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5/2 W01/March 2017 Award in General Insurance

Introduction

When speaking of contracts in general terms in chapter 3 we looked at the nature of all contracts. All
parties to a contract must act with good faith. In this chapter, we will discuss the reasons for, and the
nature of, the higher duty that applies to insurance contracts.
Many contracts involve the purchase of a tangible product. A purchaser can inspect a tangible item at
the time they buy to check that it is good value. Provided that the seller does not mislead them (for
example, by showing a sample that is unrepresentative of the actual product), the law expects the
purchaser to satisfy themselves about the obvious properties of the product being bought.

There are some obvious difficulties when trying to apply this principle to insurance contracts. In the first
place, although the potential customer can inspect a specimen policy wording before proceeding with
the purchase, this is clearly not the same as being able to inspect, say, a table before buying it. A policy
is only really ‘tested’ in terms of adequacy and quality when a claim is made – and neither the
policyholder nor the insurer wants this to happen. Thus, from the proposer’s point of view the insurance
product is intangible – it is a promise as yet untested.
If we look at things from the insurer’s point of view, we can also see that the insurer is reliant upon a
proposer for most of the important details about the risk that is being offered.
More comprehensive standards of disclosure are necessary for insurance contracts. For this reason there
is a greater duty placed upon each party and it this is termed utmost good faith.
In the UK the duty of utmost good faith has been modified as part of the Law Commission’s general
5 review of insurance law in England and Wales. This sought to address what has long been considered an
Chapter imbalance in the rights and obligations of the parties to the contract in respect of non-disclosure and
misrepresentation. The changes differ depending upon whether the client is deemed a consumer or a
business.
A ‘consumer insurance contract’ is a contract of insurance between:
a. an individual who enters into the contract wholly or mainly for purposes unrelated to the
individual’s trade, business or profession; and Reference copy for CII Face to Face Training
b. an individual who carries on the business of insurance and who becomes a party to the contract by
way of that business (whether or not they are in accordance with the rules of the Financial Services
and Markets Act 2000).

The Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA), which came into force in
April 2013, replaced the pre-contractual duty on consumers to disclose material facts (referred to as the
duty of utmost good faith) with a duty to take reasonable care not to make a misrepresentation.
The Insurance Act 2015 (IA 2015), introduced in August 2016, applies to all insurance contracts which
are not defined as a consumer contract and introduced the concept of a duty to make a fair presentation
of a risk for non-consumer contracts. We will look at both these duties in more detail in the following
sections.
It is important to note that, despite the modifications made by CIDRA and IA 2015, contracts of insurance
are still contracts of utmost good faith (Marine Insurance Act 1906 (MIA 1906), s17). This means, in
simple terms, that the insurer and the policyholder have a duty to deal honestly and openly during their
relationship. The duty continues to apply to insurers in their pre-contractual negotiations and to both
parties during the contractual relationship.

Key terms
This chapter introduces the following terms and concepts:
Compulsory insurances Consumer Insurance Duty of disclosure Duty of fair presentation
(Disclosure and
Representations) Act 2012
Insurance Act 2015 Material facts Material circumstances Misrepresentation
Moral hazard Non-disclosure Physical hazard Policy wordings