Barker Gotelee

Last week the government published the Consumer Insurance (Disclosure and Representations) Bill which will wend its way gently through parliament.

It has quite a history altering as it will (hopefully) legislation dating back to 1906 and the Marine Insurance Act which has governed general insurance law ever since.  This law recognised initially in a commercial context that policy holders were always in a position of knowledge when compared to the insurer and this potentially gave them an unfair advantage against the gamble the insurer was taking on so it imposed on the policyholder a duty of utmost good faith.

If a policy holder in these circumstances fails to disclose something which may have affected the insurer’s judgment then the insurer has the right to avoid the policy and so avoid any claims under it.  Unfortunately this act has general application to all insurance and whereas a ship owning businesses may be big enough to realise what an insurer needs to know, it undoubtedly causes real injustice in the consumer context and indeed in relation to small businesses.

The draft bill produced last week may just be the first stage of redressing the balance for disappointed and often surprised policy holders.

This draft bill deals with failure to provide such information by consumers prior to the contract.  If and when the bill becomes law it is proposed that the duty of utmost good faith (ie duty to volunteer information which might influence an insurer) is replaced by a duty “to take reasonable care not to make a misrepresentation”.  Although the change may not seem dramatic it is.  A policy holder should no longer be ambushed by insurers suggesting that they can avoid a policy when a claim is made because of some apparently unconnected non disclosure.

The financial services ombudsman already looks to intervene in similar circumstances and the insurers have in the past tried to introduce voluntary codes to avoid these surprises but it is undoubtedly the case that injustices have fallen on unsuspecting policy holders over the last hundred years and the need for reform has been acknowledged by government and indeed to some extent the insurance industry since the 60’s.

Critical illness cases have recently provided publicised cases where a forgotten or apparently insignificant condition when the policy holder was young have voided the cover.

The onus will shift more on the insurer to ask the right questions and one can expect in the future that at the time of entering into insurance contracts policyholders will be subjected to more detailed questions.

I have come across many cases over the years where small businesses are put in jeopardy when at a time of crisis insurers refuse to pay on apparently unfair grounds.  Whilst this bill does not address that difficulty further reform may be on the way and current proposals are that relief will be extended to micro businesses (ie businesses of ten employees or less) and maybe even to larger business as a default position, ie unless the insurer clearly stipulates by contract that it requires disclosure of any material that might affect its judgment.

Dermott Thomas

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