Insurance Law Change – New Consumer Protections
A fundamental Insurance Law change came into effect this month. The change affects any contract of insurance that came into effect on, or after 6 April 2013. This includes policies that are varied or renewed after this date. The new Law only affects “Consumer” insurance policies and does not affect contracts that are taken out in the course of business.
Under the previous Law there were three difficulties that the new Legislation seeks to address: –
Contracts of Insurance, historically, have been regarded as “contracts of utmost good faith”. This has meant that there was a duty upon anyone entering into such a Contract to disclose any information that might be relevant to the Insurer. Anyone who has completed an insurance proposal form will be familiar with the catchall question, usually at the end of the form that asks “Is there any other information that we might consider relevant to this insurance?” or words to that effect. The proposer was faced with having to guess what the Insurer might regard as relevant and faced the prospect of the Insurer refusing to pay out a claim if anything “relevant” was not disclosed. The classic example of this was a case in which a lady insured her jewellery. When the jewellery was stolen the Insurance Company refused to pay on the basis that the lady had failed to disclose that her husband had a conviction for burglary. There was no suggestion that he was in any way involved in the theft, nor did the insurance proposal form ask any question about a spouse’s criminal record. Nonetheless, the Court found in favour of the Insurance Company.
In many cases the Insured has claimed that the Representative of the Insurance Company knew all of the relevant information. This was particularly the case when Insurance Company Representatives went door to door arranging policies and collecting premiums. While such practices of rare nowadays there are still cases where a particular Representative has been involved with families over generations. Under the old law the Representative was regarded as the Agent of the customer rather than the Insurance Company and accordingly any information that the Representative had was not deemed to be known by the Insurance Company. There is quite a lot of anecdotal evidence that suggests that on occasions these Representatives encouraged nondisclosure, either in an effort to “help”, or to secure the sale of a policy.
Whenever the Insurance Company was able to disclaim liability as a result of nondisclosure, not only was it able to avoid a claim, but it was also able to keep all of the premiums paid. One case where it was possible for the Insurance Company to have its cake and eat it!
Insurance Law Change
The new Law seeks to redress the balance between the customer and the Insurance Company. In future it will be for the Insurance Company to ask for the information that it considers to be relevant to the proposal. Provided the customer answers the questions with reasonable care the Insurance Company will not be able to avoid liability on the basis of nondisclosure. This does mean that it is likely that insurance proposal forms will become even longer, but customers will not be required to second-guess what the Insurer might consider to be relevant.
Secondly the Insurance Law change does provide for circumstances where a Representative is deemed to be the Agent of the Insurance Company and therefore any information that the Representative has is taken to have been disclosed to the Company. Not all cases are covered by this particular change and Independent Financial Advisers are excluded.
Finally the penalties that can Insurance Company can impose if there are any nondisclosures are to be proportionate. Unless the nondisclosure is fraudulent, or reckless the Insurer will be required to pay an appropriate proportion of the Claim, or to refund premiums so that not all will be lost.
You will still need to be careful when completing insurance proposals and it will remain sensible to disclose any information that you think might be required, even if you are not sure. However, following this Insurance Law change, the onus is now far more on the Insurer.
This Insurance Law change is long overdue. The Legislation is not perfect, but it will put more of the onus on the Insurance Companies and less on the consumer. If would like to read a more technical discussion of the new Law the views of a leading Barrister in the field can be found here.