Insurance contract law has been criticised as outdated and unduly harsh on policyholders. Is the law about to be changed?
Last month the Law Commission published its tentative proposals to change the law relating to misrepresentation and non-disclosure clauses in insurance policies. About time too considering there have been various reports calling for reform dating right back to 1957!
The problem with insurance contracts is that they are regarded as having a special status, in that the parties are expected to act "with utmost good faith". In effect this means that the customer entering in to an insurance contract must refrain from misrepresenting material facts, and must disclose material facts even if no question is specifically asked.
The sort of contracts most people are familiar with work on the basis of "let the buyer beware" where a party to a contract also must not misrepresent the facts but is under no obligation to disclose facts about which it is not asked. You see the difference?
Essentially it means that where there is a breach of 'utmost good faith' in insurance contracts, either party has the absolute right to avoid the contract completely - in other words, it is treated as if it never existed. This is the case regardless of whether the breach was fraudulent, negligent or entirely innocent and, not surprisingly, it's a popular tactic used by insurers to get out of paying a claim!
Insurers offering life cover or critical illness policies are particularly renowned for using this ploy. You make a claim after being diagnosed with skin cancer and it gets turned down because you omitted to mention you once went to the doctor about a touch of eczema (true story!)
Incredibly, the current law that means that insurers aren't obliged to ask any questions at all at the time of an application or renewal ensures that the burden is pretty much placed entirely on the customer to reveal anything the insurer might think a relevant material fact. Yet, how are we expected to know what an insurer might think is relevant?
As it happens where claims are turned down, policyholders now have a right to take their complaint to the Financial Ombudsman Service. He is obliged to consider what is 'fair and reasonable in all the circumstances of the case' which means he's not bound by the strict letter of the law as a court might be.
This has resulted in insurers not being allowed to get away with turning down claims where the policyholder acted inadvertently or innocently but, as the Law Commission points out, the law still needs to be clarified. There are people who won't be aware of the existence of the Ombudsman or who may have claims that amount to more than the £100,000 that he has the power to award.
The Commission is initially proposing a new law that would redefine what is and what is not a material fact in terms of what the reasonable consumer will think is material. They say that contracts should only be able to be avoided where the policyholder has actually been fraudulent and that the requirement that consumers should volunteer information should be abolished. The proposals won't be going out for consultation until the middle of next year though and then, presumably, there be the usual dithering before anything definitive is agreed. Hey ho - no doubt it'll be another 50 years before someone finally does something to fix this outdated bit of law!
In the meantime, if insurers are going to quibble about what regard as a material fact, then make sure you disclose everything you can possibly think of when applying for insurance - even if it was only a verruca that you consulted your doctor about back in 1989!
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