Large Changes Ahead for Consumer Insurance

The Consumer Insurance (Disclosure and Representations) recently had its first reading in Parliament. The Bill intends to change the relationship between consumers and insurance providers by abolishing the duty on consumers to disclose material facts, other than answering the specific questions put to them by the insurer. The change aims to prevent valid claims from being turned down because consumers unintentionally gave the wrong information.

Under current rules, it is expected of insurance policyholders that they make sure the insurer knows everything that could be deemed ‘relevant’ to their policy. However the proposed changes put the onus on the insurer to ensure it knows all that it needs to, through the use of key questions.

Also, under the Bill consumers will have a duty to take reasonable care not to make a misrepresentation during contractual negotiations. This would allow for:

• the insurer to potentially avoid paying out if there has been a fraudulent misrepresentation, by showing that if it had known the truth it would not have entered the contract;
• the insurer to potentially avoid paying out if there has been a negligent misrepresentation, by showing that if it had known the truth it would not have entered the contract, or if it cannot prove that, then it must pay an appropriate proportion of the claim;
• the insurer cannot avoid paying out if there is an innocent misrepresentation.

Under this duty the consumer must answer questions as a ‘reasonable consumer’ would. The Bill provides that a ‘reasonable consumer’ it is to be determined in the light of all the relevant circumstances. This includes the type of policy, explanatory material produced by the insurer, the clarity and specificity of the questions asked by the insurer and whether or not the consumer took out the policy through an agent.

Clause 6 of the Bill also abolishes the basis of the "contract clause". Under the current law, insurers may include a declaration on an insurance policy stating that the consumer warrants the accuracy of the answers or that the answers form the basis of the contract. In effect this turns the consumer’s representation into a warranty. The insurer therefore has no liability for any claims if a misrepresentation was made, even if the misrepresentation was immaterial and did not induce the insurer to enter the contract.

If the Bill goes through it is hoped that these new measures will help provide clarity for consumers, and further protect consumer rights.

Geoff Kew

Published on 10/06/2011