The Law Commission and The Scottish Law Commission INSURANCE CONTRACT LAW A Joint Scoping Paper 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 Honourable Mr Justice Toulson, Chairman Professor Hugh Beale QC, FBA Stuart Bridge Dr Jeremy Horder Professor Martin Partington1 CBE Kenneth Parker2 QC The Chief Executive of the Law Commission is Steve Humphreys and the offices are at Conquest House, 37-38 John Street, Theobalds Road, London WC1N 2BQ. The Scottish Law Commissioners are: The Honourable Lord Eassie, Chairman Professor Gerard Maher QC Professor Joseph Thomson Colin Tyre QC The Chief Executive of the Scottish Law Commission is Michael Lugton and the offices are at 140 Causewayside, Edinburgh EH9 1PR. The terms of this scoping paper were agreed on 21 December 2005 by the Scottish Law Commissioners and by the Commercial and Common Law Team of the English Law Commission. The closing date for responses is 19 April 2006. A response form can be found in Part 4 of the scoping paper, or may be downloaded from: http://www.lawcom.gov.uk/insurance_contract.htm Completed forms and other correspondence may be sent By post to: Peter Tyldesley Law Commission Conquest House 37-38 John Street Theobalds Road London WC1N 2BQ By email to: [email protected] Tel: 020-7453-1201 It would be helpful if, where possible, comments sent by post could also be sent on disk, or by email to the above address, in any commonly used format. Responses will be treated as public documents in accordance with the Freedom of Information Act 2000, and may be made available to third parties. The text of this paper is available on the Internet at: http://www.lawcom.gov.uk/insurance_contract.htm http://www.scotlawcom.gov.uk/downloads/cp_insurance.pdf 1 Until 31 December 2005. 2 With effect from 1 January 2006. LAW COMMISSION AND SCOTTISH LAW COMMISSION INSURANCE CONTRACT LAW A JOINT SCOPING PAPER CONTENTS PART 1: INTRODUCTION 3 Categories of policyholder 5 Arguments against reform 5 Consumer cases 6 MLB policyholders 6 Negotiating tools 7 Certainty 7 Europe 7 PART 2: POSSIBLE AREAS FOR REVIEW 9 Insurable interest 9 A definition of insurance 10 Agency and insurance 11 Non-disclosure 11 Other issues 12 Subrogation 13 “Worthless” policies 14 Joint policyholders 15 “Contract Certainty” 16 Post-contractual good faith 16 Fraud 17 Repeals 18 Marine Insurance Act 1906, section 22 18 Marine Insurance Act 1906, section 53 19 1 Marine Insurance Act 1788 19 Fires Prevention (Metropolis) Act 1774, section 83 19 Unjustifiable Delay 20 Reinsurance 23 Other issues 23 PART 3: STATUTORY CODES 24 PART 4: QUESTIONS 26 APPENDIX A: NON-DISCLOSURE, MISREPRESENTATION AND BREACH OF WARRANTY 32 APPENDIX B: INSURABLE INTEREST 41 APPENDIX C: POSSIBLE APPEALS 44 2 PART 1 INTRODUCTION 1.1 The English and Scottish Law Commissions are setting up a joint review of insurance contract law. We would very much welcome your views on its scope. 1.2 In its Ninth Programme, the English Law Commission said it would set up this joint project to examine at least two key areas of insurance contract law: non-disclosure (which will necessarily include misrepresentation) and breach of warranty. It said we would consult on whether there is a need to review other areas such as the law on insurable interest and on joint policies. No decision has yet been made as to whether other areas should be reviewed. 1.3 We would like to know whether you feel there are areas that we should review, and whether you think a statutory insurance code is desirable. In Part 4 of this paper we have asked you to list those areas you think we should review, and to rank them in order of importance. Your responses will be considered by the Commissioners before they determine the scope of this project in the light of the resources available to us. 1.4 Our current intention is that any reforms we may ultimately recommend will be intended to apply to England, Wales and Scotland.1 Insurance contract law in Scotland is broadly similar to that in England and Wales. There are, however, some important differences. For example, in Scotland a policyholder may be able to claim losses caused by an insurer's unjustifiable delay in settling a claim, whereas in England this is not possible for the reasons we give in paragraph 2.64. There is also a different test for materiality in life insurance cases in Scotland.2 1.5 The English Law Commission last considered insurance contract law in 1980, when it looked at non-disclosure and breach of warranty. Its conclusion then was that the law was “undoubtedly in need of reform” and that such reform had been “too long delayed”.3 Reform was also urged in a report published by the National Consumer Council in 1997,4 which considered a wider range of issues, including subrogation. The recommendations in these reports have not been implemented. 1 The Law Reform Advisory Committee of Northern Ireland has asked us to keep it informed of developments. 2 Life Association of Scotland v Foster (1873) 11 M 351. 3 Insurance Law, Non-Disclosure and Breach of Warranty (1980) Law Com No 104. 4 National Consumer Council, Insurance Law Reform: the consumer case for review of insurance law (May 1997). 3 1.6 A major factor in our decision to return to this area was the publication of a report by the British Insurance Law Association (“BILA”) in 2002.5 This report was prepared by a sub-committee with an impressive breadth of membership — academics, brokers, insurers, lawyers, loss adjusters, a self-regulatory body and trade associations. It included the text of lectures given by two senior members of the judiciary, and a foreword contributed by a third. BILA declared itself “satisfied that there is a need for reform” and put forward detailed proposals for change. 1.7 The review will have three stages. First, with this paper we are consulting on the scope of the project. Secondly, we will consult on the perceived problems within that scope, and possible solutions. Thirdly, we will prepare a final report and, if necessary, a draft Bill. We very much hope that all those with an interest in insurance contract law will become actively involved in the consultation processes, either individually or collectively through representative organisations. We have already met a wide range of organisations and individuals, and later in this paper we refer to some of the views that have been expressed to us. 1.8 The review will cover the law as it affects long-term and general insurance contracts. Both branches of the insurance industry have urged us to recognise the differences in the way they do business and, where appropriate, to reflect these differences in our proposals. In our next consultation paper, we will invite submissions on these issues. 1.9 It has also been suggested to us that some weaknesses in the law would be best addressed by statutory or self regulation rather than insurance contract law reform. Where appropriate, we will consider recommending a regulatory response. See, for example, the discussion of contract certainty in paragraph 2.36. However, we do not accept the arguments of one consultee who suggested that extensive rules from the Financial Services Authority (“FSA”) and the mechanisms for change already in place were an adequate substitute for a review of the law. 1.10 For the remainder of Part 1 of this paper, we discuss some preliminary issues. In Part 2 we give some examples of areas other than non-disclosure and breach of warranty that might be included in the review, and ask for your views. We discuss the advantages and disadvantages of statutory codes in Part 3, and ask whether you think we should seek to produce such codes for insurance contract law. In Part 4 we list, for convenience, the nineteen questions we have asked. We set out in Appendix A the reasons that we concluded that non-disclosure and breach of warranty should be considered within the review. In Appendix B we explore some of the issues relating to insurable interest, and in Appendix C we give the text of those statutory provisions which it has been suggested could usefully be reformed. 1.11 The period of consultation on scope will end on 19 April 2006. 5 British Insurance Law Association, Insurance Contract Law Reform (September 2002). 4 CATEGORIES OF POLICYHOLDER 1.12 In this paper we use the abbreviation “CSB” to refer to consumers and small businesses, and the abbreviation “MLB” to refer to medium and large businesses. We draw this distinction because the typical small business lacks specialist knowledge of insurance, may not have the resources to seek outside advice and does not have the bargaining power to agree special terms. Small businesses apparently face broadly the same problems as consumers. We note that the Financial Ombudsman Service (“FOS”) is able to consider complaints from small businesses as well as consumers. It defines a small business as one with an annual turnover of less than £1 million. The questions of whether small businesses should be dealt with in the same way as consumers, and what should constitute a small business for this purpose, will be raised in our next consultation paper. ARGUMENTS AGAINST REFORM 1.13 Most people to whom we have spoken support a measure of reform, though there are significant differences of opinion as to the extent and nature of change that is desirable.