{"id":428,"date":"2019-04-04T11:29:30","date_gmt":"2019-04-04T11:29:30","guid":{"rendered":""},"modified":"2019-06-11T08:57:18","modified_gmt":"2019-06-11T08:57:18","slug":"pre-contractual-duty-disclosure-6638","status":"publish","type":"post","link":"https:\/\/www.lawteacher.net\/free-law-coursework\/pre-contractual-duty-disclosure-6638.php","title":{"rendered":"Pre-contractual Duty of Disclosure | Analysis"},"content":{"rendered":"

Introduction<\/h2>\n

Prior to the Consumer (Disclosures and
\nRepresentations) Act 2012 and the Insurance Act 2015, the pre-contractual duty of
\ndisclosure for insurance contracts attracted significant criticism for placing
\nan unfair burden of disclosure on the insured, the breach of which led to the
\nsevere and disproportionate remedy of complete policy avoidance. The Law
\nCommissions have historically suggested that this duty be abolished for
\nconsumer insureds and modified for business insureds, and these changes have now
\nbeen subsumed and introduced under the above-mentioned acts. Where there was
\npreviously a general insurance law, these acts have now introduced a doctrinal
\ndistinction between consumer and business insurance.[1]<\/a> Given
\nthe inherent weaknesses of the old law and differences between consumer and
\ncommercial entities, this essay will seek to establish that the Law
\nCommissions\u2019 recommendations are right, and have resulted in a more balanced
\nprotection of insured interests. <\/p>\n

This essay will first focus on the weaknesses
\nof the traditional regime and the juristic basis for reform to the
\npre-contractual duty of disclosure. The essay will then move on to examine how the
\ncurrent law has effectively addressed these inadequacies before finally
\nexploring the underlying doctrinal reasons for this divergence of consumer and
\nbusiness regimes.  <\/p>\n

The Traditional Regime<\/h2>\n

The pre-contractual duty of disclosure
\noriginates from the uberrima fides <\/em>doctrine of
\nutmost good faith in insurance contracts, as set out by Lord Mansfield in the
\nleading case of Carter v Boehm<\/em>.[2]<\/a>
\nThis principle was subsequently codified[3]<\/a>
\nin the Marine Insurance Act 1906 (the \u2018MIA\u2019), the basic effect of which imposed
\nupon insureds the duty to disclose all \u2018material circumstances\u2019 within his knowledge
\nto the insurer.[4]<\/a>
\nThe failure of the insured to demonstrate utmost good faith would allow the
\ninsurer to avoid the policy ab initio.[5]<\/a>\n<\/p>\n

The Test of Materiality<\/h3>\n

The approach toward determining a \u2018material
\ncircumstance\u2019 under the wording of the MIA has been a highly complex and
\ncontentious affair, making it quite central to calls for reform. Under s.18 of
\nthe MIA, a circumstance was material if it would \u201cinfluence the judgement of a prudent insurer in fixing the premium, or
\ndetermining whether he will take the risk<\/em>\u201d \u2013 this requirement was made from
\nthe perspective of the insurer, and imposes an onerous burden of disclosure on
\nthe insured without providing any guidance. Despite the MIA\u2019s maritime roots,
\nthe Court of Appeal drew no distinction between marine and non-marine insurance
\ncontracts and adopted this \u2018test of materiality\u2019 as a general principle in Lambert v Cooperative Insurance Society.[6]<\/strong><\/a>
\n<\/em>Nevertheless, McKenna J, in empathising with the insured, made it clear
\nthat this case \u2018showed the unsatisfactory
\nstate of the law<\/em>\u2019.[7]<\/a> <\/p>\n

The test of materiality was further
\ndeveloped in Pan Atlantic Ins. Co v Pine
\nTop Ins. Co<\/em>[8]<\/a>where the House of Lords affirmed the
\npreviously held view[9]<\/a> that
\nthe phrase \u201cinfluenced the judgement<\/em>\u201d
\nreferred merely to factual circumstances that the insurer would have liked to
\nknow of, but not necessarily acted on, when assessing risks. This objective
\ntest meant that insureds were required to disclose every piece of information which
\nwould have an effect on the mind of the insurer. This caused two main problems.
\nFirstly, it meant that insureds were held to an impossibly high standard of
\ndisclosure and were expected to effectively read into the mind of a prudent
\ninsurer. Secondly, it meant that insurers could avoid policies despite there
\nbeing no causal link between the non-disclosure and actual loss. <\/p>\n

To mitigate the harshness of the law, The
\nHouse of Lords introduced a second, independent limb of \u2018inducement\u2019 to the
\ntest of materiality. This was a subjective test that required insurers to provide
\nevidence showing that a material circumstance had induced them to enter into
\nthe contract. In St Paul\u2019s
\nFire & Marine Insurance Co v McConnell Dowell Contractors Ltd[10]<\/strong><\/a><\/em>, this
\nwas done using evidence from other insurers as well as expert witnesses.
\nAlthough it did impose an appropriately higher burden of proof on the insurer
\nin cases of non-disclosure, such an approach also added a degree of complexity
\nand artificiality to the materiality test.[11]<\/a>
\nFor example, in Marc Rich v Portman<\/em>,[12]<\/a>
\nLongmore J found the insurer in question to be \u201ca most unsatisfactory
\nwitness\u2026 (who) revealed a surprising ignorance or indifference to prudent underwriting
\npractice<\/em>.\u201d Nevertheless, the inducement requirement did allow the court to
\nlimit insurers\u2019 recourse to the drastic remedy of avoidance, as illustrated in Drake
\nInsurance Plc v Provident Insurance Plc<\/em>.[13]<\/a>
\nHowever, Merkin has criticised this approach as coming perilously close to
\nallowing the court to underwrite the policy itself.[14]<\/a>
\nThe subjective test of materiality, still very much insurer-centric, does
\nlittle to improve the clarity and scope of an insured\u2019s disclosure obligations.\n<\/p>\n

Other Weaknesses<\/h3>\n

The MIA made no distinction between
\ninnocent non-disclosure, negligent non-disclosure, or fraudulent concealment.[15]<\/a> This
\nmeant that an insured could have acted well within the meaning of \u2018good faith\u2019,
\nbut still fail to meet the standard of utmost good faith.[16]<\/a> Moreover,
\nan insurance proposal form does not remove overarching disclosure obligations.
\nIn Schoolman v Hall<\/em>,[17]<\/a> the insured\u2019s
\nclaim was rejected after it was found that he had previous convictions that
\nwere not disclosed despite there being no prompt for such information on the
\nproposal form. In this regard, there is also no obligation for the insurance to
\nask any questions.[18]<\/a><\/p>\n

Perhaps the most glaring drawback with the
\nMIA would be that it only provided a single remedy of policy avoidance ab initio.
\nGiven that the courts did not entertain the idea of damages in insurance law,[19]<\/a> a
\nbreach of disclosure obligations would allow the insurer to pay all premiums
\nback to the insured and act as if the policy had never existed. For obvious
\nreasons, this draconian[20]<\/a>
\napproach was a \u201ccritical flaw\u2026 that
\nprovide(d) insurers with remedies which in many circumstances (was)
\ndisproportionate<\/em>.\u201d[21]<\/a><\/p>\n

It is also important note that the law did
\nnot distinguish between consumer and commercial insureds. Although there were
\nsome protections[22]<\/a>
\noffered to consumers, the state of the law was quite aptly described by
\nTyldesley as being \u201carchaic, unclear, and
\nunfair<\/em>.\u201d[23]<\/a>\n<\/p>\n

The Current Law<\/h2>\n

Consumer Insureds<\/h3>\n

The Consumer (Disclosures and
\nRepresentations) Act 2012 (the \u20182012 Act\u2019) now governs all consumer insurance contracts,
\nand the provisions of the MIA no longer apply. Under the Act, consumers are
\nindividuals contracting \u201cwholly or mainly
\nfor the purposes unrelated to the individual\u2019s trade, business, or profession<\/em>.\u201d[24]<\/a> The
\nAct introduces sweeping pro-insured reform to pre-contractual disclosure
\nobligations. <\/p>\n

S.2 of the 2012 Act abolishes the pure duty
\nof pre-contractual disclosure, and instead introduces a duty for the consumer
\nto take reasonable care not to make a misrepresentation. This completely
\nremoves the difficult concept of \u2018material circumstance\u2019 and redraws disclosure
\nobligations from the perspective of the insured. This greatly eases the
\ninsured\u2019s burden of obligations as they are only held to the objective standard
\nof a reasonable consumer,[25]<\/a> and
\ndo not have to meet the impossibly high standard of a prudent insurer under the
\nMIA. <\/p>\n

The abolishment of disclosure obligations
\nmeans that the law on consumer remedies is completely rewritten as well. Remedies
\nare provided in ss.4 and 5, but only for \u2018qualifying misrepresentations\u2019,
\nnamely, misrepresentations that are deliberate and reckless or careless. This
\nmeans that innocent and reasonable misrepresentations do not allow for complete
\navoidance of the policy. Moreover, and in cases of careless misrepresentations,
\nthe insurer is barred from avoiding the policy if (a) he would have entered the
\ncontract on different terms or (b) if would have charged a higher premium. For
\nscenario (a), the insurer is taken to have contracted on the terms that would
\nhave been applied if the careless misrepresentation was not made. For scenario
\n(b), the insurer is liable to pay the proportion of the claim against the actual
\npremium paid by the insured. In both these scenarios, the insurer can terminate
\nthe contract \u2013 this prospective remedy means that an insured would be able to
\nenforce prior claims. The distinction between innocent, reasonable and careless
\nmisrepresentation is a major step up from the traditional regime, and protects
\ninsureds from unfair and exploitative treatment by insurers who seek to avoid a
\npolicy on the most insignificant breaches. <\/p>\n

Business Insureds<\/h3>\n

The Insurance Act 2015 (the \u20182015 Act\u2019)
\nsupplements the MIA instead of replacing it, and applies to all non-consumer
\ninsurance contracts.[26]<\/a> <\/p>\n

The 2015 Act recasts the traditional disclosure
\nobligation – the duty to disclose and misrepresentation are subsumed under a single
\nholistic \u2018duty of fair presentation\u2019.[27]<\/a> At
\nits heart, the Act retains the core test of materiality, albeit with some
\nmodifications. The first major change involves a much needed provision of
\nguidance on the materiality of facts.[28]<\/a> In
\naddition to the original MIA s.18(1) disclosure requirement, the 2015 Act also adds
\na second element that builds upon case law developments[29]<\/a> and allows
\ninsureds who fail to meet the MIA disclosure requirement to merely make a \u201cdisclosure which gives the insurer
\nsufficient information to put a prudent insurer on notice that it needs to make
\nfurther enquiries for the purpose of revealing those material circumstances<\/em>.\u201d[30]<\/a> This
\nallows the insured to make a somewhat \u2018lesser\u2019 form of disclosure, and signifies
\na shift toward providing a more balanced, less insurer-centric disclosure
\nobligation where a breach of duty is not automatically assumed if the insured
\nfails to provide a piece of information. Finally, S.8(1) codifies the Pan Atlantic<\/em> subjective materiality
\ntest, which was in practice the real protection for the insured.[31]<\/a> <\/p>\n

Perhaps the most significant[32]<\/a>
\nmodification to the duty of disclosure lies in the remedies available for its
\nbreach. Much like the 2012 Act, the 2015 Act introduces the concept of
\nproportionate remedies that draws a distinction between deliberate or reckless,
\nand careless breach of the duty.[33]<\/a> The
\nonly difference is that the 2015 Act does not distinguish between innocent and
\nnegligent breaches, and the insurer remains entitled to a remedy in light of
\nsuch breaches. <\/p>\n

A Doctrinal Divergence<\/h2>\n

The Law Commission has drawn a clear line
\nbetween consumer and business insurance contracts with the total abolishment of
\na consumer\u2019s disclosure duties and modification of a business\u2019s duties. From a
\njuristic standpoint, these changes appear to have addressed the weaknesses of
\nthe traditional law, namely the unfair test of materiality and the stringent
\nremedy of avoidance. However, it will be necessary to examine the impact of
\nthese changes against the greater doctrinal backdrop of insurance law. Without
\ndelving into too much socio-legal analysis, this essay will explore two areas:
\nthe reasoning behind the divergence and potential problems of the reform. <\/p>\n

Reasoning<\/h3>\n

The decision of the Law Commission to deal
\nseparately with both branches of law was shrewd because rules suitable for mass
\nmarket consumer insurance would not be appropriate for larger scale businesses
\nwho were generally very well informed.[34]<\/a> Additionally,
\nit has been almost 250 years since Lord Mansfield first elucidated the
\nprinciple of utmost good faith,[35]<\/a> and
\nadvances in technology now mean that a varied range of insurance contracts are now
\nconcluded very quickly and by parties from all sorts of backgrounds. <\/p>\n

The Law Commissions were acutely aware that
\neach class of insured was unique; for example, the duty of disclosure was
\nretained for businesses in the UK because market practice meant that they did
\nnot use proposal forms, undertook a wide range of unusual risks, and often
\noperated through professional intermediaries.[36]<\/a> The
\nasymmetric bargaining position of consumers also meant that businesses did not
\nneed protections such as the Financial Ombudsmen Service (FOS), and were
\nneither allocated the post reform remedial benefit of innocent
\nmisrepresentations that was offered to consumers. In this respect, the FOS
\nprovided perhaps the most effective pre-reform protection for consumers \u2013 the
\nservice is not obliged to follow the law and do not enforce the duty of
\ndisclosure.[37]<\/a>
\nIn fact, the FOS refused to allow avoidance for non-disclosure in cases where
\nno question was asked by the insurer. The Law Commissions chose to abolish the
\nconsumer\u2019s duty of disclosure to bring the law into line with this industry
\npractice,[38]<\/a>
\nand the prevailing mentality was that insurers should have sufficient industry
\nexpertise to adopt the burden of finding out information, rather than require
\nconsumers\u2019 positive disclosure.[39]<\/a>
\nMoreover, technology has since altered the market for insurance, and initial
\nfears regarding \u2018sharp practices\u2019[40]<\/a> by
\nconsumers quickly dispersed upon the advent of telemarketing and canvassing.
\nShould a duty of disclosure have been retained, it would have led to an
\nundesirable amount of litigation and an increased FOS workload.[41]<\/a> <\/p>\n

Problems<\/h3>\n

The 2015 Act does not provide a definition
\nfor a \u2018business\u2019, but rather applies generally to all non-consumers. This means
\nthat smaller enterprises such as sole traders, who are more akin to consumers
\nthan commercial entities, are caught under the provisions of the Act. Whilst some
\nmay be able to seek recourse from the FOS, this is an illustration of how the
\nLaw Commission has compromised their recommendations to accommodate the
\ninsurance industry\u2019s deep rooted resistance to reform.[42]<\/a> <\/p>\n

The nascence the 2015 Act means that one
\ncan only speculate on its efficiency. Nevertheless, there is the potential for
\nincreased commercial uncertainty, particularly with suggestions that the lack
\nof an explanation of \u2018fair representation\u2019 would lead to increased litigation.[43]<\/a>
\nMoreover, the concept of proportionate remedies had been previously rejected by
\nthe Law Commission on the basis that it was too difficult to calculate a
\npremium in hypothetical circumstances.[44]<\/a> In
\nthis respect, it has also been predicted that 
\n\u201crisk would be determined not by
\nthe free market but by judges exercising after-the-fact highly discretionary
\n(and arbitrary) judgments<\/em>.\u201d[45]<\/a>
\nAlthough purely academic at present, these are potential problems that will
\nhave to be ironed out in practice. <\/p>\n

Conclusion<\/h2>\n

The Law Commissions\u2019 recommendations are a
\nstep in the right direction for the law of insurance. They have addressed the
\nflaws that the traditional insurance regime posed to two fundamentally
\ndifferent classes of insured through the creation of two separate and doctrinally
\ndivergent legal regimes. <\/p>\n

On a juristic level, the abolition of the
\nconsumer\u2019s duty of disclosure and the recasting of disclosure obligations to
\nthe insurer has greatly eased the previously asymmetric, unfair, and archaic
\nburden on the consumer. Modification to the business disclosure duty has meant
\nthat the obligation is now clearer and less stringent. Moreover, the
\nintroduction of a common proportionate remedy now means that insureds are no
\nlonger subject to the single, draconian outcome of complete policy avoidance. <\/p>\n

Although the new law is untested and by
\nextension, conceptually imperfect, the Law Commissions\u2019 pragmatic approach to
\nreform has undoubtedly altered the traditional power balance in favour of the
\ninsured. They have provided a tailored solution that improves the protections
\naccorded to insured – in this respect, the Law Commissions\u2019 were right to have
\nrecommended for an abolishment and modification to the disclosure duties of a
\nconsumer and business insured respectively. <\/p>\n

Bibliography<\/h2>\n

Legislation <\/h3>\n