Let’s be reasonable

Nobody enjoys dealing with insurers, whether they’re trying to get compensation for luggage lost on holiday or cover for fire damage on site. Insurance companies have a reputation for relying on the small print and the unique features of insurance law to deny cover, on the basis of what many would regard as unfair grounds.

Fortunately, the government is now looking to undertake a radical reform of insurance law, which has remained largely unchanged in the past 100 years. A Law Commission consultation paper was therefore published last year, setting out modernisation proposals.

Insurance cover is key to construction projects and the reforms should make it much easier to make claims and recover payment.

One of the common grounds for cover being denied is the onerous duty of full disclosure, which few realise means a duty to disclose information that has not been asked for but that might influence the judgment of a prudent insurer. This test clearly favours insurers and acting honestly and reasonably will not be good enough if you fail to disclose a fact that might influence a prudent insurer.

Another weapon in the insurer’s armoury is the ability to avoid policies because of incorrect warranties, whether past or future, even if they were unrelated to the actual risk. This has been seen as operating unfairly so that, for example, failing to maintain a burglar alarm would prevent payment for damage by fire. This is a real risk where the obscure and small print wording of the policy has the effect of converting all answers given to warranties, so that each inaccurate or incomplete answer could be used to deny cover.

Another unusual feature of insurance law is that insurance brokers are considered agents of the insured, so any failures by the broker are at the insured’s risk.

Overall, the Law Commission felt that the current state of the law was incoherent, unclear and inaccessible. The proposals for reform therefore aim to strike a fair balance and create a coherent, clear and readily understandable regime. There will be a difference between consumers and businesses but the general principles are similar. For consumers, it is proposed to have a mandatory regime, which would abolish the duty of disclosure and protect consumers who act honestly and reasonably.

The Law Commission felt that the state of insurance law was
incoherent, unclear and inaccessible

For businesses, the duty to disclose would remain in place, but would be narrower and the insurer would need to show that a reasonable insured party would have appreciated, or actually knew, that an insurer would want to know the fact in question.

As to misrepresentation, changes are being proposed to protect businesses that act honestly and reasonably. It is envisaged that specific rules could be agreed – for example, for specific factual issues where it is accepted that any breach of the warranty would deny cover. There was also a concern that some businesses buy standard “off the shelf” insurance and it is proposed to control such standard form policies under principles similar to the Unfair Contract Terms Act 1977.

Other suggestions are designed to modernise insurance law and recognise the reasonable expectations of businesses.

In general, making insurance claims would be easier and there would be less scope for an insurer to deny cover unless it could clearly show that the insured was at fault.

The consultation period closed in November last year and it is expected that the final proposals will be published soon. Anyone who has had to make insurance claims will welcome the reforms – currently, if insurers deny cover there are only limited remedies, through the Financial Services Act and the Financial Ombudsman Service.

The consultation has served as a useful reminder that disclosure is crucial to ensuring that insurance cover is available. Applying for and renewing insurance should not be seen as a mere form-filling exercise and care should be taken to ensure that all relevant information is provided and up to date. Even when the reforms come in, the best way to avoid arguments as to whether there is cover is to disclose all relevant facts – and read the small print.