to be the insurer s agent if:- -16-
(1) The intermediary is the appointed representative of the insurer or (2) The intermediary collects information from the consumer with express authority from the insurer to do so or (3) The intermediary has authority to bind the insurer to cover and does so. 33 In all other cases it is presumed that the agent is the consumer s agent unless in light of the relevant circumstances the consumer proves otherwise. The Act provides a non-exhaustive, indicative list of factors which may indicate for whom the agent acts:- Schedule 2, Section 3... (3) Examples of factors which may tend to confirm that the agent is acting for the consumer are (a)the agent undertakes to give impartial advice to the consumer, (b)the agent undertakes to conduct a fair analysis of the market, (c)the consumer pays the agent a fee. (4)Examples of factors which may tend to show that the agent is acting for the insurer are (a)the agent places insurance of the type in question with only one of the insurers who provide insurance of that type, (b)the agent is under a contractual obligation which has the effect of restricting the number of insurers with whom the agent places insurance of the type in question, (c)the insurer provides insurance of the type in question through only a small proportion of the agents who deal in that type of insurance, (d)the insurer permits the agent to use the insurer s name in providing the agent s services, (e)the insurance in question is marketed under the name of the agent, (f)the insurer asks the agent to solicit the consumer s custom. -17-
34 In short, identifying for whom the intermediary acts at the relevant time remains difficult and fact sensitive. As the Law Commission recorded: 8.21... different agencies may arise in respect of different tasks. The intermediary may change hats during the process. For example, an intermediary may act for the consumer in obtaining a quote from the insurer, but act for the insurer in receiving premiums. The crucial issue is therefore to decide for whom the intermediary is acting at the time of any carelessness or wrongdoing. The intermediary may also act in different capacities in respect of different types of cover. For example, the intermediary may act for the insurer in binding the insurer to temporary cover, but for the consumer in respect of the main cover. SUMMARY AND CONCLUSION. 35 The Act fundamentally amends the law relating to consumer insurance contracts. Such a contract entered after 6 th April 2013 will not be subject to the requirements of the utmost good faith as set out in Marine Insurance Act 1906. Instead the consumer is subject to a duty to take reasonable care not to make a misrepresentation to insurers. As a result of the Act misrepresentations may now be divided into four categories:- (1) A misrepresentation made despite the exercise of reasonable care by the consumer. Such a misrepresentation has no effect on the policy and the insurer must pay the claim. (2) A misrepresentation (whether or not made without the exercise of reasonable care) which does not influence the insurers decision to enter the contract or the terms on which it was entered. Such a misrepresentation has no effect on the insurance policy and the insurer must pay the claim. (3) A qualifying misrepresentation (see paragraph 21 above) which is deliberate or reckless. The resulting insurance contract can be avoided by insurers who need not pay the claim or return premium (unless it would be unfair not to return it) and -18-
(4) A qualifying misrepresentation made carelessly. The resulting policy and/or premium may be retrospectively revised (see paragraph 26 above). 36 The Act is not perfect. It may prove difficult to determine whether an insurance contract falls under the Act s regime or that of the Marine Insurance Act 1906. This stems from the untested definition of consumer insurance contract. (See paragraph 9 above). The Act may prove harsh upon anyone who does not check the renewal information provided by insurers (See paragraph 22 above). But these are relatively small imperfections. The Act strikes a fairer balance between insurers and consumers than was achieved by the Marine Insurance Act 1906 and whist it may be said that the Act merely codifies the practice which is already applied by the Financial Ombudsman Service and accepted by insurers this is to understate its significance. Before the Act a consumer had to restrict his claim to 150,000 in order to have the benefit of the practices applied by the Ombudsman rather than facing the letter of the law set out in the Marine Insurance Act 1906. Now the consumer is spared such a choice: the same rules will be applied by both the ombudsman and the Court. Whereas the Ombudsman s findings did not create binding legal precedent, the Act will result in new case law which will be binding. The Act provides a clear statement of law which consumers can consult to learn their rights. graham@charkham.biz 20 ESSEX STREET MARCH 2013. -19-
: C.V. Graham Charkham's principal areas of practice are insurance and reinsurance, shipping, shipbuilding disputes, civil fraud, international sale of goods, commodities, conflicts of laws and professional negligence claims. He advises in relation to litigation and arbitration in England and abroad and represents his clients before Courts and arbitration panels in England. He is also a CEDR accredited mediator. Graham s interests include: classical music, watching cricket, photography, medical ethics and medical law. He assists both Hope for Justice (www.hopeforjustice.org.uk) and International Justice Mission (www.ijmuk.org) in their work to stop human trafficking. For full c.v please see http://www.20essexst.com/member/graham-charkham -20-