Insurance: Proposed Law Reform - Business Insurance

In July 2007 the Law Commission and Scottish Law Commission

published a Joint Consultation Paper setting out proposals for

reform of the law relating to non-disclosure, misrepresentation and

breach of warranty. To read our Law Now on the consultation paper

click here. The Consultation Paper made separate proposals for

consumer and business insurance and a summary of the responses

received on business insurance reform has recently been published.

Whilst no definition of "business insurance" is provided,

the wide spectrum of activities it is intended to cover, from a

sole trader to a multinational public limited company, is

clear.

In contrast to consumer policyholders, it was proposed that the

duty to disclose material information on placement should be

retained for business insureds. On the whole, this proposal was

supported. Whilst some responses highlighted the potentially harsh

results for unsophisticated businesses, many felt that this would

be mitigated by the proposed new test for deciding what is material

information that needs to be disclosed.

The proposal that the test for determining whether a matter is

material ought to change from the standard of a prudent insurer to

what a 'reasonable insured' would think was relevant to an

insurer, has met with a divided response. One concern voiced is

that the new test could prove too uncertain in the absence of any

recognised 'reasonable insured' standard.

Key among the proposals is that insurers' remedies for

non-disclosure and misrepresentation should depend on the

insured's state of mind: if an insured acts innocently then the

claim should be paid and if dishonestly then the insurer should be

entitled to avoid. For cases where the insured has acted

negligently the Law Commissions asked whether a proportionate

remedy should be introduced. The majority of responses welcomed

differentiation between negligent and dishonest conduct, although

some underlined the practical problems of a proportionate remedy

and others argued that this would be giving businesses too much

protection.

In relation to warranties of past and present fact, the

majority of respondees agreed with the proposal that making an

insured's answers in a proposal form the basis of the contract

(and so automatically converting all such responses into

warranties) should not be permitted. There was also general

agreement that insurers should not be able to rely on a breach of

warranty of fact unless it is material to the contract or...

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