The government has introduced the Consumer Insurance (Disclosure and Representations) Bill, which aims to radically change the relationship between consumers and insurance providers.
When law, it will give certainty to consumers and insurers by shifting the emphasis away from a consumer’s duty to disclose all necessary information, to a requirement for insurers to ask particular questions and obtain specific information about their customers, before they issue an insurance policy.
The current law has changed little since 1906, and with additional layers of regulation, has become complex and confusing for consumers, and expensive for the industry to administer. The changes and shift in emphasis will provide better protection for consumers.
Mark Hoban of the Treasury says, "The government is committed to strengthening consumer protection in financial services and these reforms will help meet this commitment. They will provide a better deal for the consumer, while giving people the certainty they need when taking out insurance."
The Law Commission and Scottish Law Commission conducted a joint review of insurance contract law for England, Wales and Scotland. The reason for the review is that the law and insurance practice have fallen out of step. The law is based on outdated paper based methods and takes no account of electronic commerce. More worryingly, it often contrasts badly with current consumer and contract law.
The two commissions recommended new legislation covering the issue of what a consumer should tell their insurer before taking out insurance. Under the Marine Insurance Act 1906, the consumer has a duty of disclosure when completing any insurance proposal form. The current law requires consumers to volunteer information about everything that a prudent insurer would consider relevant. They recommend that this duty should be abolished, as consumers are not able to second guess what factors the insurer will take into account when accepting a risk, and can therefore easily slip up on disclosure. Instead, insurers should be required to ask questions about what they want to know.
Their overall view is that basing modern insurance law on a 1906 act for marine insurance where all parties were businessmen and reasonably equal in power, makes no sense in a word where private individuals are customers of multinational companies, an unequal balance.
The commissions identified four key problems with the 1906 act:
- The duty to disclose may operate as a trap for customers who are usually unaware that the duty exists
- Customers may be denied claims even when they have acted honestly and reasonably
- The remedy can be overly harsh. If a customer has made a mistake then the insurer is entitled to refute all claims, even those that would have been paid if given full information
- Proposal forms often state that answers form the basis of the contract. So if any statement is incorrect, the insurer can refuse all claims, however insignificant the error.