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Insurance law reform

In December 2012, the Law Commission and Scottish Law Commission published summaries of the responses received to their consultations on:

1.Damages for late payment and
2.Insurers’ Remedies for Fraudulent Claims.

These consultations form part of the Law Commissions’ ongoing review of insurance contract law which has already resulted in reform of pre-contract non-disclosure and misrepresentation for consumer contracts.

Damages for late payment

The Law Commissions received 39 responses from the insurance industry, the legal profession, the judiciary, consumer groups and academics.

Damages for late payment

A large majority of respondents (87%) agreed that insurers should be under a contractual obligation to pay claims within a reasonable time and 81% agreed that a failure to do so should result in liability to pay damages for any resulting foreseeable loss.

Some insurers raised concern that if the time given to investigate is insufficient and the potential penalties are too high, insurers might be put under pressure to settle claims without properly investigating. Also, the prospect of claims for damages for late payment which significantly exceed the underlying claim would lead to uncertainty of liability and result in increased premiums. Nevertheless, the majority of insurer respondents agreed to penalties for the late payment of claims subject to there being a sufficiently clear definition of a “reasonable time” (see below) and the scope of foreseeability.

Definition of a reasonable time

The majority of respondents agreed with the Law Commissions’ proposals that: insurers should not be held responsible for delay by the policyholder; insurers should have sufficient time to carry out a full investigation; that it may take time to seek information from third parties; and that once the information was available, the insurer should make a prompt decision.

However, concern was expressed that the recommended approach might prove overly complex in practice and lead to uncertainty over the point at which insurers had sufficient information to take a decision (i.e. the point from which time starts to run). Further, it was recognised that there is a tension between certainty and flexibility as to the date that insurers have sufficient knowledge.

Business insurance exclusion

Insurers were unanimously in favour of being able to contract out of a liability to pay damages for late payment in commercial insurance contracts. However, concerns were raised by other respondents that freedom of contract was more apparent than real for all but the largest of insureds and that small businesses would be most vulnerable to late payment.

Insurers were evenly split by the Law Commissions’ proposal that any exclusion be subject to the insurer having acted in good faith.

Consumer insurance

In respect of consumer insurance contracts, 65% of respondents agreed that it should not be possible to exclude liability for damages for late payment. There was some disagreement from insurer groups, but it appears likely that the Law Commissions will proceed with this proposal and may include damages for distress and inconvenience.

Limitation

The Law Commissions asked for views on changing the date from which limitation runs for claims on insurance contracts. There was no clear consensus among the respondents as to the most appropriate date from which limitation should run. The three proposals of: 1) after a reasonable time, 2) after the communication of a decision and 3) from the date of loss (the current position) each garnered approximately 30%. Insurers expressed concern at the uncertainty which the first and second options would create.

Insurers’ Remedies for Fraudulent Claims

The Law Commissions received 40 responses to this consultation, again from a mixture of the insurance industry, the legal profession, the judiciary, consumer groups and academics.

Forfeiture

The overwhelming majority of respondents agreed with the Law Commissions’ proposals that: 1) the whole of any claim to which fraud relates should be forfeit (92%), 2) any subsequent claims under the policy should be forfeit (75%), and 3) that any claims prior to an act of fraud remain valid (94%).

It seems very likely that the Law Commissions will formalise their proposed reforms and thereby resolve the tension between the common law rule that a fraudster forfeits the claim, and the statutory rule in s17 of the MIA 1906 that the policy is avoided.

Recovery of costs

Although the respondents in principal agreed with the Law Commissions’ recommendations that insurers be allowed to recover the costs of investigating fraud, they raised significant concerns about how this would work in practice and whether a statutory regime would be more effective than the use of the tort of deceit. There was also a lack of consensus as to whether insurers should be obliged to set off the costs of investigating fraud against the value of any legitimate claims forfeited as a consequence of that fraud.

Express terms

There was strong support (86%) for the proposal that insurers be allowed to add to the statutory remedies for fraudulent claims through express contractual terms with commercial parties, although some respondents expressed concern for small businesses.

Opinion was even stronger (88%) for not allowing insurers to increase their remedies for fraud through express terms in consumer insurance contracts.

Co-insurance and group insurance

There was majority support (68%) for the Law Commissions’ tentative conclusion that there is no need to legislate on the effect of fraud by one joint insured. Meanwhile, there was strong support (81%) for legislation to amend the position of claims under group policies to allow a group member to be treated as a party to the contract where that member has acted fraudulently.

Future Developments

The Law Commissions’ summaries of the consultations on insurable interest and policies, premiums in marine insurance and business insured's duty of disclosure and the law of warranties are due out during the first half of 2013, and a final report and draft Bill on (a) post contract duties and other issues and (b) business insureds’ duty of disclosure and the law of warranties is due in December 2013.

This article first appeared in Law-Now, CMS Cameron McKenna's free online information service, and has been reproduced with their permission. For more information about Law-Now, click here.

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