4 December, 2017
Part I: the concepts of "disclosure", "misrepresentation” and the abrogated concept of "fair presentation"
Insurance law reform in the UK has been on the parliamentary agenda for over 50 years, involving various consultations, proposals and reports, despite decades of resistance by the insurance industry. Notwithstanding industry resistance, the Insurance Act 2015 (UK) (IA UK) was enacted, coming into effect on 12 August 2016 (as discussed in Global Insurance Focus – Issue 5).
In Australia, parallel developments have occurred, over a more extended period since the enactment of the Insurance Contracts Act (1984) (Cth) (ICA), which effected major changes in the common law, with a vision to modernise the practice of insurance.
In this article we compare the Australian concepts of “disclosure” and “misrepresentation” with the abrogated UK concept of “fair representation”.
Later articles in this series will cover knowledge of the insured, remedies and future Australian reform.
The “Anglo-Australian” Disclosure Regime
For present purposes, it is important to understand the “Anglo-Australian Disclosure Regime”.1 This encompasses:
a. the common law duty of disclosure, which was codified in the Marine Insurance Act 1906 (UK)2 (MIA 1906);
b. the common law that remains in force for marine insurance in Australia, codified in the Marine Insurance Act 1909 (Cth)3 (MIA 1909) (replicating the repealed UK sections);
c. the common law duty of disclosure that applies to reinsurance contracts in Australia;
d. the Australian non-marine regime, set out in the ICA; and
e. the IA UK which abrogates the common law and extends to all forms of insurance, including marine insurance and reinsurance (repealing MIA 1906).4
The Australian approach
Separate duties of non-disclosure and misrepresentation
In Australia, non-disclosure (section 21 of the ICA) and misrepresentation (section 26 of the ICA) are kept as distinct duties. However, it has been commented that they are “two sides of the same coin”. This sentiment is echoed by UK common law decisions, where generally the concepts are pleaded together. While being kept as separate duties, the same remedies apply to a breach of these duties (section 28 of the ICA).
Abolition of the “prudent insurer” test
The ICA dramatically altered the law on misrepresentation, in particular, by abolishing the long-established requirement that insurers must prove that the judgement of a prudent insurer would have been affected by the misrepresentation and, instead, replacing it with a “prudent insured” test. Over the last two decades of the ICA’s operation, this test has proven to better balance the interests of insurers and insureds.
The Australian regime is a Code
Part IV of the ICA is a statutory code that replaces the common law. The High Court of Australia5 confirmed that the circumstances in which it is legitimate to resort to the preceding common law, for the purpose of interpreting statute, are extremely limited. Decisions in the proceeding decades have upheld the High Court’s approach.
It is important to note that the ICA applies to both general and life insurance, but carves out marine and reinsurance, unlike the IA UK, which extends to most classes of insurance.
The UK’s approach to reform
A single duty of “fair presentation”
The English common law position on disclosure has been described as being poorly understood, which led to widespread failure to provide material information.6 In light of these shortcomings, the IA UK repealed sections 18 to 20 of the MIA 1906 and so dispensed with the duty of utmost good faith in the context of the insured’s pre-contractual duties, and replaced it with the concept of “fair presentation”.7
Section 3 of the IA UK repackages the insureds’ duty to disclose as a duty of fair presentation of risk.8 Under the IA UK, the duty of fair presentation encompasses the common law elements of non-disclosure and misrepresentation; this is largely because misrepresentation and non-disclosure are often pleaded and considered together.9 Professor Robert Merkin states the law of non-disclosure has tended to dominate, with little attention being given to misrepresentation in an insurance context.10
The reform is significant because the IA UK provides illustrations of the classes of fact that are likely to be material. This includes special or unusual facts relating to the risks and/or any particular concerns which led to seeking insurance cover for the risk.11
The “prudent insurer” test
The IA UK imposes a requirement on the policyholder to disclose “every material circumstance” which might be relevant to an insurer. Despite recommendations, the “prudent assured test”, as adopted in Australia, and long mooted in the UK as a fairer approach to disclosure, has not been adopted.12
The UK’s retention of the common law, and reluctance to adopt the balanced Australian approach of the “reasonable insured” test, is possibly due to the fact that they may introduce an untested concept into the law.
In turn, this would take judges time to develop the law and make it difficult to advise businesses on what they should be expected to disclose.13
The IA UK is a default regime
Unlike its Australian counterpart, the IA UK is a default regime for non-consumer insureds. This provides insurers with the option to contract out of the disclosure obligations under the IA UK. The insurance industry was reluctant to adopt change in the UK, and it is apparent that the reform did not go as far as Australia, due to the fear of disrupting the industry. Some commentators14 are of the view that the regime will be contracted out where the risk insured is unique or complex. Therefore, the IA UK is likely to be contracted out for many reinsurance contracts. Where an insurer wishes to contract on different terms, and a term is “disadvantageous” to the insured, the insurer must:
a. take sufficient steps to bring the term to the insured’s attention; and
b. ensure that the term is clear and unambiguous.
This is a deliberately flexible test. For example, what is sufficient in a sophisticated market with well informed and advised parties, will not be adequate if the insured is a small business buying cover online.15
Concluding remarks
The UK has, like Australia before it, embarked on monumental reforms. The ICA, given its time in place has proven to strike a fair balance between insureds and insurers. This is largely a result of the consumer-driven nature of the insurance market in Australia. The IA UK is untested, and as yet, an uncertain model. While the ICA has introduced positive changes by codifying the disclosure regime and abolishing the prudent insurer test, it is important to note that it is only applicable to general and life insurance contracts. The MIA 1909 remains unchanged, mirroring the MIA 1906, and therefore the disclosure obligations for marine insurance remain outdated and out of touch in Australia.
Given the broad, albeit optional application of the IA UK, it may be time for Australian legislators to reconsider whether it is necessary to retain an entirely separate regime for marine and reinsurance contracts outside the ICA.
1. Rob Merkin, “What does an assured “know” for the purpose of pre-contractual disclosure?” (2016) Insurance Law Journal 157, 158.
2. See sections 18 and 19 of the MIA 1906 which have been repealed by the IA UK.
3. Sections 24 and 25 of the MIA 1909.
4. Rob Merkin, “What does an assured “know” for the purpose of pre-contractual disclosure?” (2016) Insurance Law Journal 157, 158.
5. Advance (NSW) Insurance Agencies Pty Ltd -v- Matthews [1989] HCA 22.
6. English Law Commission and Scottish Law Commission, “Insurance Contract Law, Issues Paper no 1 – “Misrepresentation and Non-Disclosure”, September (2006), 44, [5.8] to [5.10].
7. Rob Merkin and Ozlem Gürses, “The Insurance Act 2015: Rebalancing the Interests of Insurer and Assured” (2015) The Modern Law Review Limited (78) (6), 1004, 1009.
8. Section 3(1) of the IA UK.
9. English Law Commission and Scottish Law Commission, “Insurance Contract Law, Issues Paper no 1 – “Misrepresentation and Non-Disclosure”, September (2006), 44, 7, [2.13].
10. English Law Commission and Scottish Law Commission, “Insurance Contract Law, Issues Paper no 1 – “Misrepresentation and Non-Disclosure”, September (2006), 44, 7, [2.13].
11. Rob Merkin and Ozlem Gürses, “The Insurance Act 2015: Rebalancing the Interests of Insurer and Assured” (2015) The Modern Law Review Limited (78) (6), 1004, 1011.
12. Rob Merkin, “What does an assured “know” for the purpose of pre-contractual disclosure?” (2016) Insurance Law Journal 157, 164.
13. English Law Commission and Scottish Law Commission, “Insurance Contract Law, Issues Paper no 1” – “Misrepresentation and Non-Disclosure”, September (2006), 55, [5.47] and [5.48].
14. David Hertzell, “Reforms to UK insurance law: overview of key changes, Practical Law UK Articles 6-615-6445”.
15. David Hertzell, “Reforms to UK insurance law: overview of key changes, Practical Law UK Articles 6-615-6445".
For further information, please contact:
Rehana Box, Partner, Ashurst
rehana.box@ashurst.com
