Second Reading Committee
Arrangement of Business
The Deputy Chairman of Committees (Baroness Harris of Richmond)
My Lords, before the Minister moves that the Bill be considered, I remind noble Lords that the Motion before the Committee is that the Committee do consider the Bill. I should perhaps make it clear that the Motion to give the Bill a Second Reading will be moved in the Chamber in the usual way. If there is a Division in the Chamber while we are sitting, this Committee will adjourn as soon as the Division Bells are rung and it will resume after 10 minutes.
Consumer Insurance (Disclosure and Representations) Bill [HL]
(13 years, 6 months ago)
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The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, this Bill implements the recommendations of the Law Commission and the Scottish Law Commission in their 2009 joint report on the law governing pre-contract disclosure and misrepresentation in consumer insurance contracts. This report highlighted an area where a complex and confusing array of rules and regulation has emerged to compensate for outdated legislation.
This is a limited and targeted Bill, which applies only to consumer insurance contracts; it does not apply to insurance contracts solely or mainly covering business, including micro-businesses. There has been extensive consultation, the results of which have been reflected in the Bill where possible and relevant. The recommendations enjoy a broad consensus of support from the industry, consumer groups and regulators. It has therefore been deemed suitable for this Bill to be considered by your Lordships under the procedure for Law Commission Bills.
On 2 October 2010, a letter with a range of signatories was sent to the Times in support of this Bill. It described the current law as designed to,
“govern face-to-face commercial insurance deals in the coffee houses of Georgian London”.
It should not come as a surprise that this existing law, passed in 1906 to govern marine insurance, is no longer an appropriate basis for the law on all consumer insurance contracts. The insurance industry itself has recognised that requiring consumers to provide all information that might,
“influence the judgement of a prudent insurer”,
is no longer a sensible approach.
It does not seem a reasonable expectation of consumers that they should understand the underwriting process to the extent necessary to know precisely which facts they should disclose. For example, under current law a consumer may find that his or her critical illness policy no longer provides cover because he or she has not mentioned a visit to the doctor for a cold. Even if he or she reasonably thought this irrelevant to the cover that he or she had purchased, was not asked specifically to give details of all visits to the doctor or had simply forgotten the visit, the insurer may use the non-disclosure to refuse to pay. When facing a critical illness and any consequent financial disruption, finding that you have lost the safety net that you thought you had might, understandably, be highly distressing and disruptive.
This Bill will address these problems by changing the law through two central provisions. First, there is the change at Clause 2 from a requirement that consumers volunteer information to one that the insurer ask clear and specific questions. Secondly, provision is made in Schedule 1 for a proportionate set of remedies for the insurer when a misrepresentation has been made.
Let me start with the change at Clause 2. By replacing the existing requirement on the consumer with a duty to take reasonable care to answer questions fully and honestly, this Bill brings the law up to date with industry best practice. It reflects current regulation by the Financial Services Authority and the approach taken by the Financial Ombudsman Service. It will no longer be possible, as it currently is, for an insurer to refuse to pay a claim and have this refusal upheld by the courts but be ruled against by the ombudsman and be fined by the FSA. The current law and layers of regulation are complex and confusing for both industry and consumers.
We anticipate that providing clarity to the requirements on each party will lead to a reduced number of complaints to insurers and the FOS. At present the FOS receives around 1,000 complaints a year about non-disclosure and misrepresentation. Around half of the insurers’ decisions are upheld. We would expect the uphold rate to be much higher if there were sufficient clarity around the rules, which indicates that insurers find it difficult to locate and interpret the rules.
In future, this law should be taken into account by the ombudsman when deciding cases, as required by FSA rules. Complaints about claims that were above the FOS’s limit for consideration, or otherwise not resolved by the ombudsman, could be addressed in the courts. However, the Bill will not lead to consumers being driven to the courts earlier than at present.
We believe that the Bill will shift the balance of the law in favour of the consumer. The Marine Insurance Act is, in some parts, heavily biased in favour of insurers. This Bill attempts to rectify that bias. It removes a sometimes unreasonable level of duty on the consumer so that responsibility for accurate disclosure lies somewhere between consumer and insurer. Our replacement has received support from a range of consumer groups, including Which?, the British Heart Foundation, Consumer Focus, Macmillan and Age UK.
Of course, there is also a balance to strike between the effort required of the consumer to provide relevant information and the role of the insurer in prompting this. I know from discussions with noble Lords that there are concerns around this. The Bill does not attempt to guide what questions insurers should ask beyond a requirement that they are clear and specific. However, this is covered in industry guidance elsewhere. Under principle 6 of the FSA Principles for Businesses, a firm,
“must pay due regard to the interests of its customers and treat them fairly”.
More specifically, firms have an obligation, under this principle and under the Insurance: Conduct of Business Sourcebook, to ensure that customers know what they must disclose. The FSA has also indicated that it does not think that the entire burden around disclosure should fall on the consumer.
Once information has been provided, Clause 4 sets out which circumstances then entitle the insurer to a remedy. The insurer must establish that, had it known the true facts, it would not have entered into the contract, or would have agreed different terms, before it can reject or reduce a claim. For example, a remedy would not be permitted if the insurer could not demonstrate that failure to disclose the visit to the doctor with a cold would have affected the motor insurance policy that it offered.
This takes me to Schedule 1, which looks at remedies available to the insurer when there has been a misrepresentation. The current penalties for failing to disclose information to insurers are harsh. A failure to disclose any information that a prudent insurer would consider when writing the policy means that it becomes void. This Bill will mean that an insurer can only apply a penalty proportionate to the nature of the misrepresentation. If the misrepresentation was honest and reasonable, the insurer must pay. If the misrepresentation was careless, the insurer has a remedy based on what it would have done had the consumer answered the question accurately. If the insurer would, for example, have excluded a certain illness, the insurer need not pay claims that would fall within the exclusion but must pay other claims. If the insurer would have charged a higher premium, it must pay a pro rata proportion of the claim. This means that only if the information carelessly misrepresented or not disclosed would have affected the terms of the policy would the insurer have a remedy. Finally, if the misrepresentation was deliberate or reckless, the insurer may treat the policy as if it never existed and may decline all claims. It is also entitled to retain the premiums paid.
I should also outline some of the further contents of the Bill. It establishes a statutory code to determine for whom an intermediary acts when arranging insurance. The ombudsman has often seen consumers allege that their broker was responsible for the provision of inaccurate or misleading information. Schedule 2 therefore lists factors that tend to show whether the agent acts for the insurer or consumer and therefore who should bear the consequences. This code is based largely on existing law, as supplemented by FOS practice and industry understanding.
Clause 7 also contains special provisions for group schemes where one party, typically an employer, arranges insurance to benefit members of the group. The Bill provides that, where one group member makes a misrepresentation, that has consequences only for that individual and not for others within the group. Again, this is in line with current accepted good practice.
The Bill that I have been detailing has a broad consensus of support. Discussions with interested parties have been extensive. The consultation carried out by the Law Commission ahead of its report received over 100 responses. HM Treasury has since carried out targeted consultation to ensure that support for the Bill remained. A summary of these responses has been placed in the Libraries of both Houses. The consensus obtained by the Law Commission has remained intact throughout the process. I have mentioned support from consumer groups, but the industry and regulators are also positive about a Bill that will ensure that the law reflects their existing approaches and best practice. We believe that this Bill will clarify the standing of consumers and reduce costs for the industry. I am pleased that it has been so widely supported and I commend it to the Committee.
Baroness Kramer
My Lords, I am delighted to have an opportunity to speak in what I assume is the Second Reading of this Bill and to congratulate the Government on a piece of legislation that has long been needed.
I became aware of the issues that this Bill attempts to redress when I was a Member in the other place. A constituent came to my office. She was a redoubtable lady—and thank goodness that she was. She and her husband had purchased a house, taken out a mortgage and purchased from the mortgage provider an insurance policy so that if the husband died—he was the breadwinner in the family—the insurance policy would pay the remaining payments due on the mortgage, to provide security for the widow and children.
Her husband very sadly died of a heart attack. Obviously, it was devastating for the family. She had to consider how she would go back to work and the children had to adjust to not having the presence of their father. It was a traumatic time, but the thought that comforted them was that they could remain in their house because the insurance would take care of the mortgage. However, it turned out on examination by the insurance company that in disclosing his medical history her husband had not said that, something like two years before the insurance was taken out, he had visited his doctor. He had been somewhat under stress and the doctor suggested that he was rather depressed and gave him a prescription. I believe that it was for Valium. The depression did not continue and never became a serious issue. There was no continuing medication. However, in the doctor’s notes on that one occasion, this discussion of his depression was duly and properly recorded.
On those grounds, the insurance company refused to pay out under the policy. This lady would have lost her home. She fought the issue for over two and a half years. I ended up in many a conversation with the ombudsman, there were letters to the FSA, the courts became involved and, eventually, she won her case, but it was a two-and-a-half-year struggle. In that time, she would have lost her house had her parents not been able to help her to make the ongoing mortgage payments. The loss of the house would have added to the trauma that the children and family were facing. Even if eventually the financial solution was appropriate, it would never have dealt with the emotional damage to that family.
It seems to me that this legislation will address a situation like that—I hope that the Minister can confirm that that is so. That is critical because, although in the past many people were eventually able to get redress either through the ombudsman, a long-term court battle or in other ways, the suffering because of the struggle and its consequences took an enormous toll on families. I use this example because sometimes such issues, particularly insurance, become much more real when seen in the context of what an individual experiences. I am delighted that, as I read it, the legislation seems to address all counts for such issues.
I have one further question, which perhaps the Minister can answer. He will know that relevance in insurance policies has always been significant. In a sense, relevance is somewhat captured by this legislation as it presents itself on paper. In the claim that I discussed just now, if the insurance company were to understand that the homeowner had failed to disclose this issue, it could have decided perhaps to exclude certain conditions in the policy or to charge a higher premium, but it would not have been able to use that factor to void any responsibility to pay. The sliding scale, in effect, becomes an interesting mechanism to make sure that irrelevant conditions do not intrude on the payment obligation of the insurer. That is a big step forward.
It is good to know that the Bill has been welcomed on all sides, including by the insurance industry, as it is in the industry’s interests to restore its reputation. We know that, on the street, there is very much an attitude that an insurance company will use any mechanism that it can find to avoid paying. In the long run, that does the industry no good, so its support for this legislation is a win-win all round and I am delighted to welcome it.
Baroness Noakes
My Lords, I shall try to be brief in my contribution to this Second Reading debate. Until late last week, I had not intended to take part in the debate so I did not attend the briefing meeting that I understand my noble friend the Minister arranged. I also apologise to him for not giving notice of the points that I will be making, which arose only late last week. Indeed, some of my briefing arrived only late this morning. I should say at the outset that I fully support the Bill and endorse what my noble friend the Minister and the noble Baroness, Lady Kramer, said about its importance.
While the Bill is about consumer insurance, its impact will not be confined to consumers or insurance companies. Insurance is often sold through people other than insurance companies, which is where the BBA’s members come on to the scene, because banks typically sell insurance products alongside other financial products. It is important, therefore, that the banks can implement the new requirements effectively. Implementation is the topic that I want to address.
Clause 12 deals with the timetable for implementation and provides in broad terms that the legislation will not come into effect until an order is laid, which cannot be for a year after Royal Assent. Implementation could be from some time after next summer. The Minister will be aware that when banks and, indeed, others sell financial products, they have to ensure that their documentation is compliant with legal and regulation rules. Importantly, they have to train their staff and support them with such things as standard scripts to ensure that the rules are complied with.
As the briefing provided by the Financial Ombudsman Service today makes plain, the emphasis of the sales process for insurance products will, as a result of the Bill, shift much more towards asking relevant questions and obtaining specific information. Banks will need to ensure that their staff ask the right questions and then probe the answers to those questions in the appropriate way. More importantly, they will have to assemble the right evidence in all this so that, if necessary, they can determine and prove whether a customer has taken care in providing relevant information.
Many banks sell face to face and do not have the ready evidence provided by telephone or internet sales, so the evidence aspect to this is important. In addition to addressing the sales process, banks obviously have to review and perhaps modify compliance systems. Inevitably, there will also be changes to and investment in information systems. I should stress that the BBA, in briefing me, has no problem with that at all. The issue is not any changes that might be necessary but timing.
As the Minister will be aware, the FSA is in the process of requiring implementation of its retail distribution review, with an implementation date of December 2012—some 18 months away. The changes that will come about through this Bill will involve to some degree the same systems, processes and people to be trained as the RDR; they will not be exactly the same, but they will be in the same area. In addition, the industry will look to the impact of the new simplified advice area, which could well have an impact on insurance sales. The industry is still awaiting FSA guidance on simplified advice and hence does not know what implications that will have for the sales process. If it does have implications, it will be in exactly the same area.
The banks and doubtless others affected by the RDR and simplified advice want to be in a position, if possible, to implement all the changes in one go. It does not make business sense to carry out one set of modifications to systems, processes, training and so on and then to follow it a matter of months later with another similar set in the same area. In theory, it can be done in sequential implementations, but that is not the most efficient way in which to proceed. It adds cost to the system and probably increases implementation risk. How do the Government see the implementation timetable of the Bill? Will it be harmonised with that for the RDR and simplified advice?
The BBA has also raised the issue of the interaction between the Bill and IMD 2—that is, the proposed revision to the insurance mediation directive. The Commission is currently conducting an impact assessment of the changes and expects to produce a revision to the existing directive by the end of the year. This could well also produce changes in the same sorts of areas, raising the same sorts of issues. Have the Government considered the impact of the Bill in relation to IMD2? I hope that my noble friend can reassure me that the Government will be mindful of the burdens on those who need to implement changes in the interface with consumers when they determine when to bring the Bill into effect.
Lord Higgins
My Lords, I begin by raising one or two questions of a procedural nature. I am not clear whether I am speaking in the gap. My understanding is that there is virtually no precedent for the procedure that we have adopted today other than for one previous Law Commission Bill. It is not the least bit clear whether this is a Second Reading. My understanding is that it is not. We are considering a Second Reading in Committee. If it is in Committee, any noble Lord is entitled to speak without being on a speakers list, but I understand that there is a speakers list. Perhaps at a later stage either the Lord Chairman or my noble friend, if he has advice from the Clerk, could make the position clear.
Further, in relation to the statement made by the Lord Chairman at the beginning, as I understand it a Second Reading will be moved in the Chamber in the normal way. I am not clear whether that will be debateable. Perhaps we can have some clarification on that. Presumably, there will then be Committee and Report stages later on. At the moment, there seems little precedent to clarify the position on any of this. However, on the assumption—it may be an heroic assumption—that I am speaking in the gap, perhaps I might raise one or two points.
I first congratulate my noble friend on the helpful way in which he has had private discussions ahead of this meeting. I also congratulate those who prepared the documentation for the Bill, particularly the Explanatory Notes, with the excellent and helpful diagram. There is confusion, as my noble friend Lady Noakes implied, between the situation with the Bill and European legislation. Of course, we do not have a single market in insurance in the European Community. Consequently, some parts seem to be dealt with by directives and some parts by national legislation. That takes me a little wide of the remarks that I want to make, but I congratulate my noble friend and, indeed, the Treasury on arranging to get this Bill into the programme. It certainly would not normally get in, given the pressure on parliamentary time.
The Bill is clearly very useful. It clarifies the position considerably, except in one respect. I discovered only this afternoon the massive tome that is the Law Commission and Scottish Law Commission report. At paragraph 10.29, it raises the question of whether courts should follow industry guidance and it says at paragraph 10.30 that there is confusion as to whether the courts follow industry guidance or not. Parliamentary counsel has drafted a provision saying:
“The insurer may not take advantage of any remedy provided for under this Schedule if, or to the extent that, it would be unreasonable to do so according to written guidance generally recognised by insurers providing the type of insurance in question”.
That seeks to reconcile the position between codes of practice and legislation, which in many ways this seeks to avoid. Anyway, when I look at Schedule 1, I cannot find that particular clause, which appears to have been drafted but not included. If it is not included, this point seems still to be left in some confusion.
I will be imposing on the tolerance of the Committee if I go on much longer. However, if this is going to be done in future—and there is a strong case for using this procedure on Bills of this kind—we need to be clear on what the procedure is.
Lord Eatwell
My Lords, I express my gratitude to the Minister and his team and to Mr David Hertzell of the Law Commission for their briefing on the Bill, which was very helpful indeed.
In debates on measures brought before Parliament, the claim is often made—and perhaps even sometimes believed—that the consequences will be wide-ranging. In the case of this Bill, it is likely that the claim will indeed be true—and perhaps not only in the United Kingdom. For the Bill proposes a fundamental change in the structure of the insurance contract from a requirement that the purchaser discloses everything that will be material to the insurer’s decision to insure to a requirement in Clause 2(2) that the purchaser,
“take reasonable care not to make a misrepresentation to the insurer”.
In effect, the purchaser must answer carefully the question posed by the insurer. That is a dramatic shift of responsibility. Even though it is claimed that the Bill essentially clarifies what is accepted practice under the FSA’s insurance regulation and the various provisions of the Financial Ombudsman’s scheme, it seems that the Bill goes further than mere clarification.
One of the fundamental principles of insurance is that which is referred to as “uberrimae fidei”, or “utmost good faith”. That principle is fundamental to insurance law throughout common-law jurisdictions. A quick internet search revealed exactly the same principle as cited in the UK also cited in India, Ireland, Australia and the United States. Yet the Bill makes it clear in Clause 2(5)(a) that,
“any rule of law to the effect that a consumer insurance contract is one of utmost good faith is modified to the extent required by the provisions of this Act”.
Given that this legislation makes such a fundamental change to the principle if not to the practice of consumer insurance, it would be helpful if the Minister would clarify a number of points. First, have I interpreted correctly the shift in the onus of good faith? Is it indeed the case that the Bill characterises the information on which an insurance contract is based as deriving from the responsibility of the insurer to ask the questions and from the requirement that the consumer answer the questions with “reasonable care”, as under Clause 3? Also, is it indeed the case that there is no onus on the consumer to provide information that is not asked for—that is, there is no requirement to answer questions that are not asked, however relevant the information may be to the insurer?
As a supplementary point, what is the position if the consumer thinks that unasked-for information might be relevant to the contract but, not being asked, either concludes that the insurer believes the information to be not relevant or believes that it is not his or her responsibility to supply the information? In other words, will Clause 3(1) result in the addition of catch-all questions to insurance contracts, such as, “Is there any other information that might be relevant?”, hence substantially negating the declared intention of this Bill? Would that question be “clear and specific”? Is such a question permissible?
As a further supplementary, what questions are not permissible? As the noble Lord will be aware, the European Union seems likely to rule questions associated with gender as being out of order in motor insurance. Is this likely to become a general rule? Are questions about race permissible when they are relevant, as in the health issues associated with, say, sickle cell anaemia?
Secondly, why is there no responsibility on the insurer not merely to be clear and specific in questioning but also to demonstrate the relevance of questions asked? If questions that are indeed relevant when embodied in the insurer’s statistical analysis do not appear relevant to the consumer and their relevance is not demonstrated, the consumer may be led into treating the exercise more casually than is appropriate. This may be particularly true in medical insurance, in which the relevance of important issues may be very obscure to the consumer.
As I understand it, Clause 4(1)(b) establishes appropriate materiality in legal terms, but to the lay man, and indeed to the consumer, that clause is completely obscure. I imagine that if I asked any non-lawyer in this Room to explain how that clause established materiality, they would be hard pressed to do so. Since this is consumer legislation, should not the wording be clear and specific and not as obscure as Clause 4(1)(b)? I believe that the clause needs to be rewritten.
Thirdly, given that the insurers are now no longer protected by the catch-all requirement that the consumer must provide everything that would be material to the insurer’s decision to insure, it might be expected that the questions asked in proposal forms would become far more wide-ranging and comprehensive than has previously been the case. The very complexity of questions required to cover every eventuality might well create problems in and of itself. Are there to be guidelines to insurance companies defining the character and range of questions to be asked? Will the ABI, for example, provide such guidelines?
Fourthly, it is a familiar problem in credit analysis that a consumer’s credit rating is inappropriate because information has been logged wrongly or analysis has been faulty, or for a number of other reasons. In these circumstances, consumers have access to their credit ratings and a right of appeal. Is a similar facility available to consumers of insurance products and, if it exists, will the availability of this facility and its importance be widely publicised subsequent to the passage of this Bill? Will the facility be available, or is it available on the internet? In this context, are consumers deemed to know to what they have access? I know that this is a common outcome of business law, but it would be entirely inappropriate in consumer law.
Fifthly, how are all these matters to be played out in the process of renewal of an insurance contract referred to in Clause 2(3)? What if the request “to confirm or amend”, based on the original questions asked, does not in fact cover relevant changed circumstances? Is the consumer required to volunteer such information and how, under the terms of the Bill, is he or she to determine what is relevant? Would the insurer be allowed to ask the catch-all question, “Provide all other information that might be relevant at this stage”? If so, once again the Bill is otiose. It is particularly unclear in Clause 2(3), which therefore requires redrafting. It says that an insurance contract renewal is in fact a new contract. Renewal is not a concept known to insurance law. Should not the clause be redrafted to make that clear? What estimate has the Treasury made of the increase in the cost of insurance consequent on this legislation?
Before ending, I shall turn to the questions raised by paragraph (a) of Clause l, which seeks to define “consumer”, and by Clause 6, which is on warranties and representations. It may be—I have been unable to find out—that the concept of the consumer is defined in other relevant legislation, but as drafted in this Bill the definition is unreasonably vague. For example, taking out insurance against debilitating illness is typically motivated by the economic well-being of the sufferer and could not be said to be unrelated to the individual’s trade, business or profession. That would be especially the case if the physical or mental capacity that is insured is a necessary component of the performance of the profession. For example, for a ballet dancer, the body is the tool of his or her profession; it is the instrument of his or her art. Would any general health insurance taken out by a ballet dancer be insurance contracted by a consumer or not? Another, less exotic, example of the ambiguity of this definition of a consumer comes to mind. If I insure my BlackBerry, am I a consumer or not? The expression “wholly or mainly” is far too vague for me to know and, by the way, is unknown to insurance law.
On a related point, why was the legislation not extended to cover small businesses or even the micro-businesses to which the noble Lord, Lord Sassoon, referred, which at present suffer the same disadvantage as consumers? Indeed, the boundary between a consumer and a small business is often very vague—take my BlackBerry example. The clause requires further attention. It is not satisfactory as it stands.
On the question of insurance warrants, Clause 6(2) makes a valuable amendment to the law on misrepresentation, but this does not eliminate the generally destructive power of a warrant related to a condition of insurance. Given the drafting of Clause 3, which refers to “reasonable care”, and the remedies outlined in Schedule 1, would it not be appropriate to eliminate the role of warrants entirely from consumer insurance?
This is an important Bill, which is designed to pursue a worthy purpose. It is entirely supported by this side. However, it is not clear that the present drafting is sufficient to bear the weight of the major philosophical and practical change that is embedded within it. We will have the opportunity to pursue these matters at a later stage. In the mean time, answers to the questions that I have posed will greatly facilitate preparation of any necessary amendments.
I nearly forgot: as far as the Committee stage is concerned, I understand that under the rules governing Law Commission Bills it is possible to take evidence in Committee. Given that and given the defects in the drafting of the Bill as presently tabled, are the Government intending to call expert witnesses in Committee?
Lord Sassoon
My Lords, I start my response to what has been a helpful discussion by thanking the noble Lords who have taken the trouble to contribute this afternoon. The points have been wide-ranging and constructive. I am grateful to the noble Lord, Lord Eatwell, for his faith that I can respond so quickly to the huge number of very detailed points that he raised in his constructive intervention. He may forgive me in advance if I do not manage to cover all the details. Of course, I will write to the noble Lord and copy that to others who have taken part in the debate this afternoon.
Lord Eatwell
My Lords, I entirely understand the noble Lord’s position and am quite happy to receive written answers to my questions.
Lord Sassoon
I am grateful for that, because some of this has been a touch technical and some rather fundamental. I will talk about the process in a moment, as my noble friend Lord Higgins asked about the procedure for Law Commission Bills. The fact that it is a Law Commission Bill and has, as my noble friend pointed out, been the subject of a big report subsequently consulted on by the commission means that we can be fairly confident that all the fundamentals of the law have been considered in great detail. Otherwise, this Bill would not be going through this procedure. This is the first Bill to go through the Law Commission procedure since the procedure was made permanent last year. I am pleased that, as my noble friend Lord Higgins recognised, this innovation has allowed for parliamentary time to be found for this legislation, which would clearly otherwise have been difficult.
On what happens next, the important thing is that this is not in any sense a fast-track procedure, because the Bill will follow the usual parliamentary process but for two exceptions. First, the substantive Second Reading debate is held in Committee—that is what we are doing this afternoon—rather than on the Floor of the House. Secondly, the Committee stage will be, as the noble Lord, Lord Eatwell, said, taken by a Special Public Bill Committee, which is indeed empowered to take evidence from witnesses as well as to conduct the usual clause-by-clause examination of the Bill. I have no present intention to suggest from the Government’s side that we should call witnesses, but that is allowed for in the procedures. For the benefit of my noble friend, I draw the Committee’s attention to paragraph 8.44 of the Companion to Standing Orders, which says:
“The House agreed in 2008, on a trial basis, that second reading debates on certain Law Commission bills should be held in the Moses Room … The Committee debates the bill, and reports to the House that it has considered the bill. The second reading motion is then normally taken without debate in the House, though it remains possible, in the event of opposition, for amendments to be tabled or a vote to take place on the motion. Law Commission bills are normally committed to a special public bill committee”.
I hope that that is as clear as it can be. I do not know whether that allows for speakers lists, gaps and things this afternoon, but I am grateful that my noble friend got to his feet and contributed to the discussions in his usual lively way.
As I said in opening, we believe that this Bill is necessary in order for the law to catch up with best practice. It will also ensure that the legal duty of consumers is reasonable and clear. In answer to the questions asked by the noble Lord, Lord Eatwell, in this area, I am not sure whether it is right to look on it in the context of shifting the onus of good faith. It is clear that it is up to the insurer to ask the questions and to the consumer to answer them, with the potential consequences of misrepresentation in the way that I outlined in opening. The effect of this is to shift the burden between the insurer and the consumer in the consumer’s favour as against the law as it stands in the 1906 Act. That is entirely appropriate.
It is worth reiterating in this context—I think that this is the point on which my noble friend Lady Kramer asked for confirmation—that any information that the consumer misrepresented or failed to disclose must be proven to have been relevant to the content and/or the price of a policy before the insurer is entitled to a remedy. There is a shift in the legal position, but it is a shift towards a position that is in line with industry best practice and the standards that are currently imposed by the Financial Ombudsman Service.
I am particularly grateful to my noble friend Lady Kramer for drawing attention to a shocking but classic case of the sort that this Bill is intended to obviate and to ensure does not happen in future. The case that she put forward was interesting because it was a question not of unreasonable loss to the consumer—as I understand it, after a two-and-a-half-year struggle, the FOS found in favour of the insurer—but, as was explained to us, of the very real distress and the time and effort that had to go into getting to the right answer. That should be eliminated in similar situations as a result of this legislation.
As I said in opening, the industry will benefit, as we anticipate a reduction in the costs of handing complaints internally and with the ombudsman. In that context, I can confirm to my noble friend Lady Noakes that we will be mindful of the burdens of implementation on the industry. She rightly and helpfully pointed out the various other initiatives that will bite on training, information and standards of scripts, whether in relation to the retail distribution review or simplified advice. Her points are well taken.
My noble friend Lord Higgins referred to paragraph 10.30 of the Law Commission’s report, which discusses the pros and cons of giving legal effect to industry guidance. My noble friend quoted from paragraph 10.30, but the report discusses the issue at some length in paragraphs 10.32 to 10.43. The Law Commission decided not to include such a provision for the reasons set out in paragraph 10.38, principally because the role of guidance is different from that of legislation. I think that the discussion is extensive in the Law Commission’s report.
Lord Higgins
I am most grateful to the noble Lord. The trouble on these occasions is that the Hansard reporters tend to remove the relevant documents. I am most grateful for his clarification.
Lord Sassoon
Good. I, too, am grateful that we have nailed that one.
On the other questions raised by the noble Lord, Lord Eatwell, there is first this difficult issue about permissible questions and specifically questions of gender and race. They are made particularly difficult by the recent judgment of the court in relation to motor insurance. This issue is dealt with elsewhere and not in the Bill, which is solely focused on the transmission of information in the context of underwriting risk. It is not part of the scope of the Bill to discuss questions of discrimination or equalities legislation—nor should it be.
On the definition of consumers and micro-businesses, we discussed informally last week what would happen with respect to the insurance of the foot of a ballet dancer or a footballer. Maybe we could call this the “David Beckham’s foot” question. The Explanatory Notes on Clause 1 define a consumer as,
“an ‘individual’ who is acting wholly or mainly for non-business purposes. Thus the consumer must be a natural person, rather than a legal person (such as a company or corporation). The definition expressly provides for mixed use contracts”—
for example, the insurance for a personal car that is sometimes used for business travel to be defined as a consumer insurance contract. It means that the Bill will not apply to individuals purchasing insurance that is mainly for purposes related to their trade, business or profession, which would clearly be the case in some of the examples that have been discussed.
Lastly, on the cost of insurance, HM Treasury has not made an estimate of the impact of the Bill on insurance premiums. However, we have estimated that the net impact will be savings for the industry—that is, when we take account of the initial training costs and the savings as a result of fewer FOS complaints among other factors. On the basis that the industry should have net savings from this Bill being enacted, there is absolutely no reason to believe that there should be any additional cost passed on to consumers. In relation to the overall cost of insurance, these are relatively small marginal costs but ones that would impact favourably—that is, downwards—on insurance costs.
Lord Eatwell
I should perhaps explain the point about cost. Given that the catch-all clause from the Marine Insurance Act 1906 is removed, necessarily the range of risks to which the insurance company is exposed will be greater. Given that, it is likely that the premium charge will be greater. That was the point that I was making.
Lord Sassoon
My Lords, I do not believe that the range of risk will be any greater. Under this Bill, the range of risk to which the insurers are exposed will be brought in line with the current industry best practice and the standards to which insurers are held under FSA rules and by the FOS. There is no extension of the range of liabilities; there is merely—this is an important “merely”—an alignment, a clarification and an important legal codification of where the duties lie at the point at which the insurance contract is taken out. There is also clarification of the remedies—the remedies that are already applied by the FOS—should a misrepresentation occur. So, yes, the position under the law will change from that of the 1906 Act, but in substance the Bill will put insurers in a position that they are already in under current practice. Therefore, I would not accept that there is a greater range of liabilities and costs to which the insurer is liable; if anything, as I have said, there will be a modest saving because of the clarity that the new architecture will bring.
I have gone on at some length in response to the important questions that have been raised. I will sweep up anything else that I have not had the chance to cover and get back to noble Lords in good time ahead of the Special Public Bill Committee. I hope that I have, nevertheless, responded to as many points as I can this afternoon. I look forward to further discussion in the Special Public Bill Committee in due course.