Good Faith and Insurance Contracts

Peter MacDonald Eggers and Sir Simon Picken

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CHAPTER 5 Law reform

The social or policy view of the duty of good faith

5.01 There have been temptations to impose a moral stamp upon the obligation of disclosure and the greater duty of good faith, although the House of Lords has impressed the need to view the issues touching the duty in light of the law and not moral imperatives.1 The designation of the duty as one of good faith suggests that there is a morality underlying the open dealing required of the parties to the insurance contract. The duty of disclosure is in play only at times when the insurer is in a position to decide upon an adjustment of his rights and obligations, and, for the purposes of that decision, needs the benefit of all available information. The duty at placing will cease to be in full force when the insurer is bound by the insurance contract he has made. The law has deemed this time of “no return” to be the time when the insurer is bound “in honour” to insure the risk, even though there is no binding contract as a matter of law.2 It is not only the assured’s duty of disclosure that may be viewed in this light. It applies equally to the insurer. 5.02 Notwithstanding such moral precepts, the purpose of the duty is said to be the prevention of fraud,3 by the suppression of information that would not make its way to the insurer in the absence of any relevant obligation.4 As shall be seen,5 the test of materiality of the information that has not been disclosed (which must be proved in order to found a cause of action) rests in the attitude of the prudent or reasonable underwriter. To rely upon the assured’s own view of materiality could lead to injustice if the guilty assured would be tempted to assert an innocent view of materiality to obstruct the underwriter’s otherwise sound rejection of a claim.6 On the other hand, it is often difficult for an assured, especially

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one who insures in a private capacity, to understand what might be important to a hypothetical creature referred to as the prudent underwriter.7 5.03 It may be thought that the insurer is in an advantageous position, because the duty of good faith, in particular the duty of fair presentation of the risk, and the consequences of any breach will often lie at the door of the assured. (The moral advantage does not lie entirely with the insurer, particularly in recent times.) The courts have noted the favourable position of an insurer, who will benefit from full compliance with the duty of disclosure and more so from a breach of the duty, particularly if the breach is unrelated to the loss that occasions a claim under the policy, as the insurer will be entitled to avoid the policy and discharge his obligation to indemnify the assured in such an event subject to the return of premium, in the absence of fraud. The duty can cause the harshest consequences: take an assured who has paid the insurer a premium for cover, has failed to disclose all material facts (even though he believes he has acted with good faith) which, if disclosed, would have induced the insurer to increase the premium by 10%, and cannot recover for a total loss if the insurer avoids.8 This aspect of the law has been altered by the Insurance Act 2015 (and by the Consumer Insurance (Disclosure and Representations) Act 2012), as discussed below, but the consequences of avoidance still arise if the assured acted deliberately or recklessly in breach of duty or if the insurer would not have entered into the insurance contract at all but for the breach of duty on the part of the assured. Even in the case of a non-disclosure or misrepresentation that would have resulted in an increase of premium, the insurer’s remedy is to pay a proportionately reduced sum in respect of any recoverable claim: although this remedy is proportionate in an arithmetical sense, it may not be always proportionate as a matter of fairness or justice: an increase of premium from £1,000 to £2,000 would entitle the insurer to reduce a claim of £1,000,000 to £500,000. 5.04 Before the entry into force of the Insurance Act 2015, the position could be further tilted in favour of the insurer by the insertion of clauses that rendered the statements in proposal forms the basis of the contract, whereby the assured essentially warrants the truth of the statements, whether or not they have any effect on the risk that is insured.9 In such cases, the courts have taken the opportunity to make it clear that such clauses and any questions that are put to the assured that are subject to such “basis” clauses are expressed in the clearest and unambiguous terms.10 Such clauses now, as a matter of law, must be clearly expressed and such a clause that is unfair and has not been “individually negotiated”, may be of no effect against a consumer.11 The Insurance Act 2015, by section 9, has prohibited

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such wholesale provisions. A similar prohibition is contained in section 6 of the Consumer Insurance (Disclosure and Representations) Act 2012. 5.05 While the courts have pointed out instances of unfairness that might result from strict adherence to the duty of good faith, the purpose of the duty must not be forgotten. One must only remember the position of an underwriter sitting at his box at Lloyd’s or at the end of a telephone line, speaking to a broker, and that most of the specific information available to the underwriter on which he must rate the risk is that provided to him by the broker or the assured, as well as the industry-wide knowledge that is assumed to be known by the underwriter. It may be said that good faith underlies the very viability of the insurance industry.12 5.06 The strain between the obligation of disclosure and the perceived fairness or unfairness has been noticeable in a number of cases.13 The strain is the more apparent when viewed from the perspective of an individual assured, especially one who insures in a private capacity, of an assured that operates a family or small business. When, however, looked at from the position of the insurance industry – on which many millions rely – there is much to be said for a rigorous application of the duty, not only to ensure that others will not fall into “mere traps to catch the unwary”14 but also to ensure all assureds approach the obligation of disclosure with the good faith required of them.15 5.07 It is this tension that has given rise to much debate concerning the high standards imposed by the duty of good faith, particularly taking into account the “draconian” remedy of avoidance.16 In 1957, and again in 1980, two reports were published17 by English law reformers that addressed the issue, but that surprisingly did not deal with the issue as it

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concerned marine, aviation and transport insurance, because it was felt that such insurance did not affect the public interest! The recommendations were never implemented, being a matter of regret to some,18 but not to others.19 There have been some more recent developments for reform, inspired by the publication of the Australian Law Reform Commission’s Report for reform of the Marine Insurance Act 1909 (Cth).20 On 1 September 2002, a sub-committee of the British Insurance Law Association presented recommendations for the reform of insurance contract law.21 In North Star Shipping Ltd v Sphere Drake Insurance plc,22 Longmore LJ welcomed the publication of this report and supported the commencement of the Law Commission’s consultation process for law reform in this area in 2006. That process at first resulted, in July 2007, in the Law Commission’s Consultation Paper No. 182 on “Insurance Contract Law: Misrepresentation, Non-Disclosure and Breach of Warranty by the Insured”,23 by which it suggested a number of reforms depending on whether the insurance contract was a consumer contract or a business contract, and the publication in December 2009 of a draft bill for consumer insurance contract reform: the Consumer Insurance (Disclosure and Representations) Bill.24 In 2012, the Consumer Insurance (Disclosure and Representations) Act 2012 was passed, which entered into effect on 6 April 2013. In July 2014, in its report on “Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment”,25 the Law Commission concluded its review and proposed law reform with respect to the duty of fair presentation of the risk, the insurer’s reliance on warranties and other contractual terms in defence of an insurance claim, and remedies for fraudulent claims. This report resulted in the passage of the Insurance Act 2015, which was amended by sections 28–30 of the Enterprise Act 2016.

Proposals for reform

5.08 Given the differing views and the fatigue created by the concept of fairness and the demands of the law, it may be thought that a “fair and balanced” approach is called for,26 perhaps allowing a discretion to the court to restrain the full force of avoidance or rescission, when necessary or appropriate, and permit a more proportional response when

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avoidance would operate as the celebrated steam-hammer applied to crack the nut. This would follow the notion of “proportionality” advocated by the European Commission.27 Such a turn in the law would not be too much of a wrench, it is submitted, given that the very remedy of rescission is an equitable remedy, which traditionally at least lies within the discretion of the court.28 In the event, the approach adopted by the Law Commission and the legislature in the Insurance Act 2015 was not to introduce a flexible approach to remedies, but to replace one inflexible remedy for a breach of the pre-contractual duty with a range of inflexible remedies depending on whether the breach of duty of fair presentation of the risk was deliberate or reckless or the extent of the insurer’s inducement. In the case of other breaches of the duty of utmost good faith, a clear set of remedies were substituted for fraudulent claims, but the legislation made no provision for any other breach of duty of utmost good faith, other than abolishing the remedy of avoidance as the universal remedy for any breach of the duty (section 14). 5.09 Further, the test of materiality may also be tailored to enable an assured to appreciate the concerns of the insurer so that he might know what information specifically is required by the insurer to evaluate the risk.29 Such was the proposal of the Law Commission both in 1980 and in 2007,30 which suggested that materiality be gauged by reference to the attitudes of the “reasonable assured”, as well as the “prudent underwriter”. The Law Commission ultimately changed its mind and decided to retain the prudent underwriter test for materiality.31 This is reflected in section 7(2) of the Insurance Act 2015. 5.10 Apart from these areas of specific reform, there is a general policy advantage in favour of insurance contracts and proposal forms being drafted in order to make the concerns of the industry and the individual underwriter plain to the assured.32 5.11 The law surrounding the duty of good faith, particularly the law of pre-contractual disclosure, is fairly stable and has been so since 1766. The duty has been stretched here and tucked in there, but the essence of the duty is the same as it was described by Lord Mansfield CJ in Carter v Boehm.33 The duty of good faith is capable of further development at the hands of the courts in so far as it arises outside the context of placing, although particularly in the context of claims this has proved problematic. The central purpose of the duty remains valid. If, therefore, the whole ambit and consequences of the duty are to change, change must take place either in the industry or, preferably, by the legislature. Such change was introduced in the case of consumer insurances by the Consumer Insurance (Disclosure

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and Representations) Act 2012, which essentially absolved the consumer assured from any duty of disclosure and replaced the duty with a duty not to make negligent misrepresentations. In the case of non-consumer insurances, the Insurance Act 2015 re-packaged and re-branded the duty of utmost good faith in its pre-contractual phase, now titled the duty of fair presentation of the risk, but ultimately the duty is very much the duty that existed at common law, although there have been some modifications that are explored below.

Proposal for European Council Directive relating to insurance contracts

5.12 In 1979, the European Commission put forward a proposal for a Council Directive34 co-ordinating the laws regulating provisions included in insurance contracts in order to strike a fair balance between the interests of the insurer and the protection of the assured.35 The Commission amended this proposal in 1980.36 The proposal excluded from its scope marine, aviation and transport insurance contracts, as well as suretyship and credit insurance contracts, as they either maintained a history of freedom of contract, unfettered by regulation, or demonstrated peculiarities that could not be addressed in the proposed directive. 5.13 The chief mischief identified by the proposed directive was the consequences resulting “firstly from the conduct of the policyholder at the time of the conclusion and in the course of the contract concerning the declaration of the risk and of the claim, and secondly his attitude with regard to the measures to be taken in the event of a claim”. 5.14 The proposed directive, by article 3, sets out the rights and obligations of the parties as regards disclosure at the time of placing, including:

1. The policyholder shall declare to the insurer “any circumstances of which he ought reasonably to be aware and which he ought to expect to influence a prudent insurer’s assessment or acceptance of the risk”. Such circumstances include those that are the subject of specific questions put to the policyholder in writing.37
2. There is no obligation to disclose information already known to the insurer or matters of common knowledge.38
3. If the policyholder fails to disclose circumstances of which he was aware but that he did not expect to influence a prudent insurer’s assessment of the risk, or if further circumstances of which both parties were unaware come to light after the contract is made, the insurer or the policyholder may propose an amendment to or termination of the contract.39 The other party may choose to accept or reject the amendment proposed and, if he rejects it, the party proposing the amendment may elect to terminate the cover40 with prospective effect so that any claim that arises prior to the termination will be honoured by the insurer.41
4.

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If the policyholder fails to discharge his duty of disclosure as set out in paragraph 1 above, the insurer may terminate the contract or propose an amendment to it. In the latter case, the assured may accept or reject the proposed amendment. If he rejects it, the insurer may terminate the contract.42 If the contract is terminated, the insurer will be obliged to pay any otherwise recoverable claim that arose prior to termination in proportion to the “ratio between the agreed premium and the premium which a prudent insurer would have fixed if the policyholder had fulfilled his obligations under paragraph 1”. However, if the insurer can demonstrate that the prudent insurer would not have accepted the risk on the terms proposed, then the insurer will not have to pay any claim.43
5. If the policyholder fails to discharge his duty of disclosure “with the intention of deceiving the insurer”, the insurer may terminate the cover44 and, in that event, will not be obliged to pay any claim arising for cover before the termination.45
6. If the contract is terminated, the insurer will be obliged to return to the policyholder the proportion of the premium in respect of the period of the insurance not covered,46 unless the policyholder breached his duty with the intention of deceiving the insurer, in which case the insurer will be entitled to retain the premium paid “by way of damages” and claim further damages.47
7. The insurer will bear the burden of proving that the policyholder has failed to discharge his duty or acted fraudulently.48

5.15 The proposed directive also provides for the obligation of the policyholder to notify the insurer of any new circumstances or changes in circumstances that arise after the contract, unless such circumstances fall within an exclusion provided for in the contract,49 provided that the contract stipulates that such notification should take place.50 If the policyholder fails to discharge this duty, the remedies provided for in the case of pre-contractual non-disclosure will be available to the insurer, broadly on the same conditions.51 Similarly, if the risk insured diminishes “appreciably and permanently” after the contract is made, because of circumstances not covered by the contract, the policyholder may ask for reduction in premium and may terminate the contract, if the insurer does not agree to the reduction.52 5.16 In the event of a claim, the proposed directive provides that the policyholder is obliged to notify the insurer of any claim in accordance with the contract,53 to avoid or reduce the consequences of the claim,54 and to provide “all the necessary information and

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documents on the circumstances and consequences of the claim”.55 If the insurer proves that the policyholder failed to discharge one of these duties with the intention of causing him loss or to deceive him, the insurer “shall be released from all liability to make payment in respect of the claim”.56

Law reform recommendations in 1957 and 1980

5.17 In 1957, the Law Reform Committee issued their Fifth Report,57 which dealt with the effect of conditions and exceptions in insurance policies and of non-disclosure of material facts. The Committee recommended two pertinent changes to the law affecting material non-disclosure:58 first, no fact should be deemed material unless it would have been considered material by a reasonable assured; secondly, notwithstanding any term of the insurance contract, the insurer should not be able to maintain a defence to a claim under the policy by reason of any misrepresentation, where the assured can prove that the representation was true to the best of his knowledge and belief. The Committee considered that these suggested changes could be effected without difficulty, but noted that such legislation would interfere with the freedom of contract, which, involving issues of social policy, was outside their remit.59 5.18 In 1980, the Law Commission, under the chairmanship of the then Kerr J, issued its report on Insurance Law: Non-disclosure and Breach of Warranty.60 The Law Commission was asked to review insurance law in these areas “as a matter of urgency” in light of the draft EC Council Directive61 and the Law Reform Committee’s report of 1957. The Commission paid close attention to the Fifth Report, but dismissed the principle of proportionality embodied in the proposed EC Directive,62 since it had “inherent limitations and practical drawbacks” that would render its implementation “undesirable” and create uncertainty, preferring the view that the law could be reformed without recourse to this principle.63 The Commission also expressed the opinion that the Statements of Insurance Practice that had been adopted in 197764 could not cure the “mischiefs in the present law”.65 Nevertheless, the Commission concluded that this area of the law was in much need of long-awaited reform.66 Accordingly, the Commission proposed:

1. A fact should be disclosed if:
- (a) it is material in the sense that it would influence a prudent insurer in deciding whether to offer cover and, if so, on what terms and at what premium; and
- (b)
  
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  it is known to the assured or may be assumed to be known to the assured (for this purpose, an assured would be assumed to know a fact if it was reasonable for him to have made reasonable enquiry);67 and
- (c) a reasonable assured in the position of the assured would have disclosed it.68
2. Questions in proposal forms should be answered by the assured to the best of his information and belief, after making reasonable enquiry;69 proposal forms should contain prominent warnings as to the nature of the duty upon the assured and of the consequences of failure to discharge the duty.70 If the insurer failed to comply with the proposed requirements as regards proposal forms, the insurer should not be permitted to set aside the contract, unless he could show that no prejudice was suffered by the assured in respect of his obligation of disclosure.71 Renewal notices should be treated in a similar fashion.72
3. If the insurer asked a question, it is presumed to be concerned with a material fact, but the assured should not be obliged to answer any immaterial question.73 If the insurer did not ask a question, it is assumed that he required no further information in respect of the subject of the question.74
4. Basis clauses (clauses that render the truth of stated facts the basis of the contract) should be ineffective, unless they are the subject of a specific warranty.75
5. If there has been a breach of the assured’s duty of disclosure, the insurer should not be able to rely on any non-fraudulent misrepresentation; the insurer’s rights and remedies should be limited to remedies for breach of the duty of disclosure.76

5.19 The Commission’s recommendations were said not to apply to reinsurance77 or “professional” marine, aviation and transport insurance.78 It is notable that the Commission did not recommend the abolition of the duty of disclosure, there still being a need for the duty. While the coffee houses of the 17th and 18th centuries are more insular than the grand, networked underwriting rooms of today, the insurer remains at a disadvantage as regards his access to information concerning the risk and so the purpose of the duty remains.79 These recommendations were not adopted because it was considered that the insurance industry would attempt to regulate their own affairs with a view to softening the potentially harsh effects of the duty of the utmost good faith.

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Voluntary reform and regulation

5.20 In 1977, the Association of British Insurers and Lloyd’s issued two statements of practice, updated in 1986, in connection with Long-Term Insurance and General Insurance respectively. The Statement on General Insurance Practice was revised in May 1995. The Statements were drafted to self-regulate the drafting of insurance contracts and the relations between insurer and assured in particular respects. The Statements applied to policies of insurance that were issued to assureds who were resident in the United Kingdom and who were insured in a private capacity. 5.21 The Statement on General Insurance Practice sought to lighten the weight of the duty of disclosure at placing as follows:

1. Proposal forms were required to incorporate clear questions dealing with matters that insurers generally found to be material,80 not to include warranties of present or past fact (basis clauses), when signed to record the state of the assured’s knowledge and belief and to contain prominent warnings that facts should be disclosed if there was any doubt of their materiality and of the consequences of a failure to disclose material facts.81
2. The insurer would not repudiate liability under the policy, except marine and aviation policies, on the grounds of:
- (a) non-disclosure, unless the fact withheld was material, was known to the assured and should have been understood as such by a reasonable assured;
- (b) material misrepresentation, unless it was negligent or deliberate;
- (c) breach of warranty, unless the claim was connected with the breach, except in cases of fraud.82
3. Established claims would be paid without unavoidable delay.83
4. Renewal notices should contain a warning reminding the assured of his duty of disclosure of changes affecting the risk since the inception or last renewal date.84

5.22 This Statement had no legal force, although its terms could have been incorporated as binding terms into a contract of insurance, and non-compliance with the Statement could have been taken into account so as to deprive the insurer of a remedy for breach of the duty of the utmost good faith in any case referred to the Insurance Ombudsman Bureau or arbitration.85 The Statement’s chief shortcoming was its lack of legal effect and its restriction in scope.86 Since January 2005, the Statement of General Insurance Practice was replaced by the Financial Services Authority regulation, ICOB, and in January 2008 by ICOBS (Insurance

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Conduct of Business Sourcebook),87 as administered by the Financial Conduct Authority, which currently provides that insurers must handle claims promptly and fairly, provide reasonable guidance to policyholders, not unreasonably reject a claim and pay claims promptly after agreeing to a settlement.88 The regulation further provides that the rejection of a consumer policyholder’s claim is unreasonable where, in the absence of any evidence of fraud, the ground relied on by the insurer is the non-disclosure of a material fact that the policyholder could not reasonably be expected to disclose or non-negligent misrepresentation.89 5.23 The Insurance Ombudsman was established in 1981 by a number of insurance companies, to administer, adjudicate, mediate and make recommendations in respect of claims made by policyholders that have been rejected by insurers whether in full or partially. Lloyd’s joined as a member in 1989. The Insurance Ombudsman is now part of the Financial Ombudsman Service (“FOS”), regulated by Part XVI of the Financial Markets and Services Act 2000. Pursuant to the Dispute Resolution Rules (published by the Financial Services Authority and adopted by the Financial Conduct Authority), the Insurance Ombudsman may make recommendations for the resolution of the dispute or make monetary awards, which will be binding on the insurer up to a fixed amount. The decision is not binding on the assured. The Insurance Ombudsman will not consider disputes over policies issued to businesses with a turnover of over £1 million. In consumer cases, the approach of the FOS is to consider,90 first, whether there has been a clear case of misrepresentation or non-disclosure inducing the making of the insurance contract and, secondly, the policyholder’s state of mind. The FOS will permit the insurer to avoid the policy in the case of a deliberate or reckless misrepresentation or non-disclosure, will require the insurer to pay the claim in respect of an innocent breach of duty, and in the case of an “inadvertent” breach, will require the insurer to handle the claim on the basis of what contract the insurer would have entered into, if any, had full disclosure been made. 5.24 Under section 228 of the Financial Services and Markets Act 2000 and under the Dispute Resolution Rules, the Insurance Ombudsman will determine disputes in accordance with what the Ombudsman considers fair and reasonable in all the circumstances. 5.25 Under ICOBS, a “consumer” is any natural person who is acting for purposes that are outside his trade or profession.91 ICOBS provides that insurers must handle claims

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promptly and fairly, provide reasonable guidance to policyholders, not unreasonably reject a claim, and pay claims promptly after agreeing to a settlement.92 Further, ICOBS provides that, in respect of insurance contracts concluded on or before 5 April 2013, the rejection of a consumer policyholder’s claim is unreasonable where, in the absence of any evidence of fraud, the ground relied on by the insurer is the non-disclosure of a material fact that the policyholder could not reasonably be expected to disclose or non-negligent misrepresentation.93 In respect of insurance contracts concluded on or after 6 April 2013, when the Consumer Insurance (Disclosure and Representations) Act 2012 entered into force (discussed below), the rejection of a consumer policyholder’s claim is unreasonable where, in the absence of fraud, the ground relied on by the insurer is a misrepresentation that is not made in breach of the consumer’s duty in section 2(2) of the Consumer Insurance (Disclosure and Representations) Act 2012 or is such that the insurer would have entered into contract on the same terms even if no misrepresentation had been made.94 It is worth noting that in consumer cases the approach of the Financial Ombudsman Service (FOS)95 is to consider first whether there has been a clear case of misrepresentation or non-disclosure inducing the conclusion of the insurance contract96 and, secondly, the policyholder’s state of mind.97 The FOS will permit the insurer to avoid the policy in the case of a deliberate or reckless misrepresentation or non-disclosure, will require the insurer to pay the claim in respect of an innocent breach of duty, and in the case of an “inadvertent” breach will require the insurer to handle the claim on the basis of what contract the insurer would have entered into, if any, had full disclosure been made.

Australian Law Reform Commission’s recommendations

5.26 In April 2001, the Australian Law Reform Commission published their report No. 91 proposing an overhaul of the Marine Insurance Act 1909 (Cth).98 The 1909 Act was modelled on the Marine Insurance Act 1906. The Commission recommended substantial changes to the Commonwealth Act. As regards the duty of utmost good faith, the following are the principal suggested changes:

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1. The implication of a provision in the contract of marine insurance to the effect that each party should act towards the other with the utmost good faith. Further, the duty of utmost good faith will continue for the duration of the insurance relationship, except in so far as any claim or other aspect of that relationship is the subject of litigation.
2. The test of materiality is to be applied by reference to the position of a reasonable person in the position of the assured (not the insurer).
3. Avoidance should no longer be the automatic and inflexible remedy (most often available to the insurer) for a breach of the duty of good faith.
4. In the event of a fraudulent breach of the duty of utmost good faith, the innocent party should be entitled to avoid the insurance contract with no return of premium.
5. In the event of a non-fraudulent breach of duty, the insurer should be entitled to avoid the insurance contract, but with a return of premium, provided that he can prove that he would not have entered into the contract had there been full and accurate disclosure.
6. In the event of a non-fraudulent breach of duty, if the insurer would still have entered into the contract had there been full and accurate disclosure, the insurer will have three “remedies” available to him: (a) he will not be liable for any loss proximately caused by the undisclosed or misrepresented circumstance; (b) he will be entitled to vary his liability to reflect the variation in the terms of the contract (as to premium, excess or deductible) which he would have imposed had there been full and accurate disclosure; and (c) he will have a right to cancel the policy (prospectively) in accordance with the provisions of the Act.
7. The duty of pre-contractual disclosure will be regulated by sections 24–26 of the Act. These will be amended, but largely retaining the structure of sections 18–20 of the Marine Insurance Act 1906. The most significant suggested changes relate to the broker’s duty of disclosure; further, the exception of superfluity is to be amended so that it will be determined by reference to the “express terms” of the insurance contract, instead of the “warranties”.
8. The parties will not be permitted to agree to a contractual duty of disclosure or remedies that are more burdensome to the assured than that provided for in the Act.
9. A following insurer will be deemed to have been induced by the misrepresentation or non-disclosure if all of the leading insurers were so induced.

Law Commission’s review of insurance contract law: 2006–2014

5.27 In January 2006, the Law Commission commenced a current further review of insurance contract law, placing particular emphasis on the duty of utmost good faith and warranties. In July 2007, it published its Consultation Paper No. 1.2 on “Insurance Contract Law: Misrepresentation, Non-Disclosure and Breach of Warranty by the Insured”.99 In that report, the Law Commission suggested a number of reforms depending on whether

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the insurance contract was a consumer contract or a business insurance contract. As regards business insurance contracts, it recommended that:

1. The duty of disclosure be retained, but be defined by reference to circumstances that are actually known to the assured or ought to be known to the assured and that are material as judged by reference to the reasonable insured.
2. The insurer should have no right to avoid the policy or defend an insurance claim if the assured acted both honestly and reasonably.
3. If, however, the assured makes a negligent non-disclosure or misrepresentation, the insurer should be able to defend a claim if he would not have been liable for the claim had full and accurate disclosure been made.
4. If the assured is guilty of fraud, the insurer should be entitled to avoid the insurance policy.
5. Basis of the contract clauses should be abolished.

In October 2008, the Law Commission published a summary of responses on its business insurance contract proposals,100 the result of which has caused the Law Commission to re-consider the proposals for law reform.

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