The English and Scottish Law Commissions published their third Issues Paper on 21 March 2007. It focuses on the position where a mistake or fraud by an insurance intermediary leads to non-disclosure/misrepresentation of information to an insurer. The proposals are to be read in conjunction with the preceding Issues Papers which looked at reform of the law in respect of non-disclosure/misrepresentation and warranties generally.
The three main issues
The Commissions have identified three main issues. Firstly, if at the pre-contract stage the intermediary non-discloses/misrepresents material information received from an applicant, what should the consequence be and who should be held to account? Secondly, if the intermediary enters incorrect information on a proposal form that is then signed by an applicant, should the intermediary continue to be treated as the agent of the applicant and the applicant be bound by its signature? Thirdly, section 19 of the Marine Insurance Act 1906 imposes an independent duty of disclosure on an insurance agent; does the scope of the duty or the remedy for its breach need to be re-examined?
The consequences which flow from a pre-contractual non-disclosure/misrepresentation by an intermediary depend upon for whom the intermediary is acting - the insurer or applicant. In the former case, the insurer will be deemed to have knowledge of the material information; in the latter, it will not and will be entitled to avoid the policy.
However, it can be very difficult to determine into which camp an intermediary falls. Most commonly they are viewed as agents of the insured. Equally commonly they are remunerated by the insurer. In addition, intermediaries can and do act in a dual capacity - acting as the applicant's agent when providing advice and as the insurer's agent when issuing a cover note. There is even more scope for confusion at the reinsurance level where the broker may take on a multitude of roles for a variety of entities.
The Commissions have deemed the current position "unsatisfactory" for the consumer. Referring to instances where consumers have pursued lengthy claims against an insurer only to be told that they should have been pursuing the intermediary, they conclude that the insurance industry is being brought into disrepute. Clarity is needed. The law (and the Financial Ombudsman Service's practice) must meet the reasonable expectations of consumers. They propose that...