Reforming Marine and Commercial Insurance Law

Baris Soyer

• Publisher: Informa Law from Routledge
• Year: 2020
• ISBN:
  9781000285888
• Edition: 1
• Topic: Jura
• Subtopic: Seerecht

With reform of warranties, utmost good faith and insurable interest underway, Reforming Marine and Commercial Insurance Law provides a timely and essential analysis of this changing area of marine insurance law. The entire insurance sector is observing and participating in the reform process and this wide interest is reflected in the diversity of extremely high quality contributions to this book. This book evaluates the legal and practical implications of the proposals on commercial and marine insurance contracts. The contributors, from legal practice, the insurance sector, the judiciary and academia, comment critically on the proposals and discuss the viability and future of the reform process.

CHAPTER 1

INSURANCE CONTRACT LAW REFORM IN ENGLAND/WALES AND SCOTLAND

David Hertzell

Law Commissioner

1 INTRODUCTION

The issue of insurance law reform has been referred to the Law Commission or its predecessor on three occasions. A major factor in our decision to return to this area was a report by the British Insurance Law Association (“BILA”) published in 2002.¹ A BILA sub-committee with an impressive breadth of membership (academics, brokers, insurers, lawyers, loss adjusters, a self-regulatory body and trade associations) prepared this report. It included the text of lectures given by two senior members of the judiciary, Longmore L.J. and Rix L.J. and a Foreword contributed by Mance L.J. BILA declared itself “satisfied that there is a need for reform”.

Perhaps the problem lies in the very concept of codifying the law. The Marine Insurance Act 1906 (“the MIA”) attempted to codify the common law on insurance. The process took around 25 years, so the Act is very much a creature of the nineteenth century. Society, the economy and cultural attitudes are all very different now.

The great advantage of the English common law system is that the law develops through cases and precedent in a controlled fashion. The parties have a fair degree of certainty but the law can still adjust to new developments, new technology and changes in social attitudes.

The problem with codification is that unless it is done at a very high level and is principle-based only—the “10 commandments approach”—the law risks becoming to quote Lord Justice Rix “ossified”. That can lead to disquiet.

We can end up with the worst of all worlds in which to make commercial decisions. The law on paper looks certain but in practice it is anything but. In seeking to do justice the courts are forced to reinterpret either the law or the facts leaving us with “unknown unknowns”. “Hard cases make bad law” is still a good maxim.

1. British Insurance Law Association, Insurance Contract Law Reform—Recommendations to the Law Commission (2002).

Outdated law creates pressure to design alternative ways in which to resolve the disputes that will inevitably arise and eventually the law becomes redundant. This is the situation with consumer insurance law where we have an entirely new jurisprudence from the Financial Ombudsman Service (“FOS”). We also have an unfortunate situation where the MIA states that an insurer can avoid a claim, the Financial Services Authority (“FSA”) states that this would result in a fine and the FOS states that the claim must be paid anyway.

This disconnect between law, current social attitudes and economic status is corrosive of trust in insurance as a product. That has been most visible among consumers in the context of protection insurance. In the business arena bargaining positions might be more equal, but nevertheless there has been a constant growth of Alternative Risk Transfer products and captive insurance in soft markets as well as hard. There are many reasons for having a captive but one is certainly increased control of both risk pricing and claim outcome. The Commissions’ consultation process has revealed a number of concerns among commercial insurance buyers that it would be prudent to consider.

There is another hindrance to the evolution of the law. Even within the constraints of codification there is still some room for legal development. However, that requires cases going to court. The FOS or its predecessor has dealt with consumer matters for many years. It is now difficult for consumer law to develop outside the FOS otherwise there may well have been a challenge by now as to whether the rules of the nineteenth-century marine insurance market are really entirely applicable to today’s mass market products.

Much the same problem applies in the commercial world. For very good reasons a large proportion of commercial disputes are resolved in confidential arbitrations. There is not always a great deal left for the courts to seize on to develop the case law. This contrasts with what happened in the 1980s with the Life Assurance Act 1774 when the courts decided it—as the title suggests—did not apply to property or liability insurance. It is unlikely that the courts will ever now have the opportunity of deciding whether the MIA should be confined to marine insurance.

That places a burden on all of us. We cannot just assume that 300 years of tradition and a set of nineteenth-century rules codified primarily from the marine market is entirely appropriate for a global industry in the twenty-first century. Some parts of the MIA may still be necessary, others may not be.

2 PROJECT HISTORY

Following the publication of Scoping and Issue Papers the first Consultation Paper (CP1) in this project was published on 17 July 2007 with a consultation period closing on 16 November 2007. CP1 covered three key topics:

• misrepresentation and non-disclosure by the insured;

• the role of intermediaries in this context; and

• insurance warranties.

CP1 also dealt with some specific issues relating to group and life insurance. Details of the proposals may be found through the Commissions’ websites at www.lawcom.gov.uk and www.scotlaw.gov.uk.

The law governing the topics covered by CP1 derives primarily from the MIA. Purchasers of insurance, whether businesses or consumers, are obliged to disclose to insurers any information which would affect the judgement of a “prudent underwriter” when considering the risk. If such information is not disclosed or is misrepresented then the insurer is entitled to avoid the policy ab initio and to refuse to pay the claim. The law is equally strict in relation to warranties. Breach of a warranty will discharge the insurance contract. The claim will not be paid. There is no requirement to show any link between the breach of warranty and the loss that occurred. There is no need for the insurer to show that they were induced by the warranty into accepting the risk.

For consumers the MIA is now effectively bypassed by industry codes of practice and guidance notes, the FOS and FSA regulation. The MIA remains the governing law for business insurance, including small and medium enterprises (“SME”), to the extent that these fall outside the FOS limits and FSA rules.

CP1 defined and adopted much from insurance industry guidelines, codes of practice and FOS decisions to produce proposals for a more evenly balanced law for consumer insurance. The Commissions propose that consumers should not have an obligation to volunteer information. However, consumers must answer the questions asked by insurers honestly and reasonably. If they fail to do so then insurers will be obliged to pay only those claims where the consumer’s misrepresentation was reasonable but will be entitled to avoid policies where the consumer has been dishonest or reckless. If the consumer has been negligent then the outcome will depend on what would have happened if the correct information had been provided. For example, the insurer may have imposed a term excluding the loss in which case the claim may not be paid (but the policy will continue), or it may have charged more premium in which case the consumer will receive only a proportional payment. Warran-ties of past and present facts for consumers would be treated as representations. Consumers could still give warranties for future actions but for these to be effective there would have to be a link between the warranty given and the loss that occurred.

There are similar proposals for business insurance, although some differences are retained. For example, whereas consumers are required to answer only the questions they are asked in a proposal form a residual duty of disclosure is retained for businesses. Businesses can give warranties of past or present facts, but, as with consumers, there has to be a causal link between the loss and the warranty for it to be effective. These differences reflect the fact that businesses differ greatly in size and type, cover a broad spread of activities, are often advised and can have a level of sophistication not available to consumers.

The consumer proposals are mandatory but the business proposals are to be a default regime as is currently the case with the MIA. However, some controls are placed on the ability to contract out of the default regime where the policyholder is likely to be a SME and the policy is written on a standard non-negotiated basis. The Commissions are aware that the vast majority of businesses in the UK are SME’s.

The Commissions also considered the responsibility of intermediaries for the transfer of information from policyholder to insurer at placement of the insurance contract. The Commissions decided to retain the existing legal principle that liability for failure to transfer information accurately would depend on whether the intermediary was the agent of the insurer or the policyholder. Should the intermediary make an error which entitled the insurer to avoid or limit the payment of a claim then the consumer would have to seek a remedy against the intermediary if the intermediary were their agent. If the intermediary were the insurer’s agent then the claim would be paid and the insurer would have a remedy against the intermediary. The Commissions proposed that the test to decide the role of the intermediary should be based on whether the intermediary carried out a “fair market analysis”. If it did then the intermediary would be the agent of the insured and vice versa.

Following the publication of CP1 the Commissions’ teams undertook an active programme of engagement with the insurance market to encourage a wide response. In the event 105 ...