The Law Commission Consultation Paper No 201 and The Scottish Law Commission Discussion Paper No 152 INSURANCE CONTRACT LAW: POST CONTRACT DUTIES AND OTHER ISSUES A Joint Consultation Paper This is the second 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 Acting Chief Executive is John Saunders. The Scottish Law Commissioners are: The Honourable Lord Drummond Young (Chairman), 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 four areas of insurance contract law: damages for late payment; insurers’ remedies for fraudulent claims; insurable interest; and policies and premiums in marine insurance. Geographical scope: England and Wales, Scotland. An impact assessment is available on our websites, and is summarised in Part 21. Previous engagement: Our first consultation, in 2007, considered Misrepresentation, Non- Disclosure and Breach of Warranty. Subsequently we published five Issues Papers on the subjects covered by this consultation. They are to be found on our websites, together with summaries of the responses we have received (and other insurance project documents). Duration of the consultation: 20 December 2011 to 20 March 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: POST CONTRACT DUTIES AND OTHER ISSUES CONTENTS Paragraph Page How to respond xi Table of abbreviations xii PART I: INTRODUCTION 1 CHAPTER 1: DAMAGES FOR LATE PAYMENT PART 2: DAMAGES FOR LATE PAYMENT: THE CURRENT LAW 13 Introduction 2.1 13 Damages in general contract law: Hadley v Baxendale 2.6 14 The unenviable position of Mr Sprung 2.14 15 Applying Sprung in subsequent cases 2.39 21 Exceptions to the rule in Sprung 2.59 25 Damages for late payment in Scots law 2.62 25 Damages for distress and inconvenience 2.72 27 Limitation and prescription 2.81 30 Conclusion 2.87 31 PART 3: DAMAGES FOR LATE PAYMENT: OTHER ROUTES TO REDRESS 32 Damages for breach of the insurer’s duty of good faith 3.3 33 Damages for the insurer’s breach of statutory duty 3.20 36 v Paragraph Page The Financial Ombudsman Service 3.27 38 Conclusion 3.32 39 PART 4: DAMAGES FOR LATE PAYMENT: THE CASE FOR REFORM 40 The case for reform 4.4 40 The need for caution 4.17 42 Areas of controversy 4.22 43 Conclusion 4.50 48 PART 5: DAMAGES FOR LATE PAYMENT: PROPOSALS FOR REFORM 49 A statutory duty to pay valid claims 5.5 49 A “shield” of good faith in business insurance 5.26 53 Limitation of actions 5.38 55 Damages for distress and inconvenience in consumer insurance 5.44 57 CHAPTER 2: INSURERS’ REMEDIES FOR FRAUDULENT CLAIMS PART 6: INSURERS’ REMEDIES FOR FRAUD: THE CURRENT LAW 61 Introduction 6.1 61 The need for deterrence 6.6 62 Express terms 6.17 64 Where there is no express term: the evolving case law 6.25 65 The effect of fraud on subsequent claims 6.53 71 Can the insurer sue the insured for damages? 6.56 71 Conclusion 6.59 72 PART 7: INSURERS’ REMEDIES FOR FRAUD: THE CASE FOR REFORM 74 A new statutory code 7.2 74 vi Paragraph Page Forfeiture rather than avoidance 7.9 75 Subsequent claims 7.17 76 Damages for claims investigation 7.26 77 Express terms 7.38 79 The future of section 17 7.52 82 Conclusion 7.55 82 PART 8: INSURERS’ REMEDIES FOR FRAUD: PROPOSALS FOR REFORM 83 A statutory code 8.5 83 Forfeiture of the whole claim 8.7 84 Forfeiture of subsequent claims 8.11 85 No avoidance of previous valid claim 8.14 85 Examples 8.16 85 Damages for actual loss 8.19 87 Express terms 8.24 88 PART 9: INSURERS’ REMEDIES FOR FRAUD: CO-INSURANCE AND GROUP INSURANCE 90 Co-insurance 9.2 90 Group insurance 9.23 93 CHAPTER 3: INSURABLE INTEREST PART 10: INSURABLE INTEREST: INTRODUCTION 99 The problems 10.2 99 Calls for reform 10.6 100 Indemnity and contingency insurance 10.7 101 Our proposals 10.14 102 vii Paragraph Page Structure of this chapter 10.19 103 PART 11: INSURABLE INTEREST: THE CURRENT LAW 104 The history of the legislation 11.4 104 The definition in indemnity insurance 11.44 112 The definition in life insurance 11.70 117 The Feasey case 11.87 121 Conclusion 11.94 123 PART 12: INSURABLE INTEREST: INDEMNITY INSURANCE 124 Consultees’ views 12.2 124 Proposals for reform 12.36 131 PART 13: INSURABLE INTEREST: LIFE INSURANCE 137 Introduction 13.1 137 Consultees’ views 13.6 138 Proposals for reform 13.66 147 CHAPTER 4: POLICIES AND PREMIUMS IN MARINE INSURANCE PART 14: POLICIES AND PREMIUMS IN MARINE INSURANCE: INTRODUCTION 159 Changing market practice 14.3 159 Updating the 1906 Act 14.7 160 The structure of this chapter 14.10 160 PART 15: THE NEED FOR A MARINE POLICY: SECTION 22 OF THE MARINE INSURANCE ACT 1906 162 Slips and policies: the scheme of the 1906 Act 15.6 162 The move to a single contract 15.16 164 viii Paragraph Page Is market practice compatible with the 1906 Act? 15.19 165 The case for reform 15.26 166 Conclusion 15.37 168 PART 16: REPEALING SECTION 22: IMPLICATIONS FOR OTHER PROVISIONS IN THE 1906 ACT 169 Where “policy” means “contract” 16.3 169 Where “policy” means “a policy document” 16.7 169 Section 2(2): activities analogous to a marine