Ripe for Reform

Date: 11 April 2008
Authors: Kenneth McKenzie, Graham Ludlam
Issue: Vol 158, Issue 7316
Categories: Features, Commercial, Constitutional law, Insurance / reinsurance

Is the current UK insurance law out of step with the market? Kenneth McKenzie and Graham Ludlam consider possible areas of reform

The current law imposes heavy duties on those applying for insurance. If the duty is not met, the consequence can be that all insurance cover is lost. Insurance contracts are based on the principle of uberrimae fides, giving rise to duties on both the insurer and insured to act with the utmost good faith. The most common manifestation of the duty is the obligation on the insured to give full disclosure of all material facts and by representing only the true facts to the insurer at the time the proposal for the insurance contract is made. Whether this obligation has been met is currently judged by reference to the viewpoint of underwriters.

If the policyholder fails in this duty, and the insurer can show that, if the true position had been known, it would not have agreed to the policy on the same terms (or at all), the insurer may avoid the policy and it will be as if the policy never existed.

The common international industry perspective that UK insurance law favours the insurer stems in part from the extent of the duty on those applying for insurance as described above and the consequences for the policyholder in getting it wrong. One of the proposed reforms detailed in the Law Commission’s recent consultation, Misrepresentation, Non-Disclosure and Breach of Warranty by the Insured is to rebalance the law in respect of the insurer and the insured. The proposals would shift the appreciation of the relevance and materiality of the facts requiring to be disclosed to underpin an insurance policy away from the prudent underwriter to that of a reasonable insured. This shift would mean that underwriters would in future be unable to rely on the insured to provide information about which no specific enquiry has been made. There will therefore be a greater onus on underwriters from now on to ask more detailed questions of insureds before writing policies.

BROKERS AND INSURERS

Where insurance is bought through brokers, the law makes an important distinction between brokers who act for the insurer and those who act for the insured. A mistake by the insurer’s agent is the insurer’s responsibility.

However, if a broker acts for an insured, any mistake or dishonesty by the broker is treated as a mistake or dishonesty by the insured. The insurer may refuse the claim, and the insured is left to pursue a complaint against the broker.

LACK OF CLARITY

Under the current law, it is not always clear whether a broker is acting for the insured or insurer, but for most purposes the broker is the agent of the insured. If the proposed reforms are adopted brokers would become, as the norm, the agents instead of the insurer. Insureds would therefore take action against the insurer in a case of non-payment of a claim, where the non-payment was due to the conduct of the broker. The insurer would then have the option to seek compensation from the broker if an insured successfully litigated against the insurer (whereas now, the insured has to seek compensation from the broker if the insured fails to prove the insurer should pay a claim).

EUROPE AND BEYOND

Current UK insurance law stems in large part from the Marine Insurance Act 1906, itself a codification of earlier centuries’ case law. It is unsurprisingly therefore in certain respects out of step with law in other European countries and the rest of the world, and the needs of 21st-century business. Regulation has to some extent supplemented the creaking legislation but this only highlights the deficiencies in the law and over-regulation could make the UK less competitive. Meanwhile, we live with the anomaly that there is little consistency in the way insurance contracts are interpreted by our European partner states. If Europe decides that harmonisation of insurance law is called for, the regime imposed upon the UK could be very different to what we are used to unless the UK sets a standard from which Europe can be persuaded to take a lead. The process of law reform in this area is a continuing one and the Law Commission has recently issued a fourth issues paper concerning the law on insurable interest. Further issues papers are expected in the future, with the final consultation expecting to yield results in the form of draft legislation by 2010.

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