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The Business Insured's Duty of Disclosure and the Law of Warranties Consultation Paper

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The Business Insured's Duty of Disclosure and the Law of Warranties Consultation Paper The Law Commission Consultation Paper No 204 and The Scottish Law Commission Discussion Paper No 155 INSURANCE CONTRACT LAW: THE BUSINESS INSURED’S DUTY OF DISCLOSURE AND THE LAW OF WARRANTIES A Joint Consultation Paper This is the third consultation paper in the joint insurance law project ii THE LAW COMMISSIONS: HOW WE CONSULT About the Commissions: The Law Commission and the Scottish Law Commission were set up by section 1 of the Law Commissions Act 1965 for the purpose of promoting the reform of the law. The Law Commissioners are: The Rt Hon Lord Justice Munby (Chairman), Professor Elizabeth Cooke, Mr David Hertzell, Professor David Ormerod and Frances Patterson QC. The Chief Executive is Elaine Lorimer. The Scottish Law Commissioners are: Laura J Dunlop QC, Patrick Layden QC TD, Professor Hector L MacQueen and Dr Andrew J M Steven. The Chief Executive is Malcolm McMillan. Topic: This Consultation covers two areas of insurance contract law: the business policyholder’s duty to give pre-contract information to an insurer and the law of warranties. Geographical scope: England and Wales, Scotland. An impact assessment is available on our websites, and is summarised in Part 17. Previous engagement: Our first consultation, in 2007, considered misrepresentation, non- disclosure and breach of warranty. Subsequently we published an Issues Paper on microbusinesses. In 2011 we published a Consultation Paper on Post Contract Duties and other Issues. They are to be found on our websites, together with other insurance project documents. Duration of the consultation: 26 June 2012 to 26 September 2012. How to respond Send your responses either – By email to: [email protected] or By post to: Christina Sparks, Law Commission, Steel House, 11 Tothill Street, London SW1H 9LJ Tel: 020 3334 0285 / Fax: 020 3334 0201 If you send your comments by post, it would be helpful if, where possible, you also sent them to us electronically (in any commonly used format). After the consultation: We plan to publish final recommendations in 2013 and present them to Parliament. It will be for Parliament to decide whether to change the law. Freedom of information: We will treat all responses as public documents. We may attribute comments and publish a list of respondents’ names. If you wish to submit a confidential response, it is important to read our Freedom of Information Statement on the next page. Availability: You can download this consultation paper and the other documents free of charge from our websites at: http://www.lawcom.gov.uk (See A–Z of projects > Insurance Contract Law) and http://www.scotlawcom.gov.uk (See News column). iii CODE OF PRACTICE ON CONSULTATION The Law Commission is a signatory to the Government’s Code of Practice described below. THE SEVEN CONSULTATION CRITERIA Criterion 1: When to consult Formal consultation should take place at a stage when there is scope to influence the policy outcome. Criterion 2: Duration of consultation exercise Consultations should normally last for at least 12 weeks with consideration given to longer timescales where feasible and sensible. Criterion 3: Clarity and scope of impact Consultation documents should be clear about the consultation process, what is being proposed, the scope to influence and the expected costs and benefits of the proposals. Criterion 4: Accessibility of consultation exercises Consultation exercises should be designed to be accessible to, and clearly targeted at, those people the exercise is intended to reach. Criterion 5: The burden of consultation Keeping the burden of consultation to a minimum is essential if consultations are to be effective and if consultees’ buy-in to the process is to be obtained. Criterion 6: Responsiveness of consultation exercises Consultation responses should be analysed carefully and clear feedback should be provided to participants following the consultation. Criterion 7: Capacity to consult Officials running consultations should seek guidance in how to run an effective consultation exercise and share what they have learned from the experience. CONSULTATION CO-ORDINATOR The Law Commission’s Consultation Co-ordinator is Phil Hodgson. You are invited to send comments to the Consultation Co-ordinator about the extent to which the criteria have been observed and any ways of improving the consultation process. Contact: Phil Hodgson, Law Commission, Steel House, 11 Tothill Street, London SW1H 9LJ Email: [email protected] Full details of the Government’s Code of Practice on Consultation are available on the BIS website at http://www.bis.gov.uk/policies/better-regulation/consultation-guidance. Freedom of Information statement Information provided in response to this consultation, including personal information, may be subject to publication or disclosure in accordanc e with the access to information regimes (such as the Freedom of Information Act 2000, the Freedom of Information (Scotland) Act 2002 and the Data Protection Act 1998 (DPA)). If you want information that you provide to be treated as confidential, please explain to us why you regard the information as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on the Law Commissions. The Law Commissions will process your personal data in accordance with the DPA and in most circumstances this will mean that your personal data will not be disclosed to third parties. iv THE LAW COMMISSION THE SCOTTISH LAW COMMISSION INSURANCE CONTRACT LAW: THE BUSINESS INSURED’S DUTY OF DISCLOSURE AND THE LAW OF WARRANTIES CONTENTS Paragraph Page Table of abbreviations xi Glossary of terms and main texts xii PREFACE 1 CHAPTER 1: THE BUSINESS INSURED’S DUTY OF DISCLOSURE PART 1: DISCLOSURE: INTRODUCTION 7 The duty of disclosure 1.1 7 The duty of disclosure in practice 1.7 8 Our proposals 1.20 10 The structure of Chapter 1 1.49 14 PART 2: DISCLOSURE: THE CURRENT LAW 16 The Marine Insurance Act 1906 2.1 16 A contract of the utmost good faith 2.3 16 Non-disclosure and misrepresentation: the relationship 2.9 17 Non-disclosure 2.11 18 Disclosure by the broker 2.33 22 Misrepresentation 2.39 23 Remedies 2.46 24 v Paragraph Page PART 3: DISCLOSURE: COMPARATIVE LAW 27 Australia 3.2 27 New York 3.9 28 The Republic of Ireland 3.15 29 Germany 3.19 31 France 3.26 32 Principles of European Insurance Contract Law 3.29 32 Conclusion 3.35 33 PART 4: DISCLOSURE: THE CASE FOR REFORM 35 Introduction 4.1 35 The reasons for a duty to disclose 4.6 36 Small and larger businesses 4.14 37 Larger businesses: evidence of problems 4.20 38 The need for reform 4.53 45 Previous reports 4.57 46 The “reasonable insured” test 4.60 46 The way forward 4.72 49 Questions 4.81 50 PART 5: A FAIR PRESENTATION OF THE RISK 52 The section 18 duty 5.1 52 A fair presentation 5.12 54 Waiver 5.38 59 The inducement test 5.61 64 Proposals for reform 5.68 66 vi Paragraph Page PART 6: THE POLICYHOLDER’S KNOWLEDGE 70 The problem 6.1 70 Knowledge under section 18: a two-part test 6.7 71 Whose knowledge should be disclosed? 6.11 71 What should the relevant person know? 6.26 74 Views on the knowledge test 6.54 79 Proposals for reforming knowledge under section 18 6.73 83 The policyholder’s knowledge and section 20 6.79 84 PART 7: THE BROKER’S KNOWLEDGE 89 Introduction 7.1 89 The current law: section 19 of the Marine Insurance Act 1906 7.7 89 The nature of the duty 7.13 91 A more detailed look at section 19(a) 7.18 91 The 2007 proposals and responses 7.39 96 Proposals for reform 7.70 100 PART 8: THE INSURER’S KNOWLEDGE 103 The current law: section 18(3)(b) 8.2 103 General public knowledge 8.7 104 Industry knowledge 8.11 104 Other knowledge 8.21 106 Views on the insurer’s knowledge 8.34 109 Proposals for reform 8.42 110 PART 9: PROPORTIONATE REMEDIES 112 Introduction 9.1 112 The 2007 proposals 9.5 113 vii Paragraph Page Reforms in consumer insurance 9.10 114 Proportionate remedies in business insurance: consultees’ views 9.15 115 Our current proposals 9.28 117 The effect on reinsurance 9.41 119 Cancellation for the future 9.54 121 Dishonest conduct 9.63 123 Contracting out 9.77 125 PART 10: THE DUTY OF GOOD FAITH 127 Introduction 10.1 127 The effect of section 17 in different contexts 10.6 128 Proposals for reform 10.19 130 CHAPTER 2: THE LAW OF WARRANTIES PART 11: WARRANTIES: INTRODUCTION 135 The effect of a warranty 11.1 135 Basis of the contract clauses 11.5 135 Criticisms 11.8 136 Previous proposals for reform 11.13 137 Our current proposals 11.22 139 The structure of Chapter 2 11.24 140 PART 12: WARRANTIES: CURRENT LAW 141 History 12.1 141 What is a warranty? 12.3 141 Creating a warranty 12.10 142 The effect of a warranty 12.21 145 viii Paragraph Page Excused non-compliance and waiver 12.38 147 Moderating harsh law through strict interpretation 12.44 149 Warranties in consumer insurance: other protections 12.60 152 Conclusion 12.82 156 PART 13: WARRANTIES: COMPARATIVE LAW 157 New Zealand 13.3 157 Australia 13.10 158 Canada 13.19 160 The USA 13.24 161 New York 13.26 161 Germany 13.33 162 Principles of European Insurance Contract Law 13.41 164 Conclusion 13.50 166 PART 14: CONSULTEES’ VIEWS 167 Problems with the current law 14.1 167 Support for reform 14.4 168 The 2007 proposals 14.20 170 Concerns about the 2007 proposals 14.24 172 Freedom of contract 14.51
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