“Basis of contract” clauses
The draft clauses abolish “basis of contact” clauses whereby representations made by the insured during the proposal or on variation are converted into a warranty by means of a provision in the policy. This mirrors section 6 of the Consumer Insurance (Disclosure and Representations) Act 2012 and brings non-consumer insurance law in line with the consumer regime. The prohibition on using “basis of contract” clauses will be mandatory for non-consumer insurance contracts, as it is for consumer insurance. Insurers will still be able to include warranties or other express provisions covering similar subjects to those previously discussed or asserted between the parties but these must be expressly agreed with the insured.
Breach of warranty
Breach of warranty will no longer discharge insurers’ liability, rather, suspend it such that liability can be restored if and when the breach is remedied.
Terms relevant to particular descriptions of loss
If a contractual term is intended to reduce the risk of loss of a particular kind or at a particular location or time, the insurer will not be able to rely on breach of the term to exclude, limit or discharge liability for loss of a different kind or at a different time or location.
The Law Commissions intend the non-consumer law reforms to be a “default regime” that the parties should generally be able to contract out of and substitute their own agreed regimes. However, parties will not be able to contract out of:
a) “basis of contract” clauses; or
b) the provisions relating to deliberate or reckless late payment of insurance claims.
Conversely, the provisions of the Consumer Insurance (Disclosure and Representations) Act 2012 and all terms of the draft Bill in so far as they relate to consumers are mandatory.
Insurers’ remedies for fraudulent claims by members of group insurance schemes
The draft Bill will contain separate provisions relating to fraudulent claims made by members of group insurance schemes. A group insurance scheme is one where cover is taken out by a policyholder, such as an employer or landlord, for the benefit of a group of scheme members (such as employees or tenants) who are not themselves the policyholder. Where an insured under a group insurance scheme makes a fraudulent claim, it will be treated as if the insurer and the fraudulent member entered into a separate insurance contract. The remaining members will be unaffected but the insurer:
a) will have no liability to pay the fraudulent claim;
b) will have the option to terminate its liability to pay out any losses suffered after the fraudulent act but only as regards the fraudulent member; and
c) will remain liable for any legitimate losses suffered by the fraudulent member before the fraudulent act.
The insurer would not be able to contract out of this provision so as to put a consumer in a worse position than it would have been under the draft Bill. For example, an insurer could not include a provision to allow it to avoid insurance cover for a consumer from the outset or that fraud by one member would affect the cover available to the remaining members. The Law Commissions have drafted the clauses to refer to consumers only on the basis that there is no need for a remedy for fraud by non-consumer members of group schemes. They have however invited alternative views.
This second consultation on draft clauses for the Insurance Contracts Bill will close on 21 March giving interested parties less than two weeks to submit their views. The Law Commissions are clearly keen to finalise the drafting so that the final text of the Bill can be published before the summer but, given the timescale, it is perhaps unsurprising that only 38 responses were received to the first consultation on draft clauses which closed on 21 February.
If, as expected, the final draft Bill mirrors in substance the draft clauses that have now been published, the Bill would, if passed by Parliament, represent a significant change to the law. That said, the draft clauses published on 10 March include some changes to the draft that was published for consultation in January (for instance, the new clause 11(2), which provides that a claim may be fraudulent when made, or become fraudulent as a result of a later act) and it remains to be seen whether significant changes will be made.
Further reading: Click here for the draft clauses and accompanying notes which can be found on the Law Commission’s website.
For more detail on the Law Commissions’ proposals see previous Law-Nows on the proposals for reform of business insurance law and the proposals for late payment of claims and fraudulent claims.