As a result of the recent entry into force of the Consumer Insurance (Disclosure and Representations) Act 2012 (CIDR), insurers and insureds will have to be aware of changes affecting the treatment of consumer complaints by the Financial Ombudsman Service (FOS).
These changes are part of a wide reform of financial regulation in the UK. With effect from 1 April 2013, the Financial Conduct Authority (FCA) assumed regulatory control of the UK financial services sector, including the insurance industry, from the Financial Services Authority. The change is designed to be seamless, with the FCA largely staffed by the same people regulating the same financial services firms using virtually the same handbook. FOS will continue to co-operate and communicate with the FCA under the terms of a memorandum of understanding while remaining independent of it.
At the same time, fundamental changes have been made to the legal framework within which FOS works, with the coming into effect of CIDR. As a result, a consumer insurance contract entered into after 6 April 2013 will not be subject to the requirements of the utmost good faith as set out in the Marine Insurance Act 1906; instead the insured is under a duty to take reasonable care not to make a misrepresentation to insurers.
The new CIDR rules
CIDR applies only to contracts (or variations of contracts) entered into in the UK for consumer insurance, which it defines as: “Insurance bought by individuals ‘wholly or mainly for purposes unrelated to their trade, business or profession”. The Act does not apply to commercial insurances. Nevertheless, issues arising from the definition of a “consumer insurance contract” may well arise where contracts are for mixed use (eg, a vehicle used in part for business and in part for social purposes, or a home insurance where part of the building is used as a home office for business purposes).
CIDR effectively does away with the insured’s duty of disclosure for consumers, replacing it with a duty on insurers to ensure that they ask all questions necessary to provide the cover. CIDR specifically states that an insurer cannot rely on an insured not disclosing something that the insurer did not ask about.
Under Section 2 of the Act, it is the duty of the consumer to take reasonable care not to make misrepresentations to the insurer before the contract is entered into or varied. This changes the consumer’s duty of utmost good faith by removing the obligation to disclose all material facts. Rather than being required to volunteer information, consumers now need only to respond honestly and with reasonable care to the questions they are asked.
In short, the insured’s duty is to respond honestly and reasonably. The duty of insurers, meanwhile, is to ensure that they request the information they need to assess the risk being underwritten. If a consumer acts honestly and reasonably, the insurer will have to pay the claim. In the event that a consumer acts carelessly, CIDR stipulates that a proportionate remedy will be applied; the test for this will be what the insurer would have done had it known the full facts (such as impose terms, or charge a higher premium).
An insurer will only be able to refuse payment of a claim if a consumer acts deliberately or recklessly in making misrepresentation. The insurer would also be entitled to hold on to the relevant premiums, unless there was a good reason why it could not do so.
The insurer will need to prove, on the balance of probabilities, that the consumer knew: (a) that a deliberate or reckless misrepresentation was untrue or misleading, or did not care whether it was or not; or (b) that the matter was relevant to the insurer, or did not care whether it was or not. If a misrepresentation fails to pass this test, it will be deemed a careless representation and must be dealt with as outlined above.
CIDR: what does the future hold?
CIDR strikes a fairer balance between insurers and insureds than under the Marine Insurance Act 1906. A consumer insurance contract entered into after 6 April 2013 will not be subject to the requirements of the utmost good faith as set out in the Marine Insurance Act 1906; instead the insured is under a duty to take reasonable care not to make a misrepresentation to insurers.
The new Act effectively brings into law the long-standing FOS approach to the handling of consumer complaints relating to non-disclosure, and modifies the provisions of the Marine Insurance Act 1906 insofar as “consumer contracts” or personal insurances entered into after 6 April 2013 are concerned. But, unlike FOS jurisdiction, CIDR does not extend to “micro-enterprises”, a term covering smaller businesses with an annual turnover of less than 2 million euros and fewer than ten employees. Consideration was given to extending CIDR to include micro-enterprises but, as matters stand, there are no plans to take the insurance of micro-enterprises outside the provisions of the Marine Insurance Act 1906.
It remains the case that the law has been modified for individuals, and not for micro-enterprises. So insurers of qualifying small and medium enterprises (SMEs) will still have to juggle the law on non-disclosure as set out in the Marine Insurance Act and the FOS regime.
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