The Consumer Insurance Act (Disclosure and Representations) Act 2013 came into force on the 6 April 2013 and has brought about a significant change in the duty of disclosure on behalf of the policyholder or proposer in relation to consumer insurance products.
The Act modifies the existing duties imposed in large part by the Marine Insurance Act 1906 for the the client to disclose voluntarily any information that might influence the decision of an insurance company in determining the acceptability or premium of and for a risk proposed to them. Under this legislation an insurer was able to seek remedies against the policyholder in the event that certain material facts were not disclosed. The legislation was unpopular with many as it relied on a duty of disclosure that a policyholder may not actually be aware of.
The new legislation removes this duty from the consumer and puts the onus onto the insurance company to seek the information it requires .
This has been achieved by removing the duty of disclosure from the insured and replacing it with a duty to not misrepresent, thereby shifting the emphasis on to the insurer to make sure that it asks all the questions to obtain the information that is required.
What is consumer insurance for the purposes of the Act?
The definition of a consumer insurance contract is very similar, but not identical to that provided by the FSA, now the FCA and is limited to individuals taking out insurance wholly or mainly for purposes unrelated to their trade or business. In short this does not apply to business insurance contracts, although similar legislation is under consideration for the future.
Misrepresentation by the insured
The Act states that an insured must act reasonable and honestly in providing answers to the insurer’ questions and providing they do so then the insurance company cannot repudiate a claim under a policy. Where the insured has acted carelessly in the provision of information, albeit honestly and reasonably, the insurer will be allowed a proportionate remedy based on how they would have behaved initially if they had been in the full possession of the facts.
The insurer can only decline to pay a claim if it can show that the insured acted in recklessly or deliberately in not providing the information. In these circumstances the responsibility is on the insurer to demonstrate on the balance of probabilities that the insured knew that a deliberate or reckless misrepresentation was untrue or misleading, or did not care whether it was or not; and that the matter was relevant to the insurer in it’s decision making process.
What this means for insurers.
Whilst the law has clearly moved in favour of greater clarity for the consumer insurance customer the actual practical effect of the law may not be as widespread as many have discussed. It certainly clears up the situation regarding a clients obligation to disclose information that would have been relevant but in truth in the personal insurance world, insurers have not routinely enforced their rights only when the misrepresentation was deliberate and perhaps an attempt to defraud the insurer.
It is in this latter area that the new law creates the greatest issue for insurance companies. Yes, it still has the right to act against deliberate misrepresentation but the key issue is that it has to ask the question not rely on the insured volunteering the facts. This will certainly see insurance companies looking very hard at the questions it asks and this will be very interesting as insurers constantly battle with the need to reduce costs and remain competitive balanced against sound underwriting for profit.