The english law on insurance contracts
The English Law on insurance contracts as it stands today contains some rules which are arguably pro-insurer and consequently highly prejudicial to the assured. These rules tend to defeat the very essence of insurance i.e. protection of the insured. For example an insurer is entitled to rescind an entire contract for non disclosure. This is notwithstanding the fact that such non-disclosure or misrepresentation is minor or that there is no causal link between the loss and the non-disclosure or misrepresentation.
The English and Scottish Law Commissions have come up with a number of issues papers and proposals for reforms on some of these issues. This paper will look at two of those areas which the Law Commission has examined, namely the duty of the assured as regards pre-contract disclosure and misrepresentation.
The English and Scottish Law Commissions have recently issued their final report on these two issues and they have submitted a draft bill for reforms to the Legislature.
This paper will look at the current law in these areas and the problems associated with them. It will then look at the approach of the Law Commission to these issues in consumer and business insurance. Finally it will look at other possible approaches to these issues viz-a-viz what the Law Commission proposes.
The Pre-Contract Duty Of Disclosure By The Assured.
As stated by Lord Atkin in the case of Bell v Lever Bros the law requires the assured to disclose all material facts. Failure to do this entitles the insurer to repudiate.
The statutory provision relating to the pre-contract duty of the assured to disclose can be found in the provisions of Section 18 of the Marine Insurance Act. The Act has been held to apply to both marine and non-marine insurance contracts.
Section 18 provides that;
Subject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract.
Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.
The act does not define what is meant by prudent insurer but this is widely accepted to mean a reasonable insurer.
The duty to disclose stems from the fact that contracts of insurance are by their nature, contracts uberrimae fidae i.e. contracts of utmost good faith. This finds legislative embodiment in the provisions of Section 17 (1) of the Marine Insurance Act which provides that
A contract of Marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party.
In practice, this doctrine mainly finds expression in the duty on the assured to disclose all material facts. This is because the information relevant to the formation of the contract lies within the knowledge of the assured. According to Lord Mansfield
“First, insurance is a contract upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only: the underwriter trusts to his representation and proceeds upon confidence that he does not keep back any circumstance in his knowledge to mislead the underwriter into a belief that the circumstance does not exist and to induce him to estimate the risk as if it did not exist...”
However as was reiterated in the case of Banque Financiere de la cite S.A V Westgate Insurance Company Ltd held that the duty applies equally both to the insurer and the assured.
The duty of the assured to disclose is not absolute, there are exceptions provided in the Act. Section 18(3) provides for the following exceptions
(a) Any circumstance which diminishes the risk;
(b) Any circumstance which is known or presumed to be known to the insurer. The insurer is presumed to know matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his business, as such, ought to know;
(c) Any circumstance as to which information is waived by the insurer;
(d) Any circumstance which it is superfluous to disclose by reason of any express or implied warranty.
Section 18(4) provides that whether any particular circumstance, which is not disclosed, be material or not is, in each case, a question of fact.
Also the insured is under a duty to disclose only facts that he knows. According to Fletcher Moulton LJ in Joel v Law Union and Crown Insurance “you cannot disclose what you do not know”.
Formerly the test for materiality was whether a prudent insurer would consider it relevant in deciding whether or not to accept the risk or in fixing the premium. There was no need for the particular insurer in question to regard it as material. The insurer could avoid it if it was a fact that would have influenced a prudent insurer.
In the case of Container Transport International Inc v Oceanus Mutual Underwriting Association (Bermuda) Ltd the Court of Appeal held that an insurer was entitled to avoid a contract under Section 18 of the Marine Insurance Act where there was undisclosed before the contract was concluded, any circumstance which a prudent insurer would have taken into account when reaching his decision whether or not to accept that risk or what premium to charge.
The court rejected the decisive influence test as the test for materiality and instead stated the non disclosed information should have been of such a nature that a prudent insurer would have wished to know the facts. The consideration here being the prudent insurer and not the particular insurer.
However following the decision of the House of Lords in the case of Pan Atlantic Insurance Company Ltd v Pine Top Insurance Company Ltd, the test for materiality and whether an insurer can avoid liability for non disclosure now involves a dual step approach. The first issue is what would the non disclosed fact have had on the mind of a prudent insurer when accepting the risk or fixing the premium? On this point the opinion of the court was divided, the majority favouring the rejection of the decisive influence test.
According to Lord Mustill, it would be difficult to assess which materials would turn the scales in the mind of an insurer. Instead he preferred a test which considers what if the non-disclosed facts are of such a nature that a prudent insurer would take them into account. Lord Lloyd on the other hand in a particularly strong dissenting judgement, was of the opinion that the fact should be more than just what a prudent insurer would have wanted to know, it must at least have the effect of what a prudent insurer would see as increasing or decreasing the risk.
The second issue is as to whether or not the insurer in the present instance was in fact induced to enter into the contract on the relevant terms on account of the non-disclosure. Hence an underwriter who was not induced by the material non-disclosure to make the contract could not rely on the non-disclosure to avoid the contract.
As earlier said court like the one in the CTI case the rejected the decisive influence test. The court however took the test proposed in the earlier case further by requiring that the insurer concerned must have been induced by the non- disclosure i.e. the actual inducement test. In other words the non disclosure must have induced the insurer to enter into the contract.
In the words of Lord Goff,
“...there is to be implied in the Act of 1906 a requirement that a material misrepresentation will only entitle the insurer to avoid the policy if it induced the making of the contract; and that a similar conclusion must be reached in the case of a material non-disclosure”.
The decision in Pan Atlantic has been followed in the more recent case of St Paul Fire & Marine UK Ltd v McConnell Dowell Constructors Ltd. In that case, the Court of Appeal held that it was sufficient the non-disclosure was an inducement. It was not necessary that it was “the” inducement.
The decision of the court in this case has also generated criticism. First is it actually possible for one to be “induced” by silence? It has been also argued that if the decisive test was accepted as the accurate test, there would be no need for the requirement of inducement. This is because if the resolution of the whole issue was left in the realm of materiality, all that would need to be done is to objectively look at the effect on the mind of a prudent underwriter and not the particular insurer.
Problems With The Current Law On Non-Disclosure
The application of the law on pre-contract disclosure places a duty on the assured to disclose all matters which may be relevant to a prudent insurer.
It requires the assured to volunteer information without being asked for it. Most times the consumers do not know that they are on a duty to disclose and even when they do know, they may not know what is relevant to the insurer.
The question of materiality is looked at solely from the insurer's point of view. According to the English Law Commission, “Given that few consumers understand how the underwriting process works, it imposes a duty on consumers that most are unable to fulfil”.
In the case of Horne v Poland the defendant repudiated liability of an insurance contract on the grounds that the insured did not disclose that he was of alien birth and that he entered the contract under an assumed name. According to Lush J
“The plaintiff was making a contract of insurance, and if he failed to disclose what a reasonable man would disclose he must suffer the same consequences as any other person who made a similar contract... As a matter of fact, the plaintiff might not have known that his nationality and real name were not unimportant, but he had had to register under the Aliens Registration Act, and had had, as he knew, to give his real name on his marriage. What he did not know was that he was under a duty to disclose material facts...the law is, in my opinion, as I have stated it, and, whatever the hardship, I must apply it”.
In the case of Lambert v Co-operative Insurance Society Ltd the plaintiff insured jewellery. The insurer did not ask whether her spouse had been previously convicted neither did she venture such information. When she sought to recover, the insurers repudiated the claim on grounds that the conviction was a material fact. On appeal the Court of Appeal upheld this contention as valid. The non-disclosed fact was a material one within the contemplation of the Marine Insurance Act. It was of no consequence that the insured did not realise the fact that she ought to have disclosed.
There is also the problem of the remedy which allows the insurer to repudiate the whole contract for material non-disclosure. “Where the insurer establishes that the policyholder failed to disclose a material fact, it may refuse all claims, even if (had it known the truth) it would have made only a small change to the policy”.
The avoidance usually takes place the assured has suffered a loss and a claim has been made.This is harsh on the assured and defeats the whole aim of the assured taking out an insurance policy.
As Staughton LJ put it in Kausar v Eagle Star
“Avoidance for non-disclosure is a drastic remedy. It enables the insurer to disclaim liability after and not before he has discovered that the risks turn out to be a bad one; it leaves the insured without the protection which he thought he had contracted and paid for...”
The Law On Misrepresentation
Misrepresentation and Non-disclosure are usually treated together as one issue by the courts. There are however differences between the two. Non-disclosure deals with the duty placed on the assured to volunteer information that would be deemed relevant to the insurer while Misrepresentation deals with the failure to present the information asked for correctly. In practice, insurers often raise both by way of defence. It is also the practice of the courts to merge the doctrines into one in the area of remedies.
Section 20 of the Marine Insurance Act provides that
Every material representation made by the assured or his agent to the insurer during the negotiations for the contract, and before the contract is concluded, must be true. If it be untrue the insurer may avoid the contract.
There is also a difference between a representation as to a matter of fact and a representation as to a matter of expectation. As regards the former it is true, if it be substantially correct, i.e. if the difference between what is represented and what is actually correct would not be considered material by a prudent insurer.
As regards the latter, it is true if it be made in good faith. The facts of the case of Economides v Commercial Union Assurance Co is relevant here. In that case, a student insured the contents of his flat for £12,000. He completed a proposal form which contained terms that the sum insured represented the full replacement value of the contents and that precious items like jewellery did not represent more than a third of the total value.
His parents later came from Cyprus to live with him, they brought a quantity of silverware and jewellery, the actual value of which was unknown to him. His father who happened to be an ex- senior police officer suggested that he increase the insurance cover to £16,000. The flat was later burgled and properties worth £31,000 including the jewellery were stolen. The insurance company denied liability on the grounds that the assured misrepresented the true value of the items.
On appeal, it was held per Simon Brown and Peter Gibson L.JJ that when making a statement of belief as to the total value of the items insured under a household contents insurance policy, the assured was only under an obligation to be honest; his belief, if made in good faith, was deemed to be honest, satisfying the test in section 20(5) of the Marine Insurance Act 1906.
Problems With The Current Law On Misrepresentation
Insurers sometimes draft their questions in very wide and general terms. Where this is the case, it may be unclear to the assured what exactly the insurer wants to know. The end result is that the assured misunderstands the question and the insurer denies the claim even where the assured has acted honestly and reasonably.
Another problem is the so called “basis of contract” clauses. When a proposal contains a term that the answer supplied by the consumer in response to the questions contained in it forms the basis of the contract, the effect is to transform what would have otherwise been a mere representation, into a warranty.
Section 33(1) of the Marine Insurance Act provides
A warranty...is a condition which must be exactly complied with, whether it be material to the risk or not. If it be not so complied with, then, subject to any express provision in the policy, the insurer is discharged from liability as from the date of the breach of warranty, but without prejudice to any liability incurred by him before that date.
In the case of Dawsons v Bonnin, Viscount Haldane stated as follows,
“If the insurer can show that they contracted to get an accurate answer to this question and to make the validity of the policy conditional on that answer being accurate, whether the answer was of material importance or not, the fulfilment of this contract is conditional on the insured being able to recover.”
This practice has been denounced by the courts. As has been stated by the English & Scottish Law Commission, “Few consumers would understand the significance of signing a statement that their answers were “warranted” or that they formed “the basis of the contract”. Nor is it clear why insurers should be permitted to refuse claims because of trivial or immaterial mistakes on application forms”.
Non-Disclosure And Misrepresentation. What Does The Law Commission Propose?
There have been a lot of criticisms of the current state of the Law as regards these two areas of insurance. Following pressure from various quarters such as the British Insurance Law Association and developments in other jurisdictions, The English & Scottish Law Commission have published a number of consultation papers as regards these issues. The end result is a draft Bill that was submitted to Parliament on the 15th of December 2009. This Bill applies to consumer insurance. Consumers are defined to be individuals who take out insurance for purposes wholly or mainly unrelated to their businesses. The Bill contains a number of changes in the following areas.
The Bill proposes the abolition of the present duty imposed on consumers to volunteer information which may be material to a prudent insurer. It however imposes a duty on consumers to make sure that they do not misrepresent facts.
In the area of remedies, it is proposed that where an insurer has been induced to enter into a contract by reason of misrepresentation, the remedy will vary depending on the state of mind of the assured.
Where there is a honest and reasonable misrepresentation, this insurer is obliged to pay the claim. The consumer is however under a duty of care adjudged by the standards of a reasonable consumer. Factors such as the type of policy, relevant explanatory material or publicity produced or authorised by the insurer and the nature of the questions asked will be taken into consideration when deciding what a reasonable consumer is.
For careless misrepresentation, it is proposed that the insurer should have some form of compensatory remedies. This is assessed on what the insurer would have done had the consumer not misrepresented.
Where the misrepresentation is deliberate or reckless, the insurer is not bound to pay the claim. It also has the right to avoid the whole policy. According to the report, for a misrepresentation to be deliberate or reckless, the insurer must show that the assured;
knew that the statement was untrue or misleading, or did not care whether it was or not; and
knew that the matter was relevant to the insurer, or did not care whether it was or not
In the area of business insurance, work is still ongoing as regards coming up with a policy statement and final report, but in 2007, the Law Commission issued a consultation paper which proposed the following reforms. First the rules proposed apply as a set of default rules i.e. they apply unless they are contracted of.
Given the nature of the UK insurance market where many business policies are taken out without the use of proposal forms and the insurer relies on the broker and the assured to properly present the risk, the Law Commission is of the view that the duty to disclose should be retained in the area of business insurance. They however propose that the duty should be restricted to require the giving out of information that a reasonable insured would consider material to the insurer.
Also in the area of misrepresentation, the result varies whether the misrepresentation is honest, negligent or fraudulent like in consumer insurance.
They also propose that insurers should not be able to use basis of contract clauses to convert all statements of fact into warranties. Where insurers seek to make use of warranties of facts, they should be stated in the policy or its accompanying documents.
The Bill also addresses the problem associated with intermediaries in this area of insurance. The issue has always been for whom does an intermediary act. The answer to the question determines whether information is deemed to have been disclosed or not.
In the case of Wing v Harvey A life policy contained a term that the insured was not to go beyond Europe without the consent of the directors of the insurance company. The insured later moved to Canada, communication of this fact was made to the agents of the insurer who continued to receive premium. The court held that communication to the agents of the insurer of that fact was communication to the insurers on the basis that the agents had ostensible authority to receive such information.
The draft bill attempts to clarify this area of the law in consumer insurance cases by proposing rules for determining for who an agent acts. The agent is always deemed to act for the insurer in the following instances:
When the agent does something in the agent's capacity as the appointed representative of the insurer for the purposes of the Financial Services and Markets Act 2000;
(b) When the agent collects information from the consumer, if the insurer had given the agent express authority to do so as the insurer's agent;
(c) When the agent enters into the contract as the insurer's agent, if the insurer had given the agent express authority to do so.
It further provides that in all other circumstances, the agent is presumed to be the agent of the insured unless it appears otherwise in the light of relevant circumstances. It also goes on to give examples of relevant factors which may be taken into consideration while determining this. For example if the agent undertakes to give impartial advice to the consumer, conduct a fair analysis of the market or acts for a fee. These are however indicators and are by no means conclusive in determining the issue, they should be considered against the background of all relevant facts.
Non-Disclosure And Misrepresentation, What Should Be The Right Approach?
The effect of the provisions of the Law Commission's report and draft bill is the abolition of the consumer's duty to volunteer information in consumer insurance contracts. Logically speaking, although it is not explicitly stated, since the duty to volunteer information has itself been abolished, it therefore follows that an insurer cannot repudiate a contract for non-disclosure. The implication of this is that insurers now have an obligation to put forward all questions which they consider material in the making of their judgement in accepting risk or calculating premium.
This is somewhat similar to what obtains in Australia where before an insurer can deny a claim for non-discloser, they must have put forward specific relevant questions or expressly requested the consumer to disclose exceptional circumstances within their knowledge or which a reasonable person in the position of the assured is expected to consider as relevant.
This has an advantage of making questions contained in policy documents more straightforward and explicit. Therefore an insurer has an obligation to put forward all questions that he considers relevant.
However, the abolition of the duty of non disclosure has one effect which I think was not taken care of under the draft Bill. What happens where in spite of the specific nature of the questions asked, the consumer still does not disclose the facts. Since the duty to disclose has been abolished, does this elevate a non- disclosure into a fraudulent misrepresentation with its attendant consequences? And if not, what remedy does the Insurer have?
Also in some cases special circumstances may exist which the insurer may not envisage in putting forward questions. Although this is not contained in the draft bill, this kind of situation may be resolved by inserting a clause to the effect that the consumer should disclose exceptional circumstances which a reasonable person would consider material and it is not a matter which a insurer could have reasonably been expected to have asked. However, the issue is still not resolved as to what the effect of such non-disclosure is.
It would have been preferable if this issue was resolved by inserting a provision to that effect in the Bill.
It is also important to ask whether outrightly absolving the consumer of the duty to disclose is the appropriate approach. The approach adopted in Australia is to restrict the duty of disclosure to such matters which a reasonable insured would have considered to be material to a prudent insurer. This is the approach of the Law Commission to the issue of consumer insurance. Sir Longmore proposed six different approaches to the matter. They are namely;
if a prudent insurer would have considered that had the relevant fact been disclosed, the risk would be a different risk;
Whether if the matter had been disclosed, the prudent insurer would have declined to take the risk or taken it on different terms;
Whether a reasonable insured would have considered it as being material to a prudent insurer.
Whether the insured in question should have considered it as relevant to a prudent insurer;
Whether the undisclosed matter was such that a reasonable inured would have realised that they were within the knowledge of only himself rather than being capable of independent investigation by a prudent insurer;
Whether the duty should be merely to answer any question asked by the insurer correctly.
In his view, option (e) is the preferable approach. The duty of disclosure should not be abolished but retained only in the circumstances where the matter was of such a nature that a reasonable assured would have realised that only he was aware of them and they could not be found out by independent investigation.
On this issue, I would have to agree with the position adopted in Australia. This position seems to best strike a balance between the duty of the insured to volunteer information and the interest of the insurer in not having relevant facts that would be material in making an informed assessment withheld from him. It is preferable to abolishing the duty altogether. The Australian act goes further to require that before an insurer can deny liability for non disclosure, the insurer must request the insured to answer one or more specific questions which are relevant in coming to a decision whether to accept the risk and on what terms.
On the other hand the insurer could in addition to doing this, go further and expressly require the insured to disclose exceptional circumstances known only to the assured and would be such that a reasonable person would be expected to know as relevant to the insurer in the circumstances. In addition, it would be such a matter that the insurer could not be reasonably expected to ask in the circumstances. If the insurer fails to do this, it is deemed to have waived compliance with the duty of disclosure. The test for materiality under the Australian act focuses on the prudent insured rather than a prudent insurer.
However the Bill is welcome in that the assured is offered a greater form of protection. Also in the area of misrepresentation, the proposal that the state of mind of the consumer should be borne in mind as well as the prohibition of breach of contract clauses is a welcome recommendation. Now before an insurer can entirely avoid a contract for misrepresentation, it should be one which is fraudulent. Insurers should also not be in a position to convert by a single clause, all statements of fact into warranties.
In the area of business insurance, the view that the rule should be retained subject to modifications earlier stated seems best. However work is still ongoing in this area and the Law Commission is yet to come out with its final report and recommendations in this area.