For many years (since 2007 to be exact) the English and Scottish Law Commissions have been conducting an extensive review of insurance contract law. A number of significant milestones have been passed. Most notably:
- A new Consumer Insurance (Disclosure And Representations) Act received Royal Assent in March 2012 and may come into force in the spring of 2013.
- In June a final consultation paper dealing with a policyholder’s duty of disclosure in a business context was launched. Indeed, Willis played host to the launch in our Auditorium 26th June 2012.
Has the Duty of Disclosure had its Day?
As the law currently stands, there is an obligation on all insureds to disclose to insurers all facts material to that insurer’s appraisal of the risk. Breach of this duty entitles the insurer to avoid the contract if the insurer can show that the breach induced him to enter into it in the first place. The same remedies apply where an insured actively misrepresents a risk as opposed to being responsible for non-disclosure.
The problems with this test (which is more onerous than its equivalents in most of the rest of the developed world) are twofold:
- That many businesses fail to understand what facts are material for a particular business risk
- That the remedy is an “all or nothing” one. In other words, if a court does not sanction the avoidance of the contract as a whole, there are no intermediate remedies open to it
What has proved much more difficult has been to decide how English law in this area should be reformed.
A More Proportionate Approach
The Law Commission’s new consultation paper focuses on the desirability of a statutory requirement that there be “a fair presentation of the risk”. By this, the Commission has in mind a more proportionate approach to disclosure focusing on any unusual or special circumstances that might increase the risk, as well as any particular concerns about the risk that led to the insurance being placed.
In a liability insurance context (and specifically a D&O context), this information would almost inevitably include claims and/or circumstances that might reasonably be expected to give rise to a claim under a D&O liability policy.
The second of the Law Commission’s proposed reforms would, in effect, pass the burden of enquiry onto the shoulders of the insurers, consequent upon a fair presentation of the risk. In other words, if it is apparent that there are potential problems with the insurance, insurers will be under an obligation to follow up and ask further questions. If they fail to do so, the proposal is that any remedy to the insurer be denied.
New Remedies for Non-Disclosure
As discussed above, the avoidance remedy is currently the only one available under English Law for non-disclosure or misrepresentation. The Law Commission proposes that this onerous penalty only be retained in cases where the policyholder has behaved dishonestly. It invites consultation on the question as to how high the bar should be set here. Should only deliberate or reckless behaviour suffice, or must the insurer be able to prove fraud?
For conduct that is not dishonest, the Commission proposes a new default regime of proportionate remedies as follows:
- Where the insurer would have declined the risk altogether, the policy should be voided, the claim refused and the premiums returned.
- Where the insurer would have accepted the risk but included another contract term, the contract should be treated as if it included that term.
- Where the insurer would have charged a greater premium, the claim should be reduced proportionately. For example, if the insurer would have charged double the premium, it need only pay half the claim.
These proposals would represent a radical shift in the current law, which was first codified in the 1906 Marine Insurance Act. They would bring English Law more into line with remedies widely used elsewhere in the developed world. Whilst it would remain open in a business insurance context for the parties to opt out of this regime, it is unlikely that many will seek to do so.
Until the new legislation is introduced, considerable dangers for policyholders will continue to lurk undetected until too late when battle is joined in relation to a non-disclosure dispute.
The good news for those alert to the danger is that much can be done contractually to limit the scope for disputes in this area. That is certainly the case with D&O insurance but, as is so often the case, the devil lives in the detail of the words used.