Out-Law News 3 min. read
10 Nov 2009, 2:14 pm
A survey was sent to the Small Firms Consultation Database by the English and Scottish Law Commissions to find out how much 'micro-businesses' know about current insurance law. Many of those who responded said they were shocked to learn they could jeopardise their cover in this way. Even firms that were aware of the law said it should be reformed.
The exercise was part of the Law Commissions' investigations into whether the law should be changed to give micro-businesses the same legal protections as consumers when they buy insurance or when they are faced with unfair contract terms in their insurance policies.
Micro-businesses in the UK are usually defined as having fewer than 10 employees, but most are sole traders. Research has shown they are far less likely than larger businesses to obtain advice on insurance cover. And more and more of them are buying insurance direct from insurers, often online.
In the Law Commissions' view, "If these businesses are no more sophisticated than consumers and buy insurance in a similar manner, we thought that it was fair that they should be treated as consumers".
The proposal was first published in an issues paper in April 2009 as part of the Law Commissions' wider project on insurance law reform. A summary of responses published on 6th November showed 59% of respondents were in favour of including micro-businesses in the new consumer regime.
This would mean that micro-businesses, like consumers, would no longer be under a duty to volunteer information to insurers when applying for cover. They would only be required to answer honestly and with reasonable care any questions asked.
Insurers' remedies for negligent non-disclosures or misrepresentations would depend on what they would have done had they known the information. But if the insured acted honestly and reasonably, the cover would be unaffected.
The proposal would also restrict the occasions when insurers could avoid liability by relying on breach of a warranty. Insurers would have to show the breach caused or contributed to the loss claimed under the policy.
One of the questions raised by the issues paper was how best to define a micro-business. Most respondents agreed that using the same two-limb test as the Financial Ombudsman Service (FOS) would be the most logical option.
The previous FOS threshold was a turnover of less than £1million, but since 1st November 2009, the Ombudsman can hear complaints from businesses with fewer than 10 employees and a turnover of less than €2 million. For the FOS, this test is applied at the time the claim is made. The Law Commissions envisage applying the test at the time the business enters into the insurance contract.
In the response paper, they also comment that current regulations requiring insurers to tell eligible businesses of their right to take complaints to the FOS are not clearly set out in the FSA Handbook and that the written reminder is often buried in the small print of the policy.
Most respondents to the issues paper appreciated the need for additional filters to prevent more sophisticated businesses from benefiting from the consumer regime, although there was some discussion about how these safeguards would work in practice.
The proposed filters include taking into account the number of employees and turnover at any associated or group company and excluding businesses that spend more than a certain amount on their insurance premium (say £15,000) or that hold assets or have a turnover of more than £10 million.
A small majority (53%) of respondents were in favour of extending the Unfair Terms in Consumer Contracts Regulations 1999 to micro-businesses in relation to insurance contracts.
The change would allow the smallest enterprises to challenge policy terms for unfairness, provided the term has not been individually negotiated and is not a "core" term. Terms (including core terms) that are not expressed clearly in plain language would also fall foul of the regulations.
The FSA, however, said it was not keen on the proposal as it had not seen any evidence that micro-businesses were suffering any detriment because they were not covered by the regulations and the reform would confuse rules aimed specifically at protecting consumers.
The Law Commissions' intend to publish a policy statement on pre-contract non-disclosure and misrepresentation in business insurance early in 2010.
Meanwhile, a final report and a draft Bill on pre-contractual disclosure and representations in consumer insurance are due to be published this December. The Bill will include a new statutory code to clarify whether the intermediary is acting for the insured or the insurer in certain circumstances.
The Law Commissions' work programme for the New Year also includes issues papers on damages for late payment and on the insured's post-contractual duty of good faith.