Insurance Law Reform: Proposals For Business Insurance

As part of their joint review of insurance contract law, the English and Scottish Law Commissions have published their third and final Consultation Paper proposing reforms to business insurance law. The Consultation Paper builds on the Law Commissions' original Consultation Paper on the law relating to non-disclosure, misrepresentation and warranties published in July 2007 and follows the passing into law of the Consumer Insurance (Disclosure and Representations) Act in March 2012. To read more on the Law Commissions' original proposals for business insurance click here and on the reform of consumer insurance law click here.

The proposals now published by the Commissions (set out below) relate to the business insured's duty of disclosure and the law of warranties.

The business insured's duty of disclosure

Section 18 of the Marine Insurance Act 1906 places a duty on a prospective business insured to disclose "every material circumstance" which it knows or ought to know "in the ordinary course of business" to the insurer. The law does not require the insurer to ask questions of the prospective insured or to indicate what it wishes to know. The complex structure of large companies can make it difficult for some business insureds to establish what is known by whom and in the event that the insured fails to disclose material circumstances, the insurer may avoid the contract (an outcome which the Law Commission considers to be harsh).

Proposals

Disclosure should be a "reciprocal process" in which the insured should make a fair presentation of the risk, and the insurer should communicate what it wishes to know by way of appropriate questions. If the insurer receives information which ought to prompt it to make further enquiry, but it fails to do so, the insurer should not have a remedy for non-disclosure of a fact which those enquiries would have revealed. The Law Commissions feel that avoidance is too harsh a remedy and propose introducing fairer remedies in certain circumstances. They propose that avoidance only be appropriate where the insured has acted dishonestly (meaning "deliberate" or "reckless" behaviour). In the absence of dishonest conduct, the insurer should be put into the position it would have been in had full and accurate information been provided by the insured (e.g. where the insurer would have charged a higher premium, the claim should be proportionately reduced). Parties to a business insurance contract should be entitled to...