The Consumer Insurance Act is the first formal change in law in this space for more than 100 years. Paul Dalgliesh looks at the implications for insurers and advisers.
The Act will now legislate consumers to take reasonable care not to make a misrepresentation to the insurer when entering into an insurance contract. This means that consumers are no longer required to volunteer information, but instead, answer the questions specifically asked of them.
Section six of the Act removes the right by insurers to convert representations into warranties, meaning they can no longer void a contract due to non-disclosure that was not material.
What it means for consumers
As already stated, consumers will now be required to take reasonable care when answering the specific questions asked of them by an insurer. Where an insurer has a remedy against the consumer for misrepresentation it is referred to as ‘qualifying misrepresentation’ and is classed as either:
• deliberate or reckless, or
• careless.
Where it can be evidenced by the insurer that the misrepresentation is deliberate or reckless then the contract can be avoided and claims refused, with no refund of premiums paid.
Where it can not be evidenced by the insurer, then it must be regarded as careless and the insurer should amend the contract based on what it would have done, had the question been answered correctly.
If the insurer would not have offered the contract then it still has the right to avoid the contract and refuse claims, but must return premiums.
If the misrepresentation does not meet the criteria of ‘qualifying misrepresentation’, because it is neither careless, reckless or deliberate due to the consumer acting reasonably, then the insurer will have no remedy.
What it means to an insurer
While at first glance the Act appears to implement a fundamental shift in the way insurers’ business operates, in reality we had already moved away from a contractual relationship with consumers based on the 1906 Act.
For example, current operating models, which have been continually refined over the years, have been influenced by:
• industry initiatives, such as the ABI Code of Practice for managing claims;
• ongoing review of contract Terms and Conditions e.g. ensuring that there are no unfair contract terms such as ‘Read and Understood’;
• guidance and other data published by the Financial Ombudsman Service (there is an excellent summary on the FOS website – search ‘the history and development of the ombudsman’s approach to non-disclosure’);
• commitment to ‘Treating Customers Fairly’;
• on-going claims experience;
• root case analysis of complaints;
• non-disclosure audits;
• testing and refinement of question sets.
