knowledge | 23 January 2020 |
Pending Reform of Consumer Insurance Contracts
The Consumer Insurance Contracts Act 2019 (the “Act”), which was recently signed into law, comprehensively reforms the law applicable to consumer insurance contracts. Once commenced, the Act will have a significant impact on life and non-life insurers conducting insurance business with consumers in Ireland.
Amendments to consumer insurance contract law in Ireland
The Act aims to address the perceived current imbalances in consumer insurance contract law identified by the Law Reform Commission in its 2015 Report on Consumer Insurance Contracts (the “LRC Report”). The Act is expected to be commenced shortly.
The Act will apply to contracts of life insurance and non-life insurance with consumers agreed or varied following the commencement of the Act (“Contracts”). The Act defines the concept of a “consumer” by reference to the Financial Services and Pensions Ombudsman Act 2017. Accordingly, the Act applies to Contracts with individuals; unincorporated bodies, such as sole traders, partnerships and charities; and incorporated bodies with a turnover of less than €3 million (provided such businesses are not members of a group having a combined turnover greater than €3 million).
Certain contracts of insurance are excluded from the scope of the Act, including a contract of insurance involving an SPV.
Insurance contract law provides that a consumer may not recover a benefit from an insurance contract unless he or she has some identifiable interest or expectation in the risk insured, known as an “insurable interest”.
The Act largely abolishes this notion of “insurable interest”. While an insurable interest may still be required in the case of a Contract that is also an indemnity contract, the interest required may not extend beyond a factual expectation, on the part of the consumer, either of an economic benefit from the preservation of the subject-matter or an economic loss on its destruction, damage or loss that would arise in the ordinary course of events.
Pre-contractual duty of disclosure
One of the most significant changes to the existing law set out in the Act relates to the pre-contractual duties of disclosure and utmost good faith (uberrima fides) imposed on consumers. The Act replaces these duties with a duty to answer specific questions honestly and with reasonable care and the consumer will not be under any duty to volunteer information over and above that required by the specific questions asked by the insurer in its pre-contractual forms. Accordingly, insurers should consider, in particular, whether changes to policy wordings and pre-contractual consumer proposal forms are required as a result of the Act.
An insurer must draft the relevant questions in plain and intelligible language and, in case of doubt or ambiguity, the interpretation most favourable to the consumer will prevail. An insurer will be deemed to have waived any further duty of disclosure on the part of the consumer where it fails to investigate an absent or obviously incomplete answer to a question, unless the non-disclosure arises from fraudulent, intentional or reckless concealment.
Before a Contract is entered into or renewed, an insurer must inform the consumer on a durable medium of the general nature and effect of the pre-contractual duty of disclosure.
Insurers’ remedies for misrepresentation
The LRC Report described the existing “all or nothing” remedy for misrepresentation by consumers, namely, rescission of a Contract, as “draconian”. The Act will replace this remedy with remedies that are proportionate to the effects of any misrepresentation on the interests of the insurer and the consumer.
Although the insurer will still be able to avoid the Contract if the misrepresentation is fraudulent, the insurer will be required, where a misrepresentation is innocent, to pay the relevant claim; or, where the misrepresentation is negligent, to show what it would have done had it been aware of the full facts.
A consumer has the right to cancel a Contract within 14 working days after the date the consumer is informed that the Contract has been concluded. This right only applies to Contracts that are not covered by the cancellation rights set out in the Solvency II Regulations or in the European Communities (Distance Marketing of Consumer Financial Services) Regulations 2004.
The Act sets out a number of requirements that apply to the renewal of a Contract. Among other things, it provides that the existence of a pre-contractual duty of disclosure does not imply that a consumer must provide the insurer with any additional information at renewal of the Contract, unless expressly required to do so by the insurer.
An insurer must notify the consumer at least 20 working days before the renewal of a Contract, of any alteration to the relevant policy's terms and conditions.
The Act replaces the post-contractual duty to act with “utmost good faith” throughout the term of an insurance contract and during the period while a claim made by a consumer is being processed by an insurer with specific statutory duties and by delineating the circumstances in which an insurer may refuse a claim pursuant to an “alteration of risk” clause in a Contract.
An alteration of risk clause in a Contract will only apply where the subject-matter of the Contract has altered and will be void where it purports to apply where there is only a modification of the risk to insured. Any clause in a Contract that refers to a material change will be interpreted to mean a change that takes the risk outside that which was within the reasonable contemplation of the contracting parties when the Contract was concluded.
The consumer must cooperate with the insurer in the investigation of an insured event, including by responding to a reasonable request for information in an honest and reasonably careful manner.
Where non-compliance by a consumer with a specified notification period does not prejudice the insurer, the insurer will not be entitled to refuse liability under the claim on this ground alone.
The Act imposes specific obligations on a provision of a Contract that defers the insurer’s obligation to pay a claim until repair, replacement or re-instatement work has been completed and specified documentation has been furnished to the insurer.
In addition to requiring such clauses to be drawn specifically to the consumer’s attention both prior to the commencement of the Contract and at the time of making the claim, the Act limits the claim settlement amount that can be deferred.
Proportionate remedies and claims handling
The Act contains specific provisions regarding fraudulent claims and specifically recognises an insurer’s right to refuse to pay a claim and terminate the relevant Contract where a consumer makes a claim containing fraudulent information that:
- is false or misleading in any material respect; and
- which the consumer knows to be false or misleading or where the consumer consciously disregards whether the relevant information is false or misleading.
The Act abolishes “basis of contract” clauses in Contracts so that any term in a Contract purporting to convert statements made by the consumer into a warranty will be invalid and therefore unenforceable.
The Act makes certain warranties “suspensive conditions”, whereby the insurer’s liability will be suspended for the duration of the breach but can be restored if the breach is subsequently remedied.
The Unfair Terms in Consumer Contracts Regulations
The Act states that the European Communities (Unfair Terms in Consumer Contracts) Regulations 1995 apply to a consumer within the meaning of the Act. Currently those Regulations only apply to a person that is a natural person acting for purposes which are outside his business.
Third party rights
The Act ameliorates the effects of the rule of privity of contract by transferring the rights of a person who is insured under a contract of insurance against a liability that may be incurred by the person to a third party, to that third party in certain circumstances. This change is intended to ensure that third parties (such as a person injured in an accident at work) obtain the benefits to which they should be entitled under certain contracts (such as employers’ liability contracts).
Practical implications of the Act for insurers
Clients frequently need support in preparing for the new Act, including with regard to the following issues:
- drafting changes to policy wordings and pre-contractual consumer proposal forms as a result of the Act;
- considering the impact of the Act on the disclosure process for policyholders; and
- advising on how clients’ underwriting, renewal and claims handling processes will be affected by the Act.
This briefing is for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.