Consultation on reform of insurance law
In a consultation which opened on 26th June, the Law Commission and Scottish Law Commission are proposing a new law to make clear what businesses must tell insurers when they buy insurance.
The current law states that before taking out insurance businesses must disclose every material circumstance they know or ought to know. But what exactly counts as an organisation’s knowledge? Can a vast and complex international organisation reasonably be expected to know everything that is known to every employee? And how can it work out what an insurer would think was material?
As well as being unclear, the law is considered harsh. If a business breaches the duty of disclosure, an insurer can “avoid” the contract. The consequences for the business and its employees may be catastrophic.
The Law Commissions believe that the law should support the commercial aspirations of the insurer and the policyholder. The policyholder should make a fair presentation of the risk, but they can expect the insurer to be both knowledgeable and competent.
The Commissions propose that there should be clearer principles for determining what corporate knowledge is and how to assemble it. The Commissions also suggest that if policyholders deliberately conceal information then insurers can avoid the claim. In all other circumstances, the outcome will depend on what the insurer would have done had it known the full facts.
“The law in this area is based on the Marine Insurance Act of 1906 and has fallen out of date,” said Professor Hector MacQueen, Scottish Law Commissioner. “Large, complex, international corporations struggle to cope with its requirements as much as their smaller counterparts because the present rules and remedies are weighted against them all. We are offering the industry and its business policyholders an opportunity to come together to develop definitions, principles and protocols that make for clearer, fairer law”.
The two Commissions are also consulting on the law of warranties in insurance contracts. The current law is also based on the 1906 Marine Insurance Act and has attracted much criticism.
A warranty is a term of an insurance contract which carries harsh consequences. If the policyholder does not comply exactly, the insurer can refuse a claim. It makes no difference if the breach is trivial or irrelevant to the risk, or if the policyholder remedies the breach before the loss occurs.
In their consultation, the Commissions are provisionally proposing that :
* breach of a warranty should suspend, rather than discharge, the insurer’s liability. A remedy of the breach should restore the insurer’s liability: and
* where a term is designed to reduce a particular type of risk, liability should be suspended only in relation to that risk.
These proposals would be mandatory for consumers. In business insurance, the parties would be able to contract out of these provisions, provided they did so in clear, unambiguous terms and the term was brought to the attention of the other party.
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