(10 years, 4 months ago)
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Lord Newby (LD)
My Lords, this Bill updates some important elements of insurance law. The existing legislation is outdated and does not reflect the commercial expectations of businesses purchasing insurance. That leads to disputes between insurers and policyholders, causing delay, expense and uncertainty. This undermines the reputation of one of the UK’s leading industries.
The Bill is based on the recommendations of the Law Commission and the Scottish Law Commission. The policy underlying the provisions has been the subject of extensive consultation, the results of which have been reflected in the Bill where possible. I am pleased to say that there is a broad consensus of support for the changes to the law from a wide cross-section of the insurance market. The Bill has therefore been deemed suitable to be considered by your Lordships under the procedure for Law Commission Bills.
The Bill covers two different topics relating to insurance: the law of insurance contracts, which forms the core of the Bill; and some provisions allowing the Third Parties (Rights against Insurers) Act 2010 to be brought into force. In relation to insurance contract law, the Bill addresses three main areas: first, disclosure in business insurance contracts; secondly, insurance warranties; and, finally, the insurer’s remedies for fraudulent claims.
Currently, the law is set out in the Marine Insurance Act 1906, which embodies principles developed in the 18th and 19th centuries. It is now out of step with modern commercial practices. Those principles were originally designed to protect a fledgling insurance industry against exploitation by the policyholder. The law therefore gives insurers wide-ranging opportunities to refuse liability for claims due to a policyholder’s breach of obligation, even where it seems completely out of proportion to any wrongdoing by the policyholder.
The law as it currently stands increases the likelihood that insurance may fail to respond as expected, or at all. This can significantly hinder UK businesses. Policyholders cannot always predict whether insurers will pay out or rely on technical legal arguments to deny claims. If they cannot assess quality, policyholders will buy on price alone, which could reduce the quality of insurance products available in the market. Insurance is a crucial UK export. It is important that the law does not undermine the confidence which international buyers place in the UK insurance market.
The Bill is short and principles-based. Where the language of the 1906 Act has acquired a particular meaning, the Bill adopts the same language to avoid unnecessary change or uncertainty. Many of the provisions are based on existing judicial precedent and will operate within the existing legal structure.
I shall now say a few words about each area of reform. First, regarding the duty on the policyholder to disclose information to the insurer, prospective policyholders must provide the insurer with information about the risk before the insurance contract is signed. This allows the insurer to price the risk accurately. However, the existing legal requirements can be difficult to understand and can be even more difficult to adequately comply with. A failure by the policyholder to provide all material information allows the insurer to refuse all claims under the contract.
The Bill updates and replaces the existing “duty of disclosure” with a “duty of fair presentation”. Policyholders still have a duty to disclose information and there is a duty on them to search for information, but there is also an obligation on insurers to ask the policyholder if they require further clarification. If a business fails to make a fair presentation of the risk, there is a new system of proportionate remedies for the insurer, based on what the insurer would have done if the failure had not occurred.
The Bill also deals with insurance warranties. An insurance warranty is typically a promise by the policyholder to do something which mitigates the risk. Under the current law, any breach of warranty completely discharges the insurer from liability from the point of breach, even if the breach is remedied before any loss is suffered. Modern insurance contracts are full of warranties, yet policyholders and brokers are often unaware of the harsh consequences of breaching them. The Bill provides that an insurer will be liable for insured losses arising after the breach has been remedied. This brings the law into line with best practice.
The Bill also abolishes “basis of the contract” clauses. These clauses convert every statement made by a policyholder on a proposal form into a warranty. Judges have been criticising these clauses for many years.
The Bill also introduces clear statutory remedies for the insurer where the policyholder has made a fraudulent claim. Insurers are particularly vulnerable to fraud by policyholders, and the law needs to provide clear and robust sanctions. A policyholder should not be able to think that fraudulently exaggerating a claim is worth a shot. The Bill puts into statute the remedy already upheld by the courts: that is, if a claim is tainted by fraud, the policyholder forfeits the whole of that claim. The Bill also clarifies an area of uncertainty: the insurer may choose to refuse any claim arising after the fraudulent act. However, previous valid claims should be paid in full.
The provisions of the Bill are a default regime for business insurance contracts. Parties may agree alternative arrangements if they do so transparently.
The Bill also contains provisions to amend the Third Parties (Rights against Insurers) Act 2010. The Government are committed to bringing the 2010 Act into force as soon as practicable. The amendments in the Bill will achieve this.
The Bill before us updates some important elements of insurance law and has widespread support. I beg to move.
Lord Carrington of Fulham (Con)
My Lords, I do not intend to detain the Committee very long, but I just want to say how pleased I am that we have before us today this modest little Bill. I hope that we will find, as we get into the detail, that it is largely uncontroversial, simplifying and clarifying as it does the responsibilities of both the insured and the insurer in narrowly defined circumstances. Anything which brings clarity into the insurance market must be welcomed by everyone.
I have spent a lifetime in financial services—when I was not being a Member of Parliament—and, indeed, I still am closely involved as deputy chairman of a small bank, as in the Register of Lords’ Interests, but I should add that I was never in the insurance industry. I reckon that I am reasonably financially savvy, but I have never been able to work out how the insurance industry calculates its risks and arrives at the premiums that it demands from its clients. Obviously, statistical analysis of the probability of an event occurring plays a large part, but I suspect that some elements in the insurance industry have not been above exploiting the ignorance of the insured to refuse to pay out a valid claim and, equally, that some of the insured have not been above making questionable and at times fraudulent claims to the cost of all of us.
I remember that, years ago, I was asked to lend a large amount of money to an insurance syndicate. A senior underwriter took me through all the risks and the small probability that it would have to pay out to the insured under the policy. When I insisted that I still thought the risk was not, to use the jargon, “bankable”, he explained that the documentation was so confusingly written that he was sure that, even if a valid claim was made, it would be capable of being refused by the underwriters. Noble Lords will be glad to know that I did not make the loan. The claims that came in eventually, some of which were highly questionable, bankrupted the syndicate. However, this was a long time ago, and I am sure things have changed. By clarifying the relationship between the insured and the insurer, this Bill makes a start on bringing a welcome openness to the relationship.
In this Bill, I particularly like that the insured has to provide information to the insurer in a clear and accessible manner and that it specifies what information insurers can reasonably be expected to know. I hope that this will go a long way towards removing areas of misunderstanding between the insured and the insurer. Equally, the requirement is long overdue for the insurer to be transparent about disadvantageous terms in the policy.
This little Bill is stuffed with useful things and takes us further along the path of openness between the insured and the insurer. I look forward to its coming into force in due course.
Lord Sheikh (Con)
My Lords, at the outset I make the point that I very much support the provisions in the Bill, which has been welcomed by all sides of the insurance industry, including insurers, insurance brokers and their trade associations. The Bill is also supported by the Chartered Insurance Institute. I commend the Law Commission and the Scottish Law Commission for the considerable, valuable work that they have undertaken, which has resulted in the Bill being presented in your Lordships’ House. Businesses are expected to benefit by about £100 million over the next 10 years, as there will be less litigation and transaction costs will be reduced.
The United Kingdom has led the world in the field of insurance. The London market is well respected globally. The market is well known for its ability to be innovative, and it provides cover for a very wide range of risks. Some of the risks that it accepts and continues to cover are unusual, and the market is therefore unique. The market is made up of Lloyd’s, British and foreign companies. Britain’s insurance industry is a major success—employing more than 300,000 people across the country—and the market generates considerable invisible earnings, which help the country to balance its books.
At this juncture, I should like to state that I have business interests in insurance. I have been president of the Insurance Institute of Croydon and a director and regional chairman of the British Insurance Brokers’ Association.
Insurance law was developed in the 18th and 19th centuries but was codified in 1906 with the enactment of the Marine Insurance Act 1906. Although the codified Act related to marine insurance, its provisions applied to other types of insurance, as the Act brought together common law principles. The 1906 Act was enacted when the United Kingdom was expanding its insurance activities, and the legislation worked in favour of insurers. The insurers were granted wide powers. They have been able to repudiate liability under certain circumstances and their refusal to pay such claims was unfavourable to the policyholders. A number of overseas countries have modified the legislation and the insurance contracts issued by these countries are more customer friendly. It is therefore important for us to reform our legislation in order that we can maintain our prime position in the international insurance market. We can abolish clauses of the Marine Insurance Act 1906 only by primary legislation; hence, we need to introduce and pass this Insurance Bill.
At present, when an insured enters into a contract with an insurer, he is not sure whether a claim arising in the future will be dealt with adequately. When I started writing insurance business in the London market, I used to have a face-to-face meeting with the underwriter. Before my meeting with the underwriter, I used to write brief details of the risk on a slip, which the underwriter initialled, setting out the terms on which he would accept the risk. The world has now moved on. There are new systems and sophisticated data analyses, and we therefore need to reform the legislation relating to insurance.
Looking at the Bill, I welcome the fact that it provides clear definitions of “consumer insurance contract” and “non-consumer insurance contract”. Part 2 refers to the “duty of fair presentation”, which applies to non-consumer insurance contracts where most of the problems arise. I am pleased that, in regard to consumer insurance, the Consumer Insurance (Disclosure and Representations) Act 2012 applies, and the policyholder needs only to answer the insurer’s questions carefully and honestly.
With regard to non-consumer insurance, the duty of disclosure is set out clearly in the Insurance Bill and has two parts. I note that the Bill makes clear what the insured knows or ought to know, and this clarification will help the insured and the insurer. Under the Marine Insurance Act, any breach by the insurance broker fell on the insured, not the insurance broker. This is unfair, and I welcome the change so that the insured will not be required to know what the broker has learnt from sources other than the policyholder. I also welcome the remedies which are set out in the Bill in the event of breach of the duty of fair presentation. I emphasise that breaches of utmost good faith have previously resulted in disputes between insurer and insured, and I hope that the situation will now improve.
Part 3 relates to warranties. There have been problems relating to claims where it was felt by the insurer that there had been a breach of a warranty. Any warranty must be complied with strictly, whether or not it is relevant to the circumstances of the loss. I always felt that the application of warranties was, in certain circumstances, unfair and a more common-sense approach could have been followed in instances where the wording of the warranty does not have any bearing on the circumstances of the loss. Clause 9 relates to the application of warranties, and Clause 10 explains the situation where there is a breach. I welcome both clauses.
Part 4 discusses issues relating to fraudulent claims. Fraudulent claims are a major issue and are indeed a very serious matter. Fraudulent claims arise in all types of policies. They could, for example, relate to someone pretending that he or she has lost money while travelling overseas, and the amount involved may not be much. On the other hand, there are serious claims related to arson or staged motor accidents where there are allegations of whiplash injuries. Some people have benefited by making fraudulent claims, which result in higher premiums being charged for all policyholders, and honest policyholders therefore suffer. In 2013, there were nearly 120,000 fraudulent claims which resulted in payments of more than £1.3 billion. It is felt that fraudulent claims are easy to commit, and unfortunately the police do not take effective action where it is established that the claim is fraudulent. The industry therefore needs protection. It is understood that we cannot eliminate fraudulent claims, but we must take action to alleviate the problem.
Clause 11 sets out remedies where there are fraudulent claims. The Bill does not define “fraudulent claims” in statute, and the matter will therefore be dealt with under the common law principles. In regard to group insurance policies, I am very pleased to note that under such policies, if a fraudulent claim has been submitted by a member of the group, such a person would be the only one to be penalised and no severe action would be taken against other members of the group.
I would now like to refer to the Third Parties (Rights against Insurers) Act 2010. This Act is important, as it provides rights to an aggrieved party in the event of the insolvency of a policyholder, and the aggrieved party has the right to bring an action against the insurer. Clause 17 of the Bill grants the power to change the meaning of “relevant person”, and I feel that this change is desirable. I hope that the 2010 Act can now come into force.
Let me now deal with the issues where there has been late payment of a claim by an insurer. This has caused some problems, but I am pleased that the issue has not been included in the Bill as the matter needs to be looked into further—there may be legitimate reasons why the insurer is unable to pay the claim promptly. The issue must be fully discussed and assessed, and appropriate provision can be included in future legislation.
Apart from late payment of claims, there are other issues which need further consideration and these relate to the principle of insurable interest and brokers’ liability for payments of premiums. I hope that these issues will be looked into fully and we can legislate on these matters in due course. I support the Bill and I look forward to backing it as it progresses through your Lordships’ House.
Lord Davidson of Glen Clova (Lab)
My Lords, the Minister is to be commended for bringing this Bill before the House and agreeing the procedure for Law Commission Bills. A Bill modernising important elements of the UK’s insurance law is perhaps not likely to achieve public acclaim, but it genuinely contributes to strengthening the UK’s global position in insurance markets. One might also observe that, when the constitutional position of Scotland is under challenge, the Bill is a useful reminder of how Westminster legislation can have direct value to an industry that is a significant employer throughout the UK and a significant contributor to the UK’s overseas earnings. The noble Lord, Lord Sheikh, spoke eloquently identifying the importance of the industry to the UK.
The noble Lord, Lord Carrington of Fulham, described this as a modest little Bill. It is certainly a little Bill—and doubtless it has a becoming modesty—but it is a very useful Bill. He spoke to the question of its clarity. Unlike many Bills that seek to produce clarity, this Bill actually does. Again, that is to be commended.
Turning to the proposed duty of fair representation, I agree that a shift from a remedy confined to avoiding the contract, in the event of a breach of the duty of disclosure, is welcome. The experience of losing insurance cover as a result of a failure in disclosure, which may be wholly unconnected with the loss claimed, has often seemed unnecessarily harsh—or, to put it another way, to have worked disproportionately in favour of insurers. The widespread welcome for these reforms by both insurers and insured demonstrates perhaps that such a change is overdue. The Law Commission correctly identified that the “all or nothing” nature of the consequences of a breach of the disclosure duty actively promotes adversarial disputes, whereas the new proposal should encourage more rational resolution of claims.
One notes that contracting out of these provisions remains possible. Of course, one recognises that as being consonant with freedom of contract. The Law Commission identifies the possible use of “boilerplate clauses” to contract out of the consequences of this reform. The Bill’s use of transparency requirements, however, at Clause 16, should either discourage or make expressly clear where any such contracting out obtains, and that is a useful addition. It would be interesting to know whether the Government are proposing to monitor and test the efficacy of Clause 16 to make sure that it works and to avoid relentless contracting out simply by way of forms. Plainly, the widespread use of contracting out, were it to occur, would undermine much of the benefit of this reform.
The restriction of conversion of representations into warranties in non-consumer contracts and the abolition of avoiding contracts for breach of utmost good faith per se are also welcome changes. The application of the old law regarding “basis of contract” warranties—what in Scotland we still call “uberrimae fidei”—has sometimes left the insured with the sense that they have been cheated out of what they took to be their entitlement. Would it be prudent for some monitoring of contracting out regarding these provisions also to be undertaken?
Turning to fraudulent claims, I think that the greater clarity that the clauses concerning fraudulent claims provide is a useful addition to the armoury against the pernicious but not especially visible area of crime that is insurance fraud. Again, the noble Lord, Lord Sheikh, identified eloquently how this problem requires to be tackled. Fraud by a member of a group insurance scheme has raised a number of jurisprudential difficulties and paradoxes which the Bill seeks to remove—a plainly welcome development.
The statutorily stated exclusion of liability to pay fraudulent claims should have the positive effect of discouraging the notion that deliberately exaggerating an insurance claim is somehow fair game. Expressly identifying the point at which the insurer may treat the contract as terminated should further improve clarity. The past uncertainty of legal advice in this area—I declare an interest as being a member of the Bar, and doubtless some of my advice may not always have been pellucid—has not served either insured or insurers particularly well. On the other hand, the decision not to define “fraud” itself in the Bill is wise reticence where facts and circumstances are so variable and where new means of committing fraud tend to emerge often unforeseen, especially given the various technological developments that we are heir to.
In relation to the amendment to the 2010 Act, I have nothing further to add.
Before concluding, I observe that it is perhaps unfortunate that the Bill could not have found a way to cover the issue of late payment by insurers—I depart from the position adopted by the noble Lord, Lord Sheikh, in this regard. This is not simply a dispute on the grounds of ideology. A remedy for the insured whose businesses have been severely disadvantaged by late payment of a claim is available in Scotland, and that has been the case for many years. It is unfortunate that the remedy cannot yet be extended to the rest of the UK, and the noble Lord, Lord Sheikh, might, in his leisure time, like to examine some of the Scots law in this fascinating area.
However, from this side we welcome the Bill and are pleased to see the latest efforts of the Law Commission and the Scottish Law Commission regarding insurance being rendered into statute relatively speedily.
Lord Newby
My Lords, I thank all noble Lords who have spoken in this debate. I think that they all stressed the importance of greater clarity in the areas covered by the Bill, and indeed they felt that the Bill achieves that clarity. Certainly, as a non-expert, I was able to get quite a long way into the Bill before I felt that I was losing my way, and that is a good way of testing how clear it is going to be. I thought that it was very clearly drafted in an area where there is plainly a lack of clarity at the moment.
I loved the description of the Bill given by the noble Lord, Lord Carrington, as being stuffed with useful things. Possibly that should be incorporated into the mission statement of the Law Commission—to stuff all their Bills with useful things. It is a delightful concept.
The noble Lord, Lord Sheikh, reminded us of the history of the sector and its current success, which is considerable, particularly in the UK. He pointed out that one of the consequences of the Bill, once passed, will be to reduce insurance litigation. That is clearly a most welcome prospect, given the very high levels of litigation that currently take place because of the ambiguities and problems that the Bill seeks to deal with. I was also grateful to the noble Lord for explaining from a practitioner’s point of view how specific provisions in the Bill will help to reduce current difficulties and make the sector and the UK market more competitive.
The noble Lord, Lord Sheikh, and the noble and learned Lord, Lord Davidson of Glen Clova, discussed a provision that is not in the Bill which relates to late payment. Originally, there was a draft clause in the Bill, but it did not receive consensual support across the market as a whole and the Government decided to remove it at this point. However, that was not because the Government and the Law Commission think that we should drop it as an area. Attempts continue to be made to reach a degree of agreement on this because it is a difficult area. If we can get a resolution of it quite quickly with drafting that would satisfy the noble Lord, Lord Sheikh, while meeting the basic requirements of a late payment provision, we think it would be worth doing. Efforts are ongoing. We hope that we might yet be able to bring that to a consensual point, which will enable us to legislate on it.
The noble and learned Lord, Lord Davidson, also asked about monitoring the efficacy of Clause 16 and pointed to the danger of widespread contracting out. At the moment, we do not see any pent-up demand for widespread contracting out, but the Government have committed to conduct a post-implementation review of the Bill after five years. We need a bit of time to see whether people in the market think that there is an advantage to contracting out. At the moment, we do not feel that there is a great danger in that area, but we will be watching it and will have a formal review after five years.
I hope that I have dealt with the specific questions raised by noble Lords. I am extremely grateful for the support they have shown so far, and I look forward to joining at least some of them in the Committee on the Bill.