The decision of the Association of British Insurers to drop its earlier opposition to the Law Commission's proposals to reform insurance contract law for personal lines business is good news. Earlier this year, when the All Party Group on Insurance & Financial Services met the Law Commission and the ABI, the insurers' trade body expressed some serious reservations about moving away from the century old law based on the traditional 'Buyer Beware" (Caveat Emptor) principle. It felt that the Law Commission's approach could force insurers to pay claims on policies that it would never have issued had it known all the facts. These objections did not impress MPs.Fortunately, wiser counsels have prevailed in the ABI since then. There was always a feeling that the ABI membership was divided on this issue as its objections did not carry alot of conviction.
At the heart of the proposals is a genuine switch in the balance of power between policyholder and insurer with a three tiered approach to meeting claims.
If the Consumer Insurance Bill becomes law insurers will have to ask direct questions about any information they need to underwrite the risk and, if consumers have taken reasonable care in answering those questions, claims will have to be paid in full. This will apply even if an honest and reasonable mistake has been made by the policyholder. If a claimant is found to have been careless in answering a question, however, then the insurer will be entitled to reduce the payout dependent on what it would have done had it known the full facts at the time the policy was taken out. Only if there is deliberate misrepresentation will an insurer be able to decline a claim.
Insurers will be banned from using the current basis of contract clauses, such as "failure to disclose any material information may invalidate your insurance cover", further emphasising the switch towards better consumer protection that the Law Commission is proposing. The bill will also clarify the law of agency as it applies to insurance brokers and intermediaries by introducing a statutory code based largely on existing law and supplemented by current
Financial Ombudsman Service guidance and industry practice.
The ABI still has some fears that the bill could be amended as it goes through Parliament to make the provisions even more consumer-friendly. I think that now some of the controversy has been taken out of the debate that there is much less likelihood of this and that the bill could move very swiftly through its Parliamentary stages, although it has to be touch and go whether it will make it into law before a General Election is called. We may well find ourselves still debating this in a year's time.
Following on behind this will be reforms of commercial insurance contract law which the Law Commission is currently working on. Whether these prove to be as radical remains to be seen.
