Consumer Insurance (Disclosure and Representations) Bill [HL]
(Limited Text - Ministerial Extracts only)
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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report highlighted an area where a complex and confusing array of rules and regulation has emerged to compensate for outdated legislation.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.
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.