UK: Law Commissions´ Proposals For Reform - Intermediaries And Pre-Contract Information

The English and Scottish Law Commissions published their third Issues Paper on 21 March 2007. It focuses on the position where a mistake or fraud by an insurance intermediary leads to non-disclosure/misrepresentation of information to an insurer. The proposals are to be read in conjunction with the preceding Issues Papers which looked at reform of the law in respect of non-disclosure/misrepresentation and warranties generally.

The Commissions have identified three main issues. Firstly, if at the pre-contract stage the intermediary non-discloses/misrepresents material information received from an applicant, what should the consequence be and who should be held to account? Secondly, if the intermediary enters incorrect information on a proposal form that is then signed by an applicant, should the intermediary continue to be treated as the agent of the applicant and the applicant be bound by its signature? Thirdly, section 19 of the Marine Insurance Act 1906 imposes an independent duty of disclosure on an insurance agent; does the scope of the duty or the remedy for its breach need to be re-examined?

The consequences which flow from a pre-contractual non-disclosure/misrepresentation by an intermediary depend upon for whom the intermediary is acting - the insurer or applicant. In the former case, the insurer will be deemed to have knowledge of the material information; in the latter, it will not and will be entitled to avoid the policy.

However, it can be very difficult to determine into which camp an intermediary falls. Most commonly they are viewed as agents of the insured. Equally commonly they are remunerated by the insurer. In addition, intermediaries can and do act in a dual capacity - acting as the applicant's agent when providing advice and as the insurer's agent when issuing a cover note. There is even more scope for confusion at the reinsurance level where the broker may take on a multitude of roles for a variety of entities.

The Commissions have deemed the current position "unsatisfactory" for the consumer. Referring to instances where consumers have pursued lengthy claims against an insurer only to be told that they should have been pursuing the intermediary, they conclude that the insurance industry is being brought into disrepute. Clarity is needed. The law (and the Financial Ombudsman Service's practice) must meet the reasonable expectations of consumers. They propose that the intermediary should be regarded as the insurer's agent for the purposes of obtaining pre-contract information, unless the intermediary is genuinely searching the market on the insured's behalf. Single-tied and multi-tied agents are to be deemed agents for the insurer. The insurer's remedy for their fraudulent/negligent acts would be against their agent rather than avoidance of the policy.

The proposal is to treat small businesses in the same way as consumers but to maintain the status quo as regards business insureds. There are a number of reasons for this: the sophistication of the (larger) business insured; the fact that such business contracts are rarely sold through tied or multi-tied agents; and the reality that brokers are frequently the ones who conceive of and sell the insurance product in question to both the insurer and insured. In such circumstances it would be unfair automatically to attribute the misdeeds of the broker to the insured or the insurer.

The Commissions consider that the current position requires clarification. They propose that an intermediary who would otherwise be regarded as acting for the insurer in obtaining pre-contract information remains the insured's agent while completing a proposal form. They also propose that the insured's signature on an erroneous proposal form should not be regarded as conclusive evidence of the insured's honesty in the way that the proposal form was completed. The burden would, however, remain on the insured to establish that the error on the form was the fault of the intermediary.

The Commissions query whether the same changes should be made vis à vis business insureds.

Section 19(a) imposes an independent duty on agents effecting insurance to disclose every material circumstance which is known to them, and they are deemed to know every circumstance which in the ordinary course of business ought to be known by or communicated to them. The insurer's remedy for breach is avoidance of the policy. The Commissions consider this wrong in the consumer context because the remedy is to the detriment of the innocent insured rather than the perpetrator of the breach. They propose that this section ceases to apply to consumer policies or, in the alternative, that the current remedy be replaced with a remedy in damages against the intermediary. The Commissions acknowledge that the point may be of academic importance only - they have found no examples of an insurer relying on section 19(a) in a consumer case.

In the business context, the Commissions likewise suggest the replacement of the insurer's right to avoid with a right to claim damages from the agent. Another interesting query which they raise is whether or not the law should specifically state that an intermediary is not required to disclose information given to it in confidence by a third party.

Section 19(b) requires the agent to disclose every material circumstance which the insured is bound to disclose, unless it came to the insured's knowledge too late to communicate it to the agent. The Commissions question the usefulness of this provision given that the only remedy available to the insurer is avoidance of the policy - a remedy which would be available to it because of the insured's non-disclosure in any event.

The proposals made in the third Issues Paper are far reaching and, in some instances, controversial. Market participants will therefore wish to review them with care before supplying their feedback to the Commissions at the forthcoming open seminars.

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