The Joint Law Commission Proposals for the Reform of the Law - Essay Example

? Critically appraise the Joint Law Commission proposals for the reform of the law relating to Business Insureds, considering further the case for differential treatment of Micro-Businesses [Name] [Institution] Critically appraise the Joint Law Commission proposals for the reform of the law relating to Business Insureds, considering further the case for differential treatment of Micro-Businesses. The Marine Insurance Act (MIA) dates back to 1906. It is over 100 years old. There have been so many changes in businesses and insurance that it is only common sense to expect an updated model of MIA. That answers the questions whether there was a need for Joint Law Commission’s proposals or not. Business Insureds can be divided into their components so the Commission’s proposals can be critically analysed. Duty of Disclosure The law of disclosure is famously referred to in the section 18 of MIA. It states that the insured must provide every material circumstance that it knows or ought to know in the ordinary course of its business (Joint Law Commission Report, 2012, p. 7); both the insurer and the insured owe a duty of utmost good faith to each other (Brook, 2012, p. 21). In Goshawk Dedicated Ltd v Tyser & Co Ltd it was held that utmost good faith was not free standing but formed the basis for implicating a term (Gurses, 2013, p. 77). The need for change (proposal) arose from the 2007’s section that a business insured only needs to provide volunteering facts that an insurer would want to know (Palmer, Mackie, Davies & Marris, 2012). To rectify this, the Commission’s proposal retains duty of the insured for providing all material facts that any reasonable insurer would want to know. For instance, a proper disclosure would look something like;  “(1) Any unusual or special circumstances which increase the risk; (2) Any particular concerns about the risk which led the policyholder to seek insurance;(3) Standard information which market participants generally understand should be disclosed” (Joint Law Commission Report, 2012, p. 11) Regarding misrepresentation, the insured must not make any material misrepresentation, where material means, “would influence the judgment of a prudent insurer” (Joint Law Commission Report, 2012, p. 7). So in the case of breach, the insurer’s remedy lies in avoiding the contract, yet this has caused problems in the past. For instance, in practice, strict adherence to MIA can sometimes produce results that are unjust or inappropriate for the insurer (Joint Law Commission Report, 2012, p. 38). Although the Consumer Insurance (Disclosure & Misrepresentation) Act 2012 has addressed these issues in its proposal but concrete reforms in this regard are yet to come. Proposals for Non-disclosure and Misrepresentation The original Act of 1906 suggests that an insurer can only avoid the contract in only those areas where the insured is guilty of non-disclosure or misrepresentation (Joint Law Commission Report, 2012, p. 24). This does not do justice to the insurer as the losses by misrepresentation or failure to disclose material information can range from minimal to catastrophic (Joint Law Commission Report, 2012, p. 179). For this reason, the Commission’s proposal suggests defining this dishonest conduct (Joint Law Commission Report, 2012, p. 213). Two options in this regard are; either going for deliberate or reckless, or the common law test of fraudulent conduct (Joint Law Commission Report, 2012, p. 213). So this is what the new picture looks like. If the misconduct on insured’s part is innocent or negligible then the remedy for the insurer is only proportionate to the amount of damages. This ‘leniency’ is because not all damages arise out of deliberate fraud or misrepresentation. In Economides a 21-year-old man placed the contents of his flat below their market value when his parents moved in with him, the Court of Appeal considered his statement an opinion rather than a fact. As it was made in honest good faith it did not have to be reasonable (Summer, 2013, p. 178). This proposal seems justified because it gives the insurer what he lost. For instance, when the case is analysed and it is found the insured did not write the risk altogether, the insurer gets the right to avoid policy, decline the claim and return premiums, just like in the Century Insurance Company of Canada v Case Existological Laboratories Ltd (The Bamcell II) [1984] 1 Western Weekly Reports 97. The Commission’s proposals regarding non-disclosure and misrepresentation are not only to expand or ask for revision, they are to enshrine the interpretations as well to form more elaborate and clearer provisions. For example; “any circumstance as to which information is waived by the insurer” is not mandatory to be disclosed (Joint Law Commission Report, 2012, p. 20). The commission is also in the favour of inducement test, which was established in the Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co [1994] 3 WLR 677. This actual inducement test is quite different from the mere hypothetical test of insurer’s prudency (Hodges, 2012, p. 267). The reason for these two tests is that the prudency test establishes the materiality while the inducement test establishes basis to avoid the contract. An insured’s actual knowledge depends on whether he is a natural person or a corporation (Cartwright, 2012, p. 801), and that causes problems because beyond actual knowledge, an insured is affected by the circumstances which he is deemed to know in the ordinary course of business (Cartwright, 2012, p. 801). Warranty The Commission’s proposal suggests that the Law of Warranties applies equally to consumer insurance contracts and businesses. However the convenient exception is always there for the parties to define warranties in a contract and the terms on which it is executed. Under Section 33(3) of the Act, the warranty condition “must be exactly complied with, whether it be material to the risk or not”. If the insured is found to be in breach of the warranty then the policy is cancellable from the date of breach (Joint Law Commission, 2012, p. 146), and this has caused problem that the Commission has addressed in the proposal because insured has zero opportunity of remediating the breach as cancelling is at insurer’s discretion (Palmer, Mackie, Davies & Marris, 2012). Secondly the insurer cancels not only the claim, but also the policy. Therefore an absence of causal relationship between breach and the loss does not count (Palmer, Mackie, Davies & Marris, 2012). To rectify this, the commission proposed treating warranties as suspensive conditions to create opportunities to remediate the breach, which restores the insurer’s liability after remediating the breach. To rectify the second problem, the insured is in breach of any term meant to reduce the risk of a specific loss, and the insurer’s liability is only suspended under that specific type of loss (Palmer, Mackie, Davies & Marris, 2012). As far as the causal connection is concerned, the commission stepped back from its 2007 stand; maintaining the position when the insurer remains liable and the insured proves that warranty breach did not contribute to the loss. The Commission has also proposed to eliminate ‘basis of the contract’ clauses. The problem with these clauses is that they automatically convert the insured’s statements into warranties (Palmer, Mackie, Davies & Marris, 2012). These are vaguely worded and often leave one party as the victim (Palmer, Mackie, Davies & Marris, 2012). They permit the insurer to avoid the policy based on small irrelevant errors (Palmer, Mackie, Davies & Marris, 2012). Micro Business There is more than one way to define a micro business. One option is through the turnover definition. The Law Commission suggested three options regarding turnover to define a micro-business (Issues Paper, paragraph 7.18): (1) The same level used by the European Commission and BERR2, currently set at €2 million. (2) The Financial Ombudsman Service (FOS) jurisdiction limit, currently a turnover of less than ?1 million. (3) An independent level needs to be amended from time to time. In this version of micro business, there is a huge complication regarding Financial Ombudsman Service (FOS); the European Recommendations 2003/361 are not seen as a simple solution of adhering to this definition (Joint Law Commission, 2012, p. 23). Another way to look at a micro businesses is as a business with less than ten employees, to which many respondents have suggested that it needs extra protection. This makes sense because a micro business probably will not be listed on the stock market as it does not have the protection of lawyers and patents that those bigger companies and businesses have and hence the proposal ‘a micro business should have the same protection as the consumer’ (Joint Law Commission Report, 2012, p. 8). For example a person purchasing private motor insurance could use that same vehicle as a business van (Joint Law Commission Report, 2012, p. 8). Some insurers argue that micro-businesses do not need protection of extra legislature. Instead, they consider taking the case to the Financial Ombudsman Service (FOS) sufficient (Reforming Insurance Contract Law, 2012, p.12). On this matter, Aviva (Reforming Insurance Contract Law, 2012, p.12) says that instead of a legislative reform an FSA awareness campaign would serve the purpose where small businesses will be made aware of their rights/claims to the FOS. The Commission’s proposal also suggests that micro business do not need extra protection; in fact, it is better to treat it as a consumer. The reasons given for this recommendation seems justified because no matter how strictly the commission defines micro business, it cannot comprehend all aspects; the term itself is arbitrary and complex (Joint Law Commission Report, 2012, p. 217). Moreover, if the extra protection for small businesses proposal is met with, there will be a third legal regime, and there will be administrative costs (Joint Law Commission Report, 2012, p. 217). The disclosure law is not a threat to micro businesses; there have been no complaints in the past two years from brokers regarding micro businesses (Joint Law Commission Report, 2012, p. 217), and even if such a case arises, the FOS is already there to protect micro businesses (Joint Law Commission Report, 2012, p. 217). Looking at the whole picture; the commission proposals are evolutionary; they are not making abrupt changes. The focus is not on changing or amending the current legislative reforms because the proposals have been placed to clear the ambiguity and give a clear picture of what to follow. When there is unequivocal legislative system the insured is better protected and the concept of insurance being a risk transfer mechanism is upheld (Thoyts, 2010, p. 4). The remedies suggested will not come as a surprise for the insurance world as many of the proposals were already expected, considering the time it was last revised. Whenever complex or dubious decisions arise, they beg for clarity. However the law commission does not interfere with the contract and the business relationship of parties. For instance in the matter of the proportionate remedies some insurers already operate their own informal system of proportionate remedies (Joint Law Commission Report, 2012, p. 115). In the matter of warranties, the proposals are not new; they are just simplified form of the 2007 proposals. For instance the word ‘breach’ has been subjected to more scrutiny in the new proposals (Palmer, Mackie, Davies & Marris, 2012). The proposal suggests that the term breach should be measured to mitigate the risk and not to explore if the breach caused the loss or not (Palmer, Mackie, Davies & Marris, 2012). The suggested proposals have a consensus that there should be major business insurance law reforms (Palmer, Mackie, Davies & Marris, 2012). The proposal from the Commission is a great step towards refining insurance law. It is great platform for reforming insurance market. The reforms will make the MIA clearer and up to date with the modern changes in the business and insurance world. Non-disclosure, warranty, micro businesses and utmost good faith have been clearly defined in the reforms. It is better to adhere to the proposals as soon as possible. This will make the insurance law more credible. The public and businesses will feel more comfortable in entering an insurance contract knowing their rights are duly protected. References Brook, N. (2012) Insurance & reinsurance: Jurisdictional comparisons. London: Sweet & Maxwell,. Print. Cartwright, J. (2012) Misrepresentation, mistake and non-disclosure. London: Sweet & Maxwell. Eggers, M. (2012) The past and future of English insurance law: good faith and warranties. UCL Journal of Law and Jurisprudence. Gurses, O. (2013) Reinsuring clauses. London: CRC Press. Hodges. S, (2012) Cases & materials on marine insurance. London: Routledge. Palmer, E. D., Mackie, F., Davies, R. & Marris, J. (2012) Joint Law Commissions publish their final consultation on business insurance. Lexology (Association of Corporate Counsel). Retrieved July 30, 2013 http://www.lexology.com/library/detail.aspx?g=c57a65a9-bbc8-466c-bdd5-a48c8accc2ad Summer, J, (2013) Insurance law and financial ombudsman service. Mortimer Street: CRC Press. Thoyts. R, (2010). Insurance theory and practice. 1st ed. Abingdon, Oxon: Routledge. Read More