Developments in Consumer Insurance Law

The Consumer Insurance (Disclosure and Representations) Act 2012 received Royal Assent last month and is expected to come into force in 2013.

The Act provides welcome update of consumer insurance law, shifting the balance of the law in favour of the consumer. It follows on from the Law Commission's 2009 Report on Consumer Insurance Law, which set out to ensure that consumer insurance law be clear, straightforward and fair. The reform also demonstrates the benefits in responding to industry consultation papers, which address potential changes in legislation.

'Clear, straightforward and fair'

The Act defines a "consumer insurance contract" as a contract of insurance between an individual who enters into the contract wholly or mainly for purposes unrelated to the individual's trade, business or profession.

Main legal changes to consumer insurance

• 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.
  

Other provisions Insurers will be prohibited from contracting out of the effect of the Act. Importantly, the Act also abolishes basis of contract clauses, so that 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 Act is a small but welcome step in redressing the balance of power between Insurers and consumers, and brings the law into line with the practice already adopted by the Financial Ombudsman Service and Financial Services Authority rules.

Edwin Coe LLP work with CCS and kindly contributed this article for your information.