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Proposed reform of consumer insurance contracts
The Law Reform Commission has published its long-awaited report on consumer insurance contracts, including a draft Consumer Insurance Contracts Bill 2015. The report makes 105 recommendations for reforms to the rules, which date largely from the 18th century. According to the commission, the rules do not reflect the existing realities of the bargaining powers of consumers compared to large insurers.
The reforms apply to any insurance contract (life or non-life) between an insurer and a consumer. They do not apply to:
- insurance brokers or insurance intermediaries;
- reinsurance contracts; or
- marine, air or transport insurance contracts.
Definition of 'consumer'
For the purpose of the reforms, the commission recommends that the definition of 'consumer' be that which applies for the purpose of complaints to the Financial Services Ombudsman and under the Consumer Protection Code 2012 – namely, individuals and small businesses with a turnover of less than €3 million.
Duty of disclosure
One of the most significant reforms is the recommendation that the existing pre-contractual duty of disclosure be replaced with a statutory duty to answer carefully and honestly specific questions posed by an insurer that identify the material risks and relevant information actually relied on by the insurer. The commission takes the view that modern insurers are far better resourced and equipped than consumers to identify facts that will be material in deciding to accept risks or fix premiums.
The pre-contractual duty of disclosure will be confined to responding to questions and the consumer will be under no duty to volunteer additional information. The insurer must ask specific rather than general questions in plain and intelligible language. Any ambiguity shall be interpreted in the consumer's favour.
In its December 2011 consultation paper on insurance contracts, the commission had recommended retaining the pre-contractual duty of disclosure, but that this be restricted to facts or circumstances for which the proposer had actual knowledge. This is a significant change in the commission's position.
The commission has recommended that where a consumer's non-disclosure, misrepresentation or other breach of contract is innocent or due to negligence, insurers should not be able to repudiate liability under the insurance contract, but should be required to make proportionate payments to the consumer. Such payments would be proportionately adjusted to take account of the presence or absence of carelessness by the consumer and whether the breach of contract actually affected the specific risk undertaken by the insurer. The commission recommends that the insurer's right to repudiate liability remain in case of fraud.
However, the commission considers that the wide definition of 'fraudulent misrepresentation' (insofar as it includes statements that are made recklessly), derived from Derry v Peak and applied in McAleenan v AIG (Europe) Ltd, does not adequately define the concept of fraud. In the commission's view, 'recklessness' should be limited to circumstances where the maker of the statement consciously disregards whether the statement is true.
Abolition of warranties
The commission has also recommended the abolition of the concept of warranties in insurance contracts and their replacement with statutory rules that will enable insurers to continue to include provisions in contracts that precisely identify or define the risk insured while protecting consumers from the unfair and unjust effects of the law. Such provisions will be treated as suspensive conditions – that is, on breach of the condition, the insurer's liability is suspended for the duration of the breach, but if the breach has been remedied by the time that a loss has occurred, the insurer must (in the absence of any other disclosure) pay any claim made.
Significantly, the commission has also recommended that third parties which are intended to benefit under an insurance contract be permitted to make a direct claim against the insurer. The commission recommends that third parties:
- be allowed to bring claims directly against insurers where necessary and appropriate;
- be able to pay any excess under a policy where this is required to proceed with a case; and
- be able to obtain relevant documentary and other information directly from insurers where required.
The commission also recommends:
- the abolition of the requirement to have an insurable interest in the risk insured and to replace it with a requirement that a policyholder prove actual loss;
- that subrogation not be permitted against persons with a family or close personal relationship to the policyholder;
- replacement of the post-contractual duty of good faith with specific statutory duties, including a duty on consumers to pay premiums within a reasonable period and a duty on insurers to handle claims and complaints promptly and fairly; and
- that the draft bill provide that the Marine Insurance Act 1906 does not apply to any insurance contract to which the bill applies.
There are also reforms recommended in respect of both insured's and insurer's duties on renewal, in claims handling and the provision of documents to the insured.
The definition of 'consumer' adopted in the legislation is expansive and the High Court has previously recognised that difficulties arise from this definition. The definition is likely to present practical difficulties for insurers if adopted. For example, firms or companies with a turnover of less than €3 million will be considered consumers, requiring substantially different policy wordings for commercial insurance (eg, professional indemnity or directors' and officers' liability), than for similar firms or companies with a slightly higher turnover.
The recommendation that an insurer make a proportionate payment where there has been innocent or negligent non-disclosure may also be challenging to apply in practice and could lead to disputes.
Overall, the commission's draft bill envisages significant reforms to insurance law as it applies to consumer contracts. If adopted, insurers will need to substantially redraft their consumer insurance policies. Insurers will also need to give careful consideration to proposal forms and ensure that they include specific and unambiguous questions directed at identifying material risks.
However, it remains to be seen whether the draft bill will be adopted by the legislature. It appears unlikely to be priority legislation for the remaining lifetime of the government. If enacted in its current form, the draft bill envisages a period of 18 months following enactment before the reforms come into force, to enable the insurance sector to put in place the practical arrangements needed to implement the reforms and to allow consumer bodies to communicate their effects to the public. Therefore, it appears that it will be some time before the recommended reforms come into force, if enacted.