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The Consumer Insurance (Disclosure and Representations) Act 2012

The Act was given Royal Assent on 8th March 2012 and the substantive provisions are due to be brought into force as soon as possible after March 2013. It is intended to bring the statutory requirements on insurance contracts into line with industry ‘best practice’ and the guidelines of the Financial Services Ombudsman.

Under the current law an assured is required to disclose all matters which would affect the judgement of the reasonable insurer when determining whether or not to accept the risk, and if so on what terms. Failure to disclose material facts may entitle the insurer to avoid the policy from its inception and, by obtaining a declaration that the policy has been validly avoided (pursuant to section 152 of the Road Traffic Act 1988), avoid liability to satisfy judgments obtained against the policyholder.

The Act amends section 152 of the Road Traffic Act 1988 with the effect that in order to avoid liability in cases of consumer insurance, the insurer must have validly avoided the policy under the terms of the Act.

By Section of the Act, the duty to disclose all relevant facts is replaced by a duty to take reasonable care not to make a misrepresentation to the insurer. The standard of reasonable care is determined in the light of all the relevant circumstances. The Act specifies particular circumstances which are deemed to be relevant and includes how clear and specific an insurer’s questions were. An insurer must clearly communicate the importance of answering the questions or the possible consequences for failing to do so.

The insurer is only entitled to a remedy against the insured under the Act if the misrepresentation was made in breach of the duty of reasonable care and it shows that without the misrepresentation it would not have entered into the contract (either at all or on different terms).

The remedy the insurer is entitled to will depend on the nature of the misrepresentation. If the misrepresentation is deliberate or reckless the insurer may avoid the contract and refuse all claims under the policy. In the case of a careless misrepresentation the applicable remedy will depend on what the insurer would have done had the misrepresentation not been made:

If it would not have entered into the contract on any terms, it may avoid the contract and refuse all claims.

If it would have entered into the contract on different terms (other than terms relating to the premium) the contract is treated as if those terms applied.

If the insurer would have entered into the contract but would have charged a higher premium it is entitled to proportionately reduce the amount paid on a claim (see Schedule 1, section 8 of the Act for the precise calculation).

The Act will have the effect that an insurer is no longer able to avoid a policy solely on the basis of non-disclosure of material facts. It will need to prove that the consumer acted in breach of their duty to take reasonable care not to make a misrepresentation. If an insurer wants to know about a factor that it considers affects the risk of insuring someone, it will need to ask specific questions at the proposal stage and make clear to the consumer the consequences of making a misrepresentation.

January 4, 2013 · Editorial Team · Comments Closed
Posted in: News