The Consumer Insurance (Disclosure and Representation) Act 2012 (CIDRA) received Royal Assent on 8 March 2012 and came into force on 6 April 2013. It changes over 100 years of settled insurance law, imposing a duty of good faith and the general duty of disclosure on those entering into a contract of insurance.
The new Consumer Insurance law came about following a joint report from the Law Commission and the Scottish Law Commission, which were of the view that change to the law relating to disclosure in insurance contracts was necessary for a number of reasons. It was felt consumers were vulnerable because the law in this area was governed by outdated principles, which did not recognise the reality of the way consumers bought insurance in today’s market. The statute that previously covered disclosure and misrepresentation was the Marine Insurance Act 1906 and this statute, and much of the leading case law, was based on 18th and 19th century principles.
The Commissions felt that Consumer Insurance legislation had not kept pace with the growth of innovations, such as price comparison sites and applying for insurance online. They recognised that as more people turned to price comparison websites with their focus very much on achieving the lowest price, fewer people were buying insurance through a broker, who would traditionally be able to advise on their obligations concerning disclosure.
The Commissions were also of the view that the remedy open to an insurer was severe. Under the previous law, where there was a failure to disclose – even if that was as a result of an honest policyholder being unaware of their obligations – the insurer could avoid the policy and repudiate all claims.
The Commissions views were influenced by the experience within the Critical Illness Insurance market where, in 2007, some insurers rejected up to 17% of claims based on grounds of non-disclosure alone.
In light of the above considerations and with a view to delivering coherent, clear, and understandable law for both consumers and insurers, parliament introduced the Consumer Insurance (Disclosure and Representation) Act 2012.
What insurance does CIDRA apply to?
CIDRA governs contracts of insurance entered into “wholly or mainly for purposes unrelated to the individual’s trade, business or profession.” As such, CIDRA applies to all types of insurance where the policyholder is taking out, renewing or varying the insurance in a personal (as opposed to commercial) capacity and includes motor, household and life policies.
The law as it stood
In relation to disclosure and representation, the law treated an insurance contract as a contract of utmost good faith. A consumer was required to volunteer all relevant information to an insurer to allow them to consider entering into a contract of insurance, even where the consumer may have been unaware of what the insurer considered relevant.
This was illustrated by the case of Lambert v Co-operative Insurance Society Ltd 1975. In this case, Mrs Lambert took out insurance for her small collection of jewellery. At the time she took this out, she did not mention that her husband had a conviction for handling stolen cigarettes. No questions were asked of Mrs Lambert at the time she took out the insurance as to whether her husband had any convictions. When Mrs Lambert made a claim on the policy it was rejected by the insurer. The Court of Appeal applied the law as governed by The Maritime Insurance Act 1906 and found that the conviction was a material fact that Mrs Lambert should have volunteered to her insurers. The court upheld the insurer’s refusal to pay the claim.
There has been a longstanding acceptance within the insurance industry that strict application of the law can result in harsh outcomes for policyholders who have not acted in a dishonest or reckless manner. As such, the question of disclosure has, over the years, been subject to various ABI codes of conduct in an attempt to mitigate the strict legal framework. The area has also been subject to regulation by the Financial Services Authority and was subject to Financial Ombudsman Service (FOS) intervention.
When the Financial Ombudsman Service investigated a complaint around disclosure, it had the power, where it found a policyholder answered questions and gave information to the best of their belief, to find that any non-disclosure was ‘innocent’ and that the insurer must reinstate the policy.
The FOS scheme had restrictions in terms of the FOS’ compulsory jurisdiction limit and in relation to its ability to call witnesses to give evidence. The introduction of CIDRA imported the modern ‘treating customers fairly’ (TCF) approach of the FOS into legislation.
Previously, most insurance contracts required that any statement on a proposal form was taken as “the basis of the contract” and, as such, if any statement was incorrect – even if it would have made no difference to the insurer – the statement was still a contractual warranty that could have served to void the contract.
How has the law changed under CIDRA?
“Basis of the contract” clauses have been abolished. Specific warranties can be put into a contract but only if they are fair. The general duty of disclosure has also been abolished. Instead, consumers must “take reasonable care not to make a misrepresentation to the insurer” (section 2(2)). Renewals are covered by the same obligation.
With the abolition of the general duty to disclose, the scope of CIDRA is such as to oblige a consumer to take reasonable care not to make a misrepresentation to questions posed by the insurer. What amounts to “reasonable care” to not make a misrepresentation will no doubt be the subject to judicial consideration in due course but CIDRA confirms that the standard of care is that of a reasonable consumer. Special characteristics of the actual consumer taking out the insurance can only be taken into account if the insurer knew, or should have known, of them.
When looking at whether reasonable care has been taken, CIDRA states that consideration should be given to: the type of insurance and the market it is aimed at; any explanatory material provided; how clear the questions were; how clear it was made to the consumer that their answers were important; and whether an agent acted on the consumer’s behalf.
When will the insurer have a remedy for misrepresentation under CIDRA?
The insurer must first establish that the formalities are in place, which is to say that the contract must be a consumer insurance contract, that a misrepresentation was made by the consumer before the contract was entered into, and show that the consumer did not take reasonable care so as not to make a misrepresentation.
However, there are further issues which the insurer must still address at that point. Crucially the insurer must be able to prove that “without the misrepresentation, that insurer would not have entered into the contract (or agreed to the variation) at all, or would have done so only on different terms.”
If all of these conditions are met then the misrepresentation amounts to a “qualifying misrepresentation” for the purposes of CIDRA. However, the remedies available will depend on whether the misrepresentation was made by a consumer who knew it was untrue or misleading or who didn’t care that it was: such misrepresentations amount to a “deliberate or reckless misrepresentation”.
All other qualifying misrepresentations that are not “deliberate or reckless” are automatically “careless misrepresentation”.
Remedies for deliberate or reckless misrepresentation
If the insurer can establish that the qualifying misrepresentation was deliberate or reckless, they may avoid the policy and repudiate all claims. The insurer may retain any premiums paid, except to the extent that would be deemed unfair.
Remedies for careless misrepresentation
If, as a result of a careless misrepresentation, the insurer would not have entered into the contract of insurance on any terms, it may avoid the contract but must return the premiums.
If the insurer would have entered into the insurance contract but on different terms (excluding terms relating to the premium), the contract is to be treated as if it had been entered into on those different terms – in effect, the insurance contract is rewritten.
If the insurer would have entered into the insurance contract but at a higher level of premium, it must still deal with the claim but may make a proportionate reduction in the payment of the claim.
While CIDRA represents a sea change in the legal arena, in practical terms the insurance industry has already moved away from the more draconian elements of the Maritime Insurance Act 1906. The application of TCF and the approach of the FOS when considering ‘innocent’ misrepresentation already reflect the change in practice, which CIDRA will put on a more regulated footing.
In terms of practicalities, insurers will no longer be able to rely on any assumption that relevant information will be volunteered and, as such, questions put forward at the time of proposal will need to be precise and aimed at the exact information required from the consumer.
Insurance underwriters will need to be able to evidence whether a misrepresentation has had a material effect and also how the insurer would have dealt with the proposal had the misrepresentation not taken place.
In terms of motor policies, the main issues around disclosure tend to relate to issues such as: failure to disclose previous accidents; driving offences; using the vehicle outside of SDP terms; where the vehicle is kept overnight; and the main user of the vehicle. It is difficult to anticipate how a consumer would make misrepresentations such as these without them falling into the deliberate or reckless categories and so the same remedies through the courts are likely to remain available.
Equally, it is difficult to imagine that such fundamentals are not already covered in proposals for insurance, whether it be online or by more traditional methods. Where insurers will need to be vigilant is in ensuring they make the appropriate enquiries upon renewal and the correct questions are asked relating to any change in circumstances.
For more information about Consumer Insurance or any of the other issues raised in this article, contact our Defendant Insurance Litigation team or call 0117 904 6000.