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Insurance contract law
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Law Commission Insurance Contract Law: Business Disclosure; Warranties; Joint Report
Scottish Law Commission Insurers’ Remedies for Fraudulent Claims; and Late Payment LC 353 / SLC 238
41872 Cm 8898 Law LC353 Cover.indd 1 09/07/2014 12:41
Insurance Contract Law: Business Disclosure; Warranties;
Insurers' Remedies for Fraudulent Claims; and Late Payment
Law Com No 353 / Scot Law Com No 238
The Law Commission
and
The Scottish Law Commission
(LAW COM No 353)
(SCOT LAW COM No 238)
INSURANCE CONTRACT LAW:
BUSINESS DISCLOSURE;
WARRANTIES; INSURERS’ REMEDIES
FOR FRAUDULENT CLAIMS; AND LATE
PAYMENT
Presented to the Parliament of the United Kingdom by the Lord Chancellor
and Secretary of State for Justice
by Command of Her Majesty
Laid before the Scottish Parliament by the Scottish Ministers
July 2014
Cm 8898
SG/2014/131
ii
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iii
THE LAW COMMISSION
AND
THE SCOTTISH LAW COMMISSION
The Law Commission and the Scottish Law Commission were set up by the Law
Commissions Act 1965 for the purpose of promoting the reform of the law.
The Law Commissioners are:
The Right Honourable Lord Justice Lloyd Jones, Chairman, Law Commission
Professor Elizabeth Cooke
David Hertzell
Professor David Ormerod QC
Nicholas Paines QC
The Chief Executive of the Law Commission is Elaine Lorimer.
The Law Commission is located at 1st Floor, Tower, 52 Queen Anne’s Gate, London
SW1H 9AG.
The Scottish Law Commissioners are:
The Honourable Lord Pentland, Chairman, Scottish Law Commission
Laura J Dunlop QC
Patrick Layden QC, TD
Professor Hector L MacQueen
Dr Andrew J M Steven
The Chief Executive of the Scottish Law Commission is Malcolm McMillan.
The Scottish Law Commission is located at 140 Causewayside, Edinburgh, EH9 1PR.
The terms of this report were agreed on 3 July 2014.
The text of this report is available on the Internet at:
http://lawcommission.justice.gov.uk/areas/insurance-contract-law.htm
http://www.scotlawcom.gov.uk/publications/
iv
THE LAW COMMISSION
THE SCOTTISH LAW COMMISSION
INSURANCE CONTRACT LAW: BUSINESS
DISCLOSURE; WARRANTIES; INSURERS’ REMEDIES
FOR FRAUDULENT CLAIMS; AND LATE PAYMENT
CONTENTS
Page
Detailed contents of chapters vii
Table of abbreviations xviii
Glossary of terms xix
Main project publications xxi
Main texts xxiii
PART 1: INTRODUCTION
Chapter 1: Introduction 3
Chapter 2: The scope of the recommendations and key definitions 18
PART 2: FAIR PRESENTATION
Chapter 3: Fair presentation: introduction 27
Chapter 4: The current law 34
Chapter 5: The case for reform 45
Chapter 6: Overview of recommendations 62
Chapter 7: Detailed recommendations: the duty of fair presentation 69
Chapter 8: Detailed recommendations: the insured’s knowledge 82
Chapter 9: Detailed recommendations: the broker’s knowledge 102
v
Chapter 10: Detailed recommendations: the insurer’s 114
knowledge and other exceptions
Chapter 11: Detailed recommendations: remedies 130
PART 3: WARRANTIES
Chapter 12: Warranties: introduction 153
Chapter 13: The current law 157
Chapter 14: The case for reform 165
Chapter 15: Overview of recommendations 171
Chapter 16: Detailed recommendations: basis of the contract clauses 175
Chapter 17: Detailed recommendations: where the breach of warranty 178
is remedied
Chapter 18: Detailed recommendations: terms relevant to 193
particular descriptions of loss
PART 4: REMEDIES FOR FRAUDULENT CLAIMS
Chapter 19: Remedies for fraudulent claims: introduction 207
Chapter 20: The current law 210
Chapter 21: The case for reform 218
Chapter 22: Overview of recommendations 222
Chapter 23: Detailed recommendations 230
PART 5: LATE PAYMENT
Chapter 24: Late payment: introduction 249
Chapter 25: The current law 252
Chapter 26: The case for reform 260
Chapter 27: Overview of recommendations 276
Chapter 28: Detailed recommendations 280
PART 6: GENERAL ISSUES
Chapter 29: Contracting out 303
Chapter 30: Good faith 317
Chapter 31: Compulsory insurance 329
vi
Chapter 32: List of recommendations 340
APPENDICES
Appendix A: Draft Bill and Explanatory Notes 347
Appendix B: Proportionate remedies on variations 386
Appendix C: List of consultees 392
vii
DETAILED CONTENTS OF CHAPTERS
Paragraph Page
PART 1: INTRODUCTION
CHAPTER 1: INTRODUCTION 3
A new Insurance Contracts Act 1.5 4
Previous reports 1.7 4
A history of the project 1.9 5
The case for reform 1.16 7
Problems in practice 1.33 10
The effect of “quality uncertainty” 1.39 12
The approach of the draft Bill 1.49 14
Legislative competence and compatibility with the European 1.52 15
Convention on Human Rights and EU law
Support for reform 1.53 15
The structure of this Report 1.58 16
Thanks 1.62 17
CHAPTER 2: THE SCOPE OF THE RECOMMENDATIONS AND KEY 18
DEFINITIONS
Introduction 2.1 18
The definition of insurance 2.5 18
A contractual relationship: the insured and the insurer 2.10 19
Consumer and non-consumer insurance 2.13 19
One regime for all business insurance 2.22 21
The role of the Financial Ombudsman Service 2.31 22
Lead-in time 2.35 23
Application 2.37 24
Extent 2.38 24
viii
PART 2: FAIR PRESENTATION
CHAPTER 3: FAIR PRESENTATION: INTRODUCTION 27
Reforming the duty for non-consumer policyholders 3.4 27
The current duty of disclosure 3.7 28
Problems 3.11 28
Consultation on the duty of fair presentation 3.12 29
Support for reform 3.20 31
The structure of this Part 3.23 32
CHAPTER 4: THE CURRENT LAW 34
The Marine Insurance Act 1906 4.2 34
Section 17: a contract of the utmost good faith 4.3 34
Section 18: the duty of disclosure and exceptions to the duty 4.7 35
Section 19: disclosure by the broker 4.34 41
Section 20: misrepresentations 4.36 41
The insurer’s remedies for breach 4.44 43
Conclusion 4.49 44
CHAPTER 5: THE CASE FOR REFORM 45
Five problems with the current law 5.6 46
An evolutionary approach to reform 5.44 54
The contrary arguments 5.55 57
Conclusions on the need for reform 5.74 60
CHAPTER 6: OVERVIEW OF RECOMMENDATIONS 62
A duty of fair presentation for all non-consumer insurance 6.4 62
Building on the current law 6.5 63
ix
The recommended reforms 6.6 63
A default regime 6.22 66
Differences between consumer and non-consumer insurance 6.27 67
CHAPTER 7: DETAILED RECOMMENDATIONS: THE DUTY OF FAIR 69
PRESENTATION
Application: non-consumer insurance contracts 7.4 69
The duty of fair presentation 7.6 69
Disclosure 7.21 72
“A reasonably clear and accessible manner” 7.41 77
A duty not to make misrepresentations 7.47 78
Recommendations 81
CHAPTER 8: DETAILED RECOMMENDATIONS: THE INSURED’S 82
KNOWLEDGE
The current law 8.7 83
The case for reform 8.31 88
Recommendation: defining what an insured “knows” 8.45 91
Recommendation: defining what an insured “ought to know” 8.77 97
Contracting out 8.92 100
Recommendations 100
CHAPTER 9: DETAILED RECOMMENDATIONS: THE BROKER’S 102
KNOWLEDGE
The current law 9.5 102
The case for reform 9.19 106
The agent’s knowledge: our recommendations 9.25 107
Knowledge of an agent “responsible for arranging the insured’s 9.28 107
insurance”
x
A reasonable search of information held by the insured’s agent(s) 9.37 109
Confidential information 9.41 110
Who does the agent act for? 9.47 111
The agent’s liability to the insured 9.48 111
Recommendations 112
CHAPTER 10: DETAILED RECOMMENDATIONS: THE INSURER’S 114
KNOWLEDGE AND OTHER EXCEPTIONS
Section 18(3)(b): the current law 10.6 115
The case for reform 10.28 119
The insurer’s knowledge: our recommendations 10.34 120
Other exceptions to the duty of fair presentation 10.64 126
Recommendations 128
CHAPTER 11: DETAILED RECOMMENDATIONS: REMEDIES 130
The inducement test 11.6 130
Avoidance as the sole remedy: the case for reform 11.13 132
Remedies for deliberate or reckless breaches 11.35 136
Remedies for other breaches 11.57 140
The effect of a breach of fair presentation on future cover 11.85 144
Proportionate remedies in reinsurance and retrocession contracts 11.93 145
Variations 11.97 146
Contracting out 11.105 148
Recommendations 148
xi
PART 3: WARRANTIES
CHAPTER 12: WARRANTIES: INTRODUCTION 153
Problems with the current law 12.4 153
Our recommendations 12.6 154
A history of the consultation process 12.8 154
Support for reform 12.15 155
The structure of this Part 12.16 156
CHAPTER 13: THE CURRENT LAW 157
Identifying a warranty 13.2 157
“Basis of the contract” clauses 13.6 158
The effect of a warranty 13.11 158
Excused non-compliance and waiver 13.20 160
Moderating harsh law through strict interpretation 13.24 161
Warranties in consumer insurance: other protection 13.32 163
Conclusion 13.39 164
CHAPTER 14: THE CASE FOR REFORM 165
The law is anomalous and unexpected 14.2 165
Problems in practice 14.5 166
The international context 14.7 166
Basis of the contract clauses 14.9 167
Support for reform 14.11 167
The opposing arguments 14.17 168
Reasons for rejecting a causal connection test 14.23 169
Conclusion: The need for statutory reform 14.28 170
xii
CHAPTER 15: OVERVIEW OF RECOMMENDATIONS 171
An outline of the key recommendations 15.2 171
Issues not covered 15.13 172
Reinsurance 15.25 174
CHAPTER 16: DETAILED RECOMMENDATIONS: BASIS OF THE 175
CONTRACT CLAUSES
An ongoing problem 16.2 175
Recommendation 177
CHAPTER 17: DETAILED RECOMMENDATIONS: WHERE THE 178
BREACH OF WARRANTY IS REMEDIED
Support for the proposal 17.3 178
The approach of the courts 17.8 179
The three elements of the recommendation 17.13 180
Breach of warranty not to discharge the insurer’s liability 17.16 180
Breach of warranty to suspend the insurer’s liability 17.20 181
Remedying a breach of warranty 17.30 182
Losses before breach or where breach is remedied 17.51 186
Other considerations concerning clause 10 17.53 186
Excused non-compliance and waiver 17.64 188
Contracting out 17.69 189
Marine insurance 17.76 190
Recommendations 192
CHAPTER 18: DETAILED RECOMMENDATIONS: TERMS 193
RELEVANT TO PARTICULAR DESCRIPTIONS OF LOSS
An overview of our policy 18.4 193
Clause 11 18.10 194
xiii
Concerns about uncertainty 18.49 201
Contracting out 18.51 201
Examples of our recommendations in action 18.55 202
Recommendations 204
PART 4: REMEDIES FOR FRAUDULENT CLAIMS
CHAPTER 19: REMEDIES FOR FRAUDULENT 207
CLAIMS: INTRODUCTION
A history of the consultation process 19.8 208
Support for reform 19.14 209
The structure of this section 19.15 209
CHAPTER 20: THE CURRENT LAW 210
Common law: forfeiting the claim 20.4 210
Section 17 of the Marine Insurance Act 1906 20.7 211
Good faith and fraud: the evolving case law 20.11 211
The effect of fraud on subsequent claims 20.25 214
Can the insurer sue for damages? 20.29 215
Express terms in contract 20.32 215
Conclusion 20.36 216
CHAPTER 21: THE CASE FOR REFORM 218
The need for a clear deterrent 21.2 218
The need for statute 21.7 219
Support for reform 21.10 219
Contrasting arguments 21.16 220
Conclusion on the case for reform 21.24 221
xiv
CHAPTER 22: OVERVIEW OF RECOMMENDATIONS 222
An outline of the key recommendations 22.4 222
Issues not covered 22.14 223
Proposals we are not progressing 22.28 226
CHAPTER 23: DETAILED RECOMMENDATIONS 230
A fraudulent claim by the insured 23.2 230
No liability to pay the fraudulent claim 23.8 231
Option to treat the contract as having terminated at the time of the 23.24 234
fraudulent act
Genuine losses preceding the fraud 23.53 240
The remedies applied 23.57 240
Contracting out of the default rules in clause 12 23.59 242
Insurers’ remedies for fraudulent claims by members of group insurance 23.63 242
schemes
Recommendations 246
PART 5: LATE PAYMENT
CHAPTER 24: LATE PAYMENT: INTRODUCTION 249
The structure of this Part 24.6 249
A history of the consultation process 24.7 250
Support for reform 24.12 251
CHAPTER 25: THE CURRENT LAW 252
General contract law and damages 25.3 252
The unique position under insurance contract law in England and Wales 25.8 254
Life insurance and reinstatement cases 25.22 257