Tuesday 7th July 2015: The Law Reform Commission’s Report on Consumer Insurance Contracts will be launched this evening by Mr Justice Ronan Keane (former Chief Justice and former Commission President) at 5 pm at the Commission’s offices.
1. Report’s recommendations for reform apply to consumers, including SMEs
The 305 page Report makes 105 recommendations for reform of the current rules in consumer insurance contracts. Many of these rules date from the 18th Century, when insurance was usually arranged between shipping traders and small insurers, and the traders often had more information than the insurers to judge the risk being insured. However, these rules continue to apply today in insurance contracts that are made between consumers (including SMEs) and large multi-national insurers with significant financial, technical and actuarial resources. The current rules do not match the current realities of the bargaining powers of consumers compared to large insurers.
The Report therefore recommends the enactment of legislation to reform and re-balance the duties of insurers and consumers. The legislation would apply to insurance contracts between insurance companies and individual consumers or SMEs with a turnover of less than €3 million. This definition of consumer to include SMEs already applies to the Office of the Financial Services Ombudsman (which provides a mediation service on consumer insurance complaints) and under the Central Bank’s Consumer Protection Code 2012 (which contains important requirements on insurance contracts). The Report’s recommendations include the following.
2. Recommendations on consumer’s duty of disclosure and on proportionate remedies
The Report’s recommendations to reform the consumer’s duty of disclosure and the insurer’s current right to repudiate liability for non-disclosure are related.
Replacing the current duty of disclosure
The current law imposes an onerous duty on a consumer to disclose information that a hypothetical “prudent insurer” might rely on in deciding whether to insure the consumer. This requires a consumer to try to anticipate what an insurer might need to know, even if the consumer is not aware that the information was relevant; and the insurer does not have to prove that it would actually have relied on that information even it had been disclosed.
|Case example on current duty of disclosure: in a case called Chariot Inns, a company had taken out fire insurance on a pub, the Chariot Inn. The MD of the company did not disclose that another company of which he was director had received a payment under a different fire insurance policy for fire damage in a different premises. When the Chariot Inn was later destroyed in a fire, the company made a claim under the fire policy. The insurance company refused to make any payment because of the non-disclosure of the payment made under the other fire policy claim. The Supreme Court accepted that, even if the insurance company had been given this information, it probably would not have actually made any difference to the insurer, but it was enough that it might have affected a hypothetical prudent insurer. Therefore the insurance company was entitled to refuse to make any payment under the policy.
The Report recommends that the law should be reformed so that the insurer would be required, by asking consumers specific questions, to identify what information it actually considers is relevant in its decision whether to insure the consumer and/or what premium to charge. A corresponding obligation should be imposed on consumers to answer, carefully and honestly, those specific questions.
Insurer’s right to repudiate should be replaced by a system of proportionate remedies
The Chariot Inns case illustrates that, under the current law, where a consumer has not complied with the duty of disclosure, the insurance company can repudiate liability, that is, refuse completely to pay anything out under an insurance contract. The Commission’s Report recommends that this “all or nothing” approach should be replaced by a system of proportionate remedies.
This would mean that, where a consumer’s non-disclosure, misrepresentation or other breaches of contract are innocent or due to negligence, insurers should not be able to repudiate all liability under the insurance contract but should be required to make proportionate payments to the consumer.
The Commission recommends, however, that where a consumer’s non-disclosure, misrepresentation or other breaches of contract are fraudulent (that is, where made intentionally or recklessly), the insurer’s right to completely repudiate liability should remain. There must be clear provisions within our laws which will deter fraudulent insurance claims.
3. Recommendations on insurance warranties (including “basis of contract” clauses) to protect consumers from unfair and unjust outcomes
Warranties in insurance contracts are special terms or conditions that permit a party to an insurance contract (usually the insurer) to repudiate the contract and refuse to meet the claim if the particular provision (the warranty) is breached. They include any statement made by a consumer which the insurance policy states is the “basis of the contract” between the consumer and the insurance company.
This means for example that if a consumer wrongly “warrants” that a particular type of burglar alarm has been installed (or states will be the “basis of the contract”) and the premises subsequently burns down as a result of faulty electrical wiring, the insurer will probably be entitled to repudiate liability under the policy even though there has been no connection between the breach of warranty (the absence of a burglar alarm) and the event giving rise to the claim (a fire).
|Case example on insurance warranties: in a High Court case called Keenan a man had taken out fire insurance on his home. The insurance company’s proposal form asked whether he had ever sustained loss or damage by any of the risks he wished to insure against. Mr Keenan answered “no” to this, and he also signed that the answers were “true and complete” and that they formed the “basis of the contract.” His home was later completely destroyed by fire and he made a claim under the policy. The insurance company refused to pay under the policy on the basis that Mr Keenan had failed to disclose that, less than a year before taking out the fire insurance, he had been paid €53 in respect of fire damage to a pump. It was agreed that this was not a “material” fact so that, even under the current “prudent insurer” test in the Chariot Inns case, this would not have allowed the insurance company to repudiate liability for such a non-disclosure. But, because he had signed that the answers were “true and complete” and that they formed the “basis of the contract” they had become insurance warranties. Therefore, even though the High Court judge pointed out that this amounted to “a relatively unimportant inaccuracy,” he had to apply the current law on insurance warranties and allow the insurance company to repudiate all liability. The judge stated that this resulted in “undoubted hardship” to Mr Keenan and that he was dismissing his claim “with considerable regret.”
There have been many other cases highlighted by the courts where reliance by insurers on breaches of warranties has appeared to be unfair and unjust and has failed to provide satisfactory protection to consumers. The Commission is therefore recommending the abolition of the concept of warranties in consumer insurance contracts and their replacement with statutory rules that will enable insurers to continue to include provisions in contracts that (a) precisely identify or define the risk insured and (b) protect consumers from the unfair and unjust effects of the current law.
4. Recommendation to permit third parties intended to benefit under an insurance contract to make a direct claim against the insurer
In general, a person who is not party to a contract (a “third party”) does not have enforceable legal rights under the contract even where the contract is intended to benefit him or her. Subject to very limited exceptions, this general rule (called the “privity rule”) applies to insurance contracts. The privity rule can make it difficult (and sometimes impossible) for third parties to obtain the benefits to which they should be entitled under certain insurance contracts (such as public or employer’s liability contracts).
This means that a (perhaps) seriously injured person cannot directly recover compensation from the insurer of an employer or other person who has paid for and holds a valid insurance policy expressly intended to benefit the injured person. This can happen where the policyholder is a corporate body in liquidation, receivership or examinership, or an individual who has died, is missing or whose decision-making capacity is in question.
|Case example on the privity rule: in a High Court case called Hu a man had been injured in a workplace accident and his employer had been found negligent and therefore liable to pay him compensation. The employer had taken out employer’s liability insurance that covered Mr Hu’s workplace accident, but it had gone into liquidation. Mr Hu then applied to obtain payment under the insurance policy directly from the insurer. The insurer refused on two grounds: first, it was entitled to repudiate liability under the policy because it was a pre-condition of making any payment that the employer (which was in liquidation) had to pay a €1,000 excess under the policy, which it had not done; and that, even though Mr Hu had offered to pay this €1,000 excess, he was not entitled to do so as he was not a party to the contract and so the privity of contract rule prevented this. The High Court accepted that, under the current law, the insurance company was correct and it dismissed Mr Hu’s claim.
The Commission recommends in the Report that third parties such as Mr Hu should be allowed to bring claims directly against insurers where that is necessary and appropriate; that they should be able to pay any excess under a policy where this is required to proceed with a case; and to obtain relevant documentary and other information directly from insurers where that is required.
5. Recommendation on subrogation in family and close relationships
Subrogation (which means substitution) entitles an insurer to “step into the shoes” of its policyholders in order to provide indemnity and secure its own rights as insurer. In road traffic claims, subrogation allows insurers to defend or settle claims made against their policyholders and then to initiate claims in the names of those policyholders in order to recover some or all of the compensation. The Report does not make any recommendation to reform this application of subrogation.
However, subrogation can give rise to some difficulties in insurance claims involving family and close relationships. For example, if a homeowner makes an insurance claim for damage to a dwelling caused by the carelessness of a visiting relative or close friend, subrogation entitles the insurer to bring a claim against the offending (and possibly uninsured) relative or friend in the name of the insured homeowner. This may result in unfair pressure being placed on the insured homeowner by an insurer not to make an otherwise perfectly valid claim for compensation. To avoid this, the Report recommends that subrogation should not be permitted in such cases.
6. Other recommendations
Among the other recommendations in the Report are:
- insurers should be required: to provide consumers with plainly written documents containing the essential terms of the contract; to provide clear warnings of the consequences of non-compliance with the statutory duties proposed in the Report; and to provide consumers with policy documents as soon as possible after the contract has been completed.
- there should be a duty on consumers to pay premiums within a reasonable time and a duty on insurers to handle claims and complaints promptly and fairly.
- the general statutory provisions on unfair contract terms should be suitably adapted to consumer insurance contracts (including that insurance contract terms will not be deemed unfair where they have actually been considered by the insurer in the calculation of the premium and where they have been drawn to the attention of the consumer).
- the requirement that a consumer must have an “insurable interest” in the risk being insured (on which the law has been described as an “illogical mess”) should be abolished, and there should instead be a rule that the consumer should simply be asked to prove what actual loss has been sustained when a claim is made.