New law will ease insurance information burden on consumers

The aim of the Bill is to make the law clearer and fairer. Instead of having a duty to volunteer any material information that might be relevant to the insurer, the consumer will only have to answer fully and accurately any questions the insurer asks.

The new law would also remove the insurer's "all or nothing" remedy of avoiding the policy for any misleading or inaccurate statement, leaving the consumer without insurance cover as if the policy had never existed. Instead, insurers will have a range of remedies based on the consumer's degree of fault.

"The Government is committed to strengthening consumer protection in financial services and these reforms will help meet this commitment," Mark Hoban, Financial Secretary to the Treasury said.

"They will provide a better deal for the consumer, while saving money for the industry and giving people the certainty they need when taking out insurance."

“We have worked hard to consult all of the interested parties in producing this Bill and, as a result, it has received broad-based support, not only from consumers and legal groups, but from insurers and brokers as well," he said.

The Consumer Insurance (Disclosure and Representations) Bill will be the first major reform of statutory insurance law since the Marine Insurance Act of 1906.

Its provisions are based on the recommendations of a 2009 report by the Law Commissions of England and Scotland which marked the end of the first stage of a wider review of insurance law (see: The draft Consumer Insurance Bill, an OUT-LAW Guide).

The recommendations reflected to a large extent the approach already taken to consumer insurance by the Financial Ombudsman Service as well as industry good practice.

The Law Commissions decided that the law, developed over a century ago for the shipping industry, no longer corresponded to the realities of the modern mass consumer insurance market. In particular, it was unreasonable to expect ordinary consumers to second guess what information might be relevant to a hypothetical "prudent" insurer.

Under the new law, a consumer will have a duty to respond honestly and with reasonable care to questions asked and to take reasonable care not to make a misrepresentation to the insurer before the contract is entered into.

If the consumer acted honestly and reasonably in providing information, the insurer will have no remedy and will have to pay any claim in full. But if the consumer was dishonest or reckless the insurer will be able to avoid the contract and, in most cases, keep the premium.

If the consumer acted carelessly, the remedy will aim to put the insurer into the position it would have been in had it known the true facts. So, if the insurer would have charged a higher premium, the claim would be reduced proportionately. Or if it would have imposed a particular term, the claim would be treated as if the policy included that term.

The Bill also includes a new statutory code to help identify whether an insurance broker is acting for the consumer or the insurer when passing on pre-contract information to the insurer.

The question is significant because, if a broker is acting as the agent of the consumer and fails to tell the insurer something material or provides incorrect information, the consumer's cover may be affected.

Since their 2009 report, the Law Commissions have published short discussion papers on various other aspects of insurance law, such as late payment of insurance claims and fraudulent claims.

Later this year they plan to publish a second consultation paper dealing with these issues and a further policy paper on the law of non-disclosure and warranties for business insurance.