Reconstructing Insurance Law: The Law Commissions' Consultation Paper

Date01 January 2008
DOIhttp://doi.org/10.1111/j.1468-2230.2008.00682.x
Published date01 January 2008
REPORTS
Reconstructing Insurance Law:The Law Commissions
Consultation Paper
Rob Merkin
n
and John Lowry
nn
In July 2007 the English and Scottish LawCommissions published the co nsultationpaper Insur-
ance Law ^ Non-disclosureand BreachofWarranty (hereafter LCCP) which sets out in detail the Com-
missions’provisional proposals for the reform of insurance contract law with particular reference
to the key areas of utmost good faith, warranties and agency. Thi s article analyses, from a critical
standpoint, the LCCP’s principal conclusions and recommendations. It begins by noting, as a
means of demonstrating that the current reform process should be informed by modern industry
practices, that the ways in which modern insurance contracts are concluded di¡er signi¢cantly
from those when i nsurance law was last reviewed by the Law Commission in 1980. The article
then discusses the dichotomy between consumer and business insurance given that this disti nc-
tion underpins the LCCP and its approach towards reforming the pre-contractual duty of good
faith. By way of backdropto the analysis, we consider the approach taken towards reforming the
law governing intermediaries acting for prospective assureds during the disclosure process.
Finally, the proposed rules for warranties and similar terms are examined. It is argued that the
proposal to retain continuing warranties in business i nsurance contracts will, if implemented,
represent a missed opportunity to rid i nsurance contracts of terms long criticised as draconian
and disproportionate in their e¡ect.
THE REFORM PROCESS
In January 2006 the English and Scottish Law Commissions launched a joint
reviewof insurance law, their ¢rst since the abortive proposals and draft bill pub-
lished in 1980.
1
The inquiry was prompted by pressure from the British Insurance
LawAssociation,
2
and also bydevelopments taking place in the European Union
towards harmonisation of insurance law. The Law Commissions’process began
with a scopingexercise to determine the ambit ofthe investigation, and thereafter
the initial focus was on utmost good faith, warranties and agency with ‘Issues
Papers’ being published on each of these topics after detailed consultation with
the industry, practising lawyers and academics. Following responses to the Issues
n
Professor of Commercial Law, University of Southampton;consultant, Barlow Lyde& Gilbert LLP.
nn
Professor of Commercial Law, UCL.
1 Law CommissionWorking PaperNo 70 (1979),followed by the Law Commission ReportNo 104,
Insurance Law ^ Non-Disclosure and Breachof Warranty, Cmnd 8064 (1980).
2 Report of the sub-committee of the British Insurance Law Association, Insurance Contract Law
Reform (September 2002). See also the reportpublished by the National Consumer Council Insur-
ance LawReform:the consumercase forreviewof insurancelaw (London, NCC May1997).See further, Sir
Andrew Longmore,‘An Insurance Contracts Act fora New Century’ [2001]LMCLQ 356.
r2008 The Authors.Journal Compilation r20 08The Modern Law Review Limited.
Published by BlackwellPublishing, 9600 Garsington Road,Oxford OX4 2DQ,UK and 350 Main Street, Malden, MA 02148, USA
(2008) 71(1) 95^113
Papers, the Law Commissions published a consolidated Consultation Document
(hereafter LCCP) in July 2007,
3
which sets out recommendations, provisional
conclusions and requests for information on each of the three areas.
4
The 2007
LCCP departs from the 1980 proposals in a number of key respects, partly by
reason of signi¢cant changes in the way in which insurance is sold and partly
by reason of wide-ranging statutory controls on the content and operation
of consumer and small business policies, i n the form of the Unfair Terms in
Consumer Contracts Regulations 1999 and the decisions reached by the Financial
Ombudsman Service (hereafter FOS) exercising its adjudication functions
under the Financial Services and Markets Act 2000. In this respect, it is immedi-
ately striking that although the LCCP purports to address all classes of insurance,
including reinsurance, there is a sense that its emphasis lies with consumer
insurance. No doubt this is an inevitable consequence of the activity of the
Financial Ombudsman Service within the realms of the areas covered by
the document.
In this article we will address the LCCP’s main conclusions and areas of
uncertainty. It is apparent that the Law Commissions have been in£uenced
by developments in other jurisdictions, particularlyAustralia which undertook a
similar exercise some 25 years ago which led to the Insurance Contracts Act 1984
(Cth). The 1984 Act has recently been reviewed by the Australian Treasury, and
some modi¢cations are likely to be introduced with e¡ect from 1 July 2008.
As many of the issues which have vexed the Law Commissions have been
tackled by the 1984 Act, we will at appropriate points make reference to its
provisions.
5
This article is in three parts. It ¢rst outlines the background against which
modern insurance contracts are concluded, focussing particularly on the role of
intermediaries in the selling and placement process. As comme nted above, it is
noteworthy that the current methods in which insurance contracts are concluded
di¡er signi¢cantly from those whichwere the norm when the Law Commission
last reviewed the law in 1980 and it is, therefore, critical that the current reform
process should be informed by modern industry practices. We next consider the
dichotomy between consumer and business insurance given that this distinction
underpins the Law Commissions’ current review of insurance law and their
approach towards reform.We then turn to examine the proposals put forward in
the LCCP on the pre-contractual duty of good faith both for consumer and
business policies. This inevitably leads us to consider the approach taken towards
agents and brokers acting for prospective assureds during the disclosure process.
Finally, we discuss the proposed rules for warranties and similar terms.We argue
3 TheLaw Commission Consultation Paper No182 and the Scottish Law Commission Discussion
Paper No 134, Insurance Contract Law: Misrepresentation, Non-Disclosure and Breach of Warranty bythe
Insured (2007), http://www.lawcom.gov.uk/insurance_contract.htm. The objective is to publish a
draft insurance law bill in 2010.
4 Work has now begun on the next tranche of topics, which include post-contractual duties and
insurable interest.
5 The¢rst-named author u ndertookan analysis of the Australian experience, the result being pub-
lished on the Law Commissions’ website, http://www.lawcom.gov.uk/docs/merkin_report.pdf.
This paper is henceforth referred to as ReverseTransportation.
Reconstructing Insurance Law
96 r2008 The Authors.Journal Compilation r20 08The Modern Law Review Limited.
(2008) 71(1) 95^113

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