Insurance Law Reform

Proposed changes to insurance law will make it more difficult for insurers to avoid liability for claims because of minor errors on application forms.

Insurance law has always been governed by the principle of ‘utmost good faith’. It is quite common for insurance companies to use this principle to try to avoid paying out on claims when there are minor errors or failures to make full disclosure on insurance application forms. Therefore, the Law Commission and the Scottish Law Commission have published a joint consultation paper proposing changes to insurance contract law. The paper deals with misrepresentation, non-disclosure and breach of warranty by the insured.

The proposed changes would have the effect that policyholders who make innocent errors of fact or non-disclosure on their proposal forms would not lose their cover, whilst retaining protection for the insurers where there is dishonesty or recklessness in completing an application. A five year cut-off period is also proposed after which statements on the application could no longer be relied upon as older statements are difficult to check.

The consultation period closed earlier this month. A second consultation paper will be published in 2008. This will deal with post-contractual good faith, insurable interest and damages for late payment of claims.

When the results of the two consultations have been considered, it is intended that new laws to replace the existing legislation (the main part of which is now a century old) will be introduced.