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Consumer Insurance Act (Disclosure and Representations) Act 2012


Feb 13 2013

Consumer Insurance Act (Disclosure and Representations) Act 2012

Reason for issue:         Update and reminder.

Action required:           Read and ensure your CPD record in your Training Log is updated.

Subject:

Duty of Disclosure

Date:

 

Background

Consumer insurance law has been unchanged for more than 100 years.  The Marine Insurance Act 1906 is based on eighteenth and nineteenth century principles and imposed a duty on consumers to tell insurers anything which would “influence the judgment of a prudent insurer” in fixing the premium or deciding whether to take the risk. 

Hence “duty of disclosure” came about and with it the ability for insurers to turn down paying out on a claim.

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

Four main problems with the 1906 Act were identified:

  • The duty to disclose may operate as a trap for consumers, who are usually unaware that the duty exists;
  • Policyholders may be denied claims even when they have acted honestly and reasonably;
  • The remedy may be overly severe.  If the consumer has made a mistake, the insurer may refuse all claims, even claims which it would have paid had it been given full information;
  • Proposal forms sometimes state that the answers “form the basis of the contract”.  In law, this means that if any statement is incorrect, the insurer may refuse all claims, even if the mistake is unimportant.

The Law Commission recommended the creation of a new consumer statute setting out what a consumer should tell their insurer before taking out insurance.

Consumers

We are used to referring to the people we deal with as clients or customers but within these groups we have those who the law and the regulator require us to identify separately.  These are either Consumers or Commercial Customers.  There has also been past reference to either Retail or Commercial.

The FSA refers to a consumer as “any natural person acting for purposes outside his trade, business or profession”, whereas this new law, which only covers consumer insurance, defines consumer insurance as insurance bought by individuals "wholly or mainly for purposes unrelated to their trade, business or profession". This wording is intended to be broad enough to include "mixed-use" contracts, which cover both private and business use, as long as the main purpose of the contract is for private use.

And it should be no surprise to learn that a Commercial Customer is not a Consumer! 

The changes apply to Consumer insurances and not those for Commercial customers.

Legislation

The Consumer Insurance (Disclosure and Representations) Act 2012 received Royal Assent in 2012 and a year’s grace was granted before it would take effect so that everyone associated with this topic would make all necessary amendments to systems, documentation and employee competence.

The Act received the backing of consumer groups, regulators and the insurance industry in general. It provides an update of consumer insurance law, shifting the balance of the law in favour of the consumer. It results from the Law Commissions’ 2009 Report on Consumer Insurance Law, which set out to ensure that consumer insurance law be “clear, straightforward and fair”, something similar to the FSA’s mantra of “clear, fair and not misleading”.

The Act comes into effect from 06 April 2013.

Main changes:

  • The Act abolishes a consumer insured’s duty to volunteer information to the insurer. A consumer’s duty will be limited to making sure it answers questions raised by insurers honestly and reasonably.
  • Insurers will have to ensure they ask for any information they need to assess the risk being insured.
  • If a consumer acts honestly and reasonably the insurer will have to pay the claim.
  • Where a consumer acts carelessly, a proportionate remedy will be applied; the test will be what the insurer would have done had it known the full facts.
  • An insurer will only be able to refuse to pay a claim if a consumer acts deliberately or recklessly in making misrepresentations.
  • An insurer will need to prove on the balance of probabilities that a consumer knew:

a)   that a deliberate or reckless misrepresentation was untrue or misleading, or did not care whether it was or not; and

b)   that the matter was relevant to the insurer, or did not care whether it was or not. If a misrepresentation does not pass this test then it will be a careless representation and must be treated accordingly.

  • If the intermediary is an appointed representative of the insurer, or is acting as the insurer’s agent, they will be considered as acting for the insurer. In all other cases the intermediary will be presumed to be acting for the consumer.

Reasonable Care and Misrepresentation

The Act makes it the duty of the consumer to take reasonable care not to make a misrepresentation to the insurer before the contract is entered into or varied. In the case of a variation, the duty would apply only to information relating to the variation.

This modifies the consumer's duty of utmost good faith by removing the obligation to disclose all material facts. The consumer would no longer be required to volunteer information but only to respond honestly and with reasonable care to questions asked.

The consumer will be under a duty to take reasonable care not to make a misrepresentation but the Act does not define what constitutes a misrepresentation.  However, it does make it clear that a failure by the consumer to comply with a request to confirm or amend particulars previously provided is capable of being a misrepresentation. This often happens at renewal (a renewed contract is, of course, a new contract).  It would be a question of fact whether or not the failure to respond was reasonable.

The standard of care is objective - that of a reasonable consumer - but this is subject to two provisos. If the insurer was, or ought to have been, aware of any particular characteristics or circumstances of the actual consumer, these are to be taken into account. And a misrepresentation made dishonestly will always be taken to show a lack of reasonable care.

The burden of showing that the consumer has acted unreasonably lies with the insurer. This does not mean the insurer has to prove what the consumer actually knew, only what a reasonable person in the circumstances would have known.

If the consumer makes a misrepresentation, the insurer has a remedy if it can show that, without the misrepresentation, it would not have entered into the contract (or agreed to the variation) at all, or would have done so only on different terms.  This is termed a "qualifying misrepresentation". Only two categories of qualifying misrepresentation are defined: "deliberate or reckless" and "careless".

A qualifying misrepresentation is deliberate or reckless if the consumer knew it was untrue or misleading (or did not care either way) and knew (or did not care) that the matter to which it related was relevant to the insurer. The burden of proving a misrepresentation is deliberate or careless lies with the insurer.

A careless qualifying misrepresentation is simply defined as a qualifying misrepresentation that is not deliberate or reckless. The Law Commissions chose the term "careless" rather than "negligent" to emphasise that this is a new standalone category that is not intended to draw on the existing law of negligence.

Remedies

If the qualifying misrepresentation was deliberate or reckless, the insurer may avoid the contract, refuse to pay claims and retain premiums "except to the extent (if any) that it would be unfair to the consumer to retain them".

For careless qualifying misrepresentations, proportionate remedies are based on what the insurer would have done had there been no breach of the consumer's duty.  For example:

  • If the insurer would not have entered into the contract on any terms, it can avoid the policy and refuse all past and future claims, but it must return the premium;
  • If the insurer would have imposed different terms (other than relating to premium), it may choose to treat the contract as if those terms applied.

The Act also brings the law into step with current market practice already adopted by the Financial Ombudsman Service and Financial Services Authority rules, providing clarity and consistency between regulators and the courts.

There are other areas of insurance law covered by this Act and they will be subject to a further “Competence Update” later.  These other provisions are:

  • Insurers will be prohibited from contracting out of the effect of the Act.
  • The Act abolishes basis of contract clauses. Therefore statements made by the consumer will not automatically be transformed into warranties.
  • For group schemes, if a group member makes a misrepresentation, this will only have consequences for the particular individual concerned.
  • If a consumer takes out life insurance on the life of another and the insured makes a careless or deliberate misrepresentation, the insurer will have the normal remedies.
  • The application of the Act is limited to individuals taking insurance wholly or mainly for purposes unrelated to their trade or business.

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