Was the Law Commission right to recommend the abolition of the pre-contractual duty of disclosure for consumers affecting policies of insurance?

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Prior to the reform on the consumer’s duty of disclosure in insurance law contracts, insurance law was recognised as archaic, unclear and unfair.[1] This essay will argue that the Law Commission was right to recommend the abolition of the pre-contractual duty of disclosure for consumers affecting policies of insurance for various reasons. Firstly, because of the lack of expertise that consumers had in this area. Secondly, because the law prior to reform was developed for business and not for consumers. Thirdly, because the alternatives to reform that were developed still did not adequately protect consumers. And finally, because of the need for bringing insurance law more in line with consumer welfare interests. 

Consumer Expertise

The Law Commission was right to recommend the abolition of the duty of disclosure because of the onerous duty is placed on consumers who lacked the relevant expertise. Tyldesley writes that ‘When consumers applied for or renewed insurance law contracts, the law required them to disclose all material facts to the insurer and to refrain from misrepresenting any material facts.’[2] A criticism of this, writes Tyldesley, was that consumers were often unaware of their duty of disclosure or of the potential consequences of a breach of this duty.[3]

The weaknesses of the old law are revealed in the case of Lambert.[4] Mrs Lambert was renewing the policy on her small jewellery store, a policy that she had in place for over nine years.[5] The insurer had rejected a claim and argued that since she did not disclose that her husband had been convicted of handling stolen goods, she had breached her duty of good faith.[6] It seems rather harsh that over the nine-year period the insurer had not asked any questions about previous convictions and, arbitrarily, her claim was rejected. MacKenna J expressed his dissatisfaction with the law already in 1975 and held that ‘[Mrs Lambert] is not an underwriter and presumably has no experience in these matters.’[7] ‘The Court of Appeal was plainly unhappy with the decision it felt bound to reach,’ writes Tyldesly.[8] It is clear that even in 1975, judges in the Court of Appeal recognised the dissatisfactory position of the law and that consumers did not have the relevant expertise in insurance law matters. The Law Commission’s 2009 report on the pre-contractual Duty of Disclosure and Misrepresentation highlighted the problem that consumers are unaware that they must volunteer information.[9]

Another problem that was highlighted by the Law Commission was the duty on insureds to disclose every material circumstance, however, materiality was viewed from the insurer’s point of view.[10] The duty of disclosure was codified in the Marine Insurance Act.[11] Section 18(1)[12] requires ‘…every disclosure of every material circumstance which is known to the assured, and the assured is deemed to know every circumstance in which, in the ordinary course of business, ought to be known by him’.[13] According to section 18(2) ‘Every circumstance is material which would influence the judgment of a prudent insurer’.[14] How were insureds to know what facts would influence the mind of the insurer? It is understandable that when two businesses contract with each other, there is an expectation that both parties have the same level of expertise. However, to expect insureds to have the expertise of insurers seems unreasonable. The Pan Atlantic[15] case developed a small way in which consumers were protected.[16] The House of Lords ruled that the non-disclosure of a material fact must induce the particular insurer to enter into the contract.[17] However, this supposed protection was not of much help to consumers, because of the harsh effect that still remained: that insurers were still able to avoid the contract entirely if the duty of disclosure was breached.

A third problem highlighted by the Law Commission was that ‘…the remedy of avoidance may operate in a particularly harsh way.’[18] In its 2009 report, the Law Commission writes that ‘Where the insurer establishes that the policyholder failed to disclose a material fact, it may refuse all claims, even if (had it known the truth) it would have made only a small change to the policy.’[19] Lowry and Rawlings write that this duty ‘…allows insurers to avoid the contract and does not depend on a causal connection between the non-disclosure and the loss.’[20] This was evidenced previously in the discussion of Lambert[21] and was especially the case for critical health insurance policies. Insurers could reject claims on the narrowest grounds that had no direct connection to the actual claim. Tidman argues that the effect of the remedy of avoidance is that ‘…insurers may be overcompensated the loss from which they actually suffered.’[22] Further, he argues that ‘Avoidance effectively renders an insurance contract non-existent, an extremely harsh result for the consumer.’[23] Similarly,  Tyldesley writes that ‘When a policy is avoided, the consumer faces a triple penalty – loss of cover, loss of any claims and a future of difficulties obtaining cover at an affordable premium.’[24] Thus, the Law Commission was right to abolish the duty of disclosure, as its operation had extremely harsh effects on consumers who lacked expertise on insurance matters. The recommendations of the Law Commission and the revised duty was therefore positively received by consumer groups, brokers, lawyers and the Financial ombudsman service (FOS).[25]

With the intention of putting consumers in a better position, the Law Commission recommended a new duty to take reasonable care in light of all the relevant circumstances.[26] Section 3(2) of the Consumer Insurance Act[27] provides a non-exhaustive list of factors that may be taken into account when determining whether the duty has been broken. Tidman argues that ‘By replacing the consumer’s duty of disclosure with the new duty to take reasonable care not to make a misrepresentation, the problem of consumers not knowing what information is material to insurers is removed.’[28] Brocklebank writes that ‘Insurers now have to ask consumers clear questions about any matter which is material to them and if they do not ask a question on a particular point then the insurer will not be able to avoid a consumer policy for non-disclosure.’[29] This is a much fairer approach which takes into account the lack of expertise that consumers have in relation to insurers. The Law Commission successfully abolished the duty of disclosure which Tyldesly questions should ever have been imposed on consumers in the first place.[30] It reformed the law, making it clear, straightforward and fair.[31]

Previous Law not Suited to Consumers

The Law Commission was right to recommend the abolition of the pre-contractual duty of disclosure for consumers because prior to reform, insurance law was not suited for consumers and had not yet adapted to adequately protect consumers. Tyldesley, writing about the law prior to the Consumer Insurance Act[32], writes that ‘Much of the current law was established in commercial cases in the 18th and 19th centuries.’[33] Also, he writes, ‘At that time, there was no mass market for insurance.’[34] It is only in the recent decades that there has been a significant rise in the market for consumer insurance policies. Thus, Tyldesley writes that the antiquated system of commercial law for consumer insurance law contracts created a system that operated to the detriment of consumers.[35]

The case of Carter v Boehm[36] was one of the keystone cases in insurance law. Lowry and Rawlings write that ‘The common law duty of disclosure emerged from a general proposition advanced by Lord Mansfield CJ in Carter v Boehm.’[37] It is important to note that Carter v Boehm[38] was a commercial law case about marine insurance, although the duty of disclosure applied also to consumer insurance law contracts.  This is supported by Tidman who writes that ‘…the problem with the duty of disclosure has arisen from its scope being extended beyond what was first depicted in Carter v Boehm.’[39] Tyldesley writes that ‘Lord Mansfield gave his judgement in a very different world, where mass-market consumer insurance policies did not exist.’[40] It is important to note the context out which the duty of disclosure arose. Birds writes that there were poor means of communication in the commercial world at the time of Carter v Boehm.[41] The improvement in the means of communication in recent decades and rise of consumer insurance policies meant that it was only time before insurance law was developed to better suit consumers. Despite the clear need for the law to develop in line with the changes in society, one could question why the process of reform took so long. Perhaps it was convenient for insurance providers for the law to remain as it was, as they largely benefited from a system that favoured insurers. In order to address this imbalance, alternative regulation mechanisms were introduced.

Alternatives to Reform not Adequate

Self-regulation, statutory regulation and the ombudsman scheme were mechanisms put in place as alternatives to reform.[42] The Association of British Insurers (ABI) consistently made a case against statutory reform and argued that the deficiencies in the law could be overcome by ‘market regulation.’[43] The ABI created the Statement of General Insurance Practice (SGIP), a self-regulatory code.[44] Although a positive step in the right direction, this code was not legally binding and there were no ways in which compliance could be monitored.[45] The SGIP was withdrawn and statutory regulation took the form of the Insurance Conduct of Business Sourcebook (ICOBS).[46] Up until this point, the direct issues caused by the duty of disclosure were not adequately addressed and the need for reform became even more pressing. The FOS was developed in response to this.

The FOS could be viewed as an alternative to reform and a positive step in addressing the problems created by the duty of the disclosure. Under section 228(2) of the Financial Services and Markets Act[47] the FOS is to determine complaints with a fair and reasonable approach. This means that the FOS is given the power to make a decision regardless of statutes and case law, so long as it provides a just result. An example of the FOS in practice is given by Soyer: ‘The FOS will not support an insurer avoiding the policy unless the consumer was asked a clear question about the matter which is now under dispute.’[48] The result of this, he argues is that ‘The disclosure duty at the pre-contractual stage is effectively removed.’[49] Despite having recourse to the FOS, this was not an adequate alternative to reform. In effect, consumers only had a means of recourse after they had been unfairly treated by insurers. Although the FOS somewhat ‘undercuts the duty of disclosure’[50], it acts as a Band-Aid to consumer’s problems, rather than addressing the problems directly. This view is supported by Tyldesley who argues that the FOS cannot be viewed as a satisfactory alternative to reform when consumers are obliged to complain to the FOS before they can be assured fair treatment.[51] Thus, the Law Commission was right to recommend the abolition of the pre-contractual duty of disclosure for consumers. The abolition of the duty went to the root of the problem. The effect of the Consumer Insurance Act, writes Tyldesly ‘…[sweeps] away the muddled patchwork of archaic law, FSA rules, industry codes and FOS guidance, providing in its place simple, clear and fair law.’[52]

Consumer Welfare

The Law Commission was right to recommend the abolishment of the pre-contractual duty of disclosure because of the need to bring insurance law in the UK more in line with consumer welfare interests. A main issue with the previous law is the inequality of bargaining power between businesses and consumers.[53] Tyldesley argues that with business to business policies, such as between the parties in Carter v Boehm[54], the insured has roughly the same bargaining power to the insurer, whereas consumers lack this equal bargaining power.[55] Tidman argues that for reform to succeed in this area, it must produce ‘…fair commerce and must protect the interest of the party holding the weaker bargaining position, usually the consumer.’[56] Prior to reform, the duty of disclosure heavily favoured insurers. In reality, businesses, depending on their size, will either have their own legal departments with the reasonable skill and expertise on the same level as insurance companies, or they will have the means to obtain professional legal expertise on insurance matters. The majority of consumers are unlikely to be able to navigate through legal jargon but were expected to know which information should be disclosed and which should not. Although Tidman argues that the weaker bargaining power of the consumer should be protected,[57] this is said alongside the need to ‘…not disturb the efficiency of the insurance market.’ [58] This is echoed by Soyer.[59] Perhaps it has taken the Law Commission this long to successfully reform the law on the consumer’s duty of disclosure because it did not want to interfere with the insurance market. However, the Law Commission was right to recommend the abolishment of the duty of disclosure because it brought the law more in line with consumer welfare.

Conclusion

In conclusion, this essay has argued that the Law Commission was right to recommend the abolition of the pre-contractual duty of disclosure for consumers affecting policies of insurance for various reasons. Firstly, because of the lack of expertise that consumers had in comparison to the expertise of insurers. Secondly, because the previous law was developed for business to business contracts and had not developed as communication and the mass market for consumer policies had developed. Thirdly, the alternatives to reform were discussed, revealing that consumers were still not adequately protected. And finally, because of the need to bring insurance law more in line with consumer welfare interests. The Consumer Insurance Act[60] was only enacted in 2013 and time will tell what practical effect the reform on the duty of disclosure has had on consumers.


[1] Peter Tyldesly, ‘Reform at Last?’ (2011) 161 New Law Journal 841, 843.

[2] Peter Tyldesly, Consumer Insurance Law: Disclosure, Representations and Basis of the Contract Clauses (Bloomsbury 2013) 46.

[3] Peter Tyldesly, Consumer Insurance Law: Disclosure, Representations and Basis of the Contract Clauses (Bloomsbury 2013) 46.

[4] Peter Tyldesly, ‘Consumer Insurance and the Duty of Disclosure’, (2012) 123 British Insurance Lawyers Association 38.

[5] ibid.

[6] ibid.

[7] Lambert v Co-operative Insurance Society Ltd [1975] 2 Lloyd’s Rep 485.

[8] Peter Tyldesly, ‘Consumer Insurance and the Duty of Disclosure’, (2012) 123 British Insurance Lawyers Association 38, 45.

[9] Law Commission Report No 319, Consumer Insurance Law: Pre-Contract Disclosure and Misrepresentation (2009) 2.10.

[10] Law Commission Report No 319, Consumer Insurance Law: Pre-Contract Disclosure and Misrepresentation (2009) 2.11.

[11] Marine Insurance Act 1906.

[12] ibid.

[13] John Lowry and Phillip Rawlings, ‘’That Wicked Rule, that evil doctrine…’: Reforming the Law on Disclosure in Insurance Contracts’, (2012) Modern Law Review 75(6) 1099, 1101.

[14] Marine Insurance Act 1906 s. 18(2).

[15] Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co [1995] 1 AC 501.

[16] John Lowry and Phillip Rawlings, ‘’That Wicked Rule, that evil doctrine…’: Reforming the Law on Disclosure in Insurance Contracts’, (2012) Modern Law Review 75(6) 1099,1102.

[17] Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co [1995] 1 AC 501, 511.

[18] Law Commission Report No 319, Consumer Insurance Law: Pre-Contract Disclosure and Misrepresentation (2009) 2.14.

[19] ibid.

[20] John Lowry and Phillip Rawlings, ‘’That Wicked Rule, that evil doctrine…’: Reforming the Law on Disclosure in Insurance Contracts’, (2012) Modern Law Review 75(6) 1099, 1101.

[21] Lambert v Co-operative Insurance Society Ltd [1975] 2 Lloyd’s Rep 485.

[22] Oliver Tidman, ‘UK Consumer Insurance Law: The Case for Reform’, (2011) Scots Law Times 13 75, 76.

[23] ibid.

[24] Peter Tyldesly, Consumer Insurance Law: Disclosure, Representations and Basis of the Contract Clauses (Bloomsbury 2013) 47.

[25] Law Commission Report No 319, Consumer Insurance Law: Pre-Contract Disclosure and Misrepresentation (2009) 1.14.

[26] Consumer Insurance (Disclosure and Representations) Act 2012, s. 3(1).

[27] Consumer Insurance (Disclosure and Representations) Act 2012.

[28] Oliver Tidman, ‘UK Consumer Insurance Law: The Case for Reform’, (2011) Scots Law Times 13 75, 79.

[29] Lea Brocklebank. ‘A New Contract’, (2007) New Law Journal 157, 1605.

[30] Peter Tyldesly, ‘Consumer Insurance and the Duty of Disclosure’, (2012) 123 British Insurance Lawyers Association 38.

[31] Law Commission Report No 319, Consumer Insurance Law: Pre-Contract Disclosure and Misrepresentation (2009) 3.2.

[32] Consumer Insurance (Disclosure and Representations) Act 2012.

[33] Peter Tyldesly, Consumer Insurance Law: Disclosure, Representations and Basis of the Contract Clauses (Bloomsbury 2013) 45.

[34] ibid.

[35] ibid.

[36] 1766 3 Burr 1905.

[37] John Lowry and Phillip Rawlings, ‘’That Wicked Rule, that evil doctrine…’: Reforming the Law on Disclosure in Insurance Contracts’, (2012) Modern Law Review 75(6) 1099, 1100.

[38] 1766 3 Burr 1905.

[39] Oliver Tidman, ‘UK Consumer Insurance Law: The Case for Reform’, (2011) 13 Scots Law Times 75, 76.

[40] Peter Tyldesly, ‘Consumer Insurance and the Duty of Disclosure’, (2012) 123 British Insurance Lawyers Association 38, 43.

[41] John Birds, Modern Insurance Law (10th edn, Sweet & Maxwell 2016) 124.

[42] Peter Tyldesly, ‘Reform at Last?’ (2011) 161 New Law Journal 841, 843.

[43] Law Commission Report No 319, Consumer Insurance Law: Pre-Contract Disclosure and Misrepresentation (2009) 1.36.

[44] Peter Tyldesly, ‘Reform at Last?’ (2011) 161 New Law Journal 841, 843.

[45] Peter Tyldesly, ‘Reform at Last?’ (2011) 161 New Law Journal 841, 843.

[46] ibid at 844.

[47] 2000

[48] B. Soyer, Reforming the assured’s pre-contractual duty of utmost good faith in insurance contracts for consumers: are the Law Commissions on the right track? (2008) 5 Journal of Business Law 385, 389.

[49] ibid.

[50] John Lowry and Phillip Rawlings, ‘’That Wicked Rule, that evil doctrine…’: Reforming the Law on Disclosure in Insurance Contracts’, (2012) Modern Law Review 75(6) 1099, 1107.

[51] Peter Tyldesly, ‘Reform at Last?’ (2011) 161 New Law Journal 841, 844.

[52] Peter Tyldesly, ‘Consumer Insurance and the Duty of Disclosure’, (2012) 123 British Insurance Lawyers Association 38, 48.

[53] ibid at 44.

[54] 1766 3 Burr 1905.

[55] Peter Tyldesly, ‘Consumer Insurance and the Duty of Disclosure’, (2012) 123 British Insurance Lawyers Association 38, 44.

[56] Oliver Tidman, ‘UK Consumer Insurance Law: The Case for Reform’, (2011) 13 Scots Law Times 75, 79.

[57] Oliver Tidman, ‘UK Consumer Insurance Law: The Case for Reform’, (2011) 13 Scots Law Times 75, 79.

[58] ibid.

[59] B. Soyer, Reforming the assured’s pre-contractual duty of utmost good faith in insurance contracts for consumers: are the Law Commissions on the right track? (2008) 5 Journal of Business Law 385, 414.

[60] Consumer Insurance (Disclosure and Representations) Act 2012.

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