Insurance And Joint Law Commission Proposals - Essay Example

Insurance: Joint Law Commission Proposals Table of Contents Table of Contents Introduction 2 Theory and Practice of Insurance 3 Duty of Disclosure 3 Joint Law Commission Proposals 4 Warranties 5 Joint Law Commissions Proposals 5 Case Studies 6 Ms S v Royal & Sun Alliance Life Assurance Aust Ltd (2003) QCA 182 7 Commercial Union Insurance Co. v. Flagship Marine Services 8 Analysis of the Proposals 8 Conclusions 9 Bibliography 10 Introduction Insurance is a contract or policy whereby an individual or firm is promised a financial protection, compensation, or reimbursement against potential future losses after a period payment of premium. Insurance contracts have an obligation of protecting financial well-being of insured by the insurer. An insurance policy is therefore a contract between an insured and insurer (Hamilton, 1995). Through such insurance policy, the contract involves a promise for compensation of the sum assured by the insured for exchange of insurance premiums. Nonetheless, it is worth noting that there are circumstances where insured has to pay some part of the loss, deductibles, in order to gain former financial position (Smith, 2012). In order to uphold such contracts, insurance is guided by Insurance Contract Law that defines the relationship between an insured and insurer. Insurance contract law in the United Kingdom has for a long time been considered outdated (Netherway, 2012). For instance, the Marine Insurance Act (MIA) was created and passed in 1906 and has not been reviewed. Nevertheless, there are major developments within motor and aviation insurances, business globalization, development of property, and the recent natural disasters have demanded for serious and extensive reforms especially within the insurance contract law. In order to appraise the Joint Law Commission proposals for the reform of the law relating to business insurance, considering further the case for differential treatment of Micro-businesses, the following discussion demonstrates solid understanding of the theory and practice of insurance. In addition, the discussion demonstrates sound understanding of key issues pertaining to the law of insurance. Lastly, the paper provides a critical appraisal of Joint Law Commission proposals before winding up with a summary of the main points. Theory and Practice of Insurance Insurance is a contract where risk financing is attainable through pooling of risks. Insurance is a form of risk management practices within firms, entities, and amongst various individuals (Lawcommission.justice.gov.uk, 2012). Insurance services, though auxiliary, are aimed at reducing the adverse financial impact that firms, entities, and individuals meet in the event of an occurrence of risks (Smith, 2012). Therefore, insurance within the global arena is a vital element especially with respect to financial planning. UK insurance law that defines and regulates contracts between insured and insurers made several proposals (Hamilton, 1995). The proposals touched on the theories and practices of the insurance. The Joint Law of Commission made various proposals on the duty of disclosure as well as the law of warranties in respect to business insured. Duty of Disclosure Duty of disclosure and the law of warranties are important aspects within the theory and practice of insurance. Under the principle of utmost good faith, the Law of Commissions in the UK demands that insurers need to ask questions about every aspect they wish to know that is likely to change the contract relationships between the insured and the insurer (Smith, 2012). Under section 21 of the Insurance Contracts Act of 1984, consumers who intend to take up an insurance policy are required to disclose every matter known to them that is considered to be relevant to insurer’s decision for purposes of accepting or rejecting the risks (Hamilton, 1995). In this regards, matter relevant to making of an insurance contract is defined as aspects of contract insurers believe to be relevant. Furthermore, under common law and the Insurance Contract Act of 1984 both insurers and policy holders have a duty to make sure that based on the utmost good faith principle should disclose all the relevant material facts. Joint Law Commission Proposals Under section 18 of the UK’s Marine Insurance Act of 1906, prospective business insured has the duty of disclosing “every material circumstance” that is known or ought to be known within “the ordinary course of business” especially to the insurer. In this regards, the law does not require insurer to ask specific questions of the perspective insured or those of which are not indicated by the party in question (Brett, 2012). Notably, the existing complex structure of huge companies makes it difficult for business insureds to be able to establish material fact known (Palmer, et. al., 2012). In the event that the insured fails to provide such material facts, insurer has the right to avoid the contract as provided for by the Joint Law Commission, a provision that many stakeholders strongly believe is too harsh (Hamilton, 1995). Consequently, the Joint Law Commission made various proposals in respect to the business insured’s duty of disclosure (Lawcommission.justice.gov.uk, 2012). The first proposal was to the fact that disclosure should be “a reciprocal process” whereby both the insured and insurer should participate in disclosure of the material facts. In this proposal, the insured is expected to make fair presentations of the risks whilst the insurer should be able to communicate timely and effectively on what should be known through applying appropriate questions. According to the Join Law Commission, the aspect of duty to disclosure being entirely on the insured is rather too harsh especially in respect to avoidance. That is, if the insurer finds out that there was information that was not disclosed then the insurer has the right to abandon the contract. Therefore a proposal made by Joint Law Commission is that there should be fair remedies in special or particular circumstances. The proposal is that avoidance should only be reached in scenarios where insured has acted dishonestly that involve deliberate or reckless behavior during the disclosure. Another proposal is the in the event that there was no dishonest or reckless behavior by the insured during the process of disclosing the material facts, then there should be a remedy that places the insured at a position that is fair enough. For instance, if the amount of premium paid was high then there should be a remedy to make sure that the claim is proportionately reduced. The last proposal by Joint Law Commission is that the parties involved in the insurance contract should be entitled based on the remedies regime referred in the previous proposal. Warranties In an insurance contract, a promise made by the insured party confirming the integrity and truth of the statements provided in respect to insurance policy. A warranty is a written pledge by the insured party regarding specific conditions that may are either inexistence or do not exist. According to section 24 of the Insurance Contracts Act of 1984, “A statement made in or in connection with a contract of insurance, being a statement made by or attributable to the insured, with respect to the existence of a state of affairs does not have effect as a warranty but has effect as though it were a statement made to the insurer by the insured during the negotiations for the contract but before it was entered into”. In this section, every insured has the duty to make sure that such statements or warranties are reached. Joint Law Commissions Proposals Based on sections 33 and 34 of the Marine Act of 1906, the Joint Law Commission believes that they are unfair and unprincipled. Nonetheless, there is seriously a need for compliance with the provisions of the warranties irrespective of the important or risky nature of the material facts (Smith, 2012). Any breach of warranty within the insurance contract definitely leads to discharging the insurer of any liability under the contract and not only the type of risk (Lloyds.com/the-market, 2012). As a result, the following are some of the proposals by Joint Law Commission: The Joint Law Commission proposes that there should be an abolishment of contract clauses that make warranties within insurance contracts not clearly identified. It is important for such clauses to be abolished in order to make sure that warranties in contracts are clearly identified. There is a proposal to remedy the breach of warranty. As it stands within the insurance contract law, it is true that insurer’s liability is discharged. The proposal is that such liability should be suspended and not discharged. Joint Law Commission also proposes that there is need to introduce special rules for terms that are designed for purposes of reducing possible risks of any given loss of risks associated with a given period of time. Based on the Joint Law Commission’s proposals, it is better to have special rules introduced within the insurance contract regarding to warranties especially in line with suspension of liability and not discharging the same. Case Studies There are many case studies that provide illustrations on the duty to disclosure as well as warranties especially with respect to insurance contract law. The following are some of the case studies that help in explain how the insured and insurer relate with respect to the ensuring that provisions of the law of insurance contract are followed to the latter. Ms S v Royal & Sun Alliance Life Assurance Aust Ltd (2003) QCA 182 In September 1998, Ms S had made applications for TPD insurance where the insurer sought to understand the nature of the risks under which she (insured) wanted to be protected against. Amongst the questions that the insurer sought to ask were if there were any other symptoms, sicknesses, or injuries other than the ones the insured had listed above. The application was accepted and insured issued with a policy only to realize two months later that Ms S had been diagnosed with psychogenic illness. Ms S resigned from her job and after serious investigations, TPD insurance discovered a history of episodic breathlessness that was associated with the illness diagnosed. According to the insurer, the insured had violated the duty of disclosure provisions under the principle of utmost good faith. During the trial, the judge stated that: “Given the intermittent nature of the symptoms and the normality of all tests, I find that for a lay person, given there were no sinister findings, she was justified in thinking that she had a ‘clean bill of health’, albeit she suffered from breathlessness from time to time” (Ms S v Royal & Sun Alliance Life Assurance Aust Ltd) The second judgment delivered by during the trial stated that: “In my opinion, in a policy of this kind, an insured’s statement as to when she last consulted a doctor and the reason for that consultation are statements which a reasonable person in the circumstances of an insured could be expected to know would be relevant to the decision of the insurer …” (Ms S v Royal & Sun Alliance Life Assurance Aust Ltd). The above judgment is one of the judgments that have so far accepted some of the proposals made by the Joint Law Commissions in as far as the duty of disclosure is concerned under the principle of utmost good faith. Commercial Union Insurance Co. v. Flagship Marine Services Another case study that attempts to provide a deeper insight into how duty of disclosure and warranties as defined by the principles of insurance contract is the one of Commercial Union Insurance Co. v. Flagship Marine Services. In this case, the court held that: "In all areas of insurance other than maritime insurance, an insureds breach of warranty does not "avoid an insurance contract or defeat recovery thereunder unless such breach materially increases the risk of loss, damage, or injury within the coverage of the contract" (Commercial Union Insurance Co. v. Flagship Marine Services).  From the above case study it is clear breaching warranties within insurance contract law. When insured breaches a warranty considered to be collateral to a given risk or policy, which is a primary concern of the contract, insured cannot be precluded from any sort of discovery. Analysis of the Proposals Insurance contract is a special kind that requires some basic principles, which will ensure that none of the parties involved takes advantage of the other party. For instance, the insurer is should not take advantage of the insured in respect to information provided or even loss incurred to turn down any compensation requisitions made by the latter (Smith, 2012). On the other hand, given that the insurer undertakes to help the insured in regaining financial position before the occurrence of a given loss, the latter should not take advantage on the former for financial gains. As a result, there are principles guiding operations between insured and insurer. Some of the principles include utmost good faith, insurable interest, indemnity, proximate cause, subrogation, and contribution amongst others (Brett, 2012). With extensive and hotly contested debates over utmost good faith, there have been serious needs for specific reforms. The Joint Law Commission regulating the insurance contract law within the UK deemed it necessary to have specific reforms on the contract and specifically on the utmost good faith principle (Brett, 2012). The proposals by the Joint Law Commissions are definitely going to have significant impact on the businesses and activities that occur between insured and insurers. Adopting the proposed reforms would definitely change the principle of utmost good faith without favoring any of the parties involved (Lloyds.com/the-market, 2012). Joint Law Commissions’ proposals with have significant implications on the insurance market especially in relations to the proposal forms as well as the terms and conditions of the contract. The proposals majorly touch on the principle of utmost good faith specifically the duty of disclosure as well as warranties. Therefore, whilst preparing the contract terms and proposals, the practitioners within the insurance market will have to take into considerations the above proposals. Conclusions Indeed, following the above discussions and analysis, it is clear that various sectors especially those that touch on business contracts should be reviewed. Based on the above discussions and analysis it is clear that the insurance contract law, specifically the Marine Insurance Act of 1906 has become outdated hence the need for serious and special reforms. Therefore, it is evident and justifiable to carry out some of the proposals identified by the Joint Law Commissions given that they understand the insurance market better. In this regards, the insurance market will continue to thrive well if the reforms are enacted. Indeed, the proposals of the Joint Law Commissions are justifiable, effective, and efficient with capability of making the market even more attractive. Bibliography Brett, E. K., 2012, The law commission’s review of insurance contract law, [Online] [Accessed 5 December 2012] Hamilton, J. 1995, "The duty of disclosure in insurance law - The effectiveness of self-regulation", Australian Business Law Review, vol. 23, no. 5, pp. 359-359. Lawcommission.justice.gov.uk, 2012, Insurance contract law: The business insured’s duty of disclosure and the law of warranties, [Online] [Accessed 5 December 2012] Lloyds.com/the-market, 2012, Reforming UK Insurance Contract Law, [Online] [Accessed 5 December 2012] Netherway, S., 2012, Insurance law reform: Proposals for business insurance, [Online] [Accessed 5 December 2012] Palmer, E., Mackie, F., Davies, R., & Marris, J., 2012, Joint law commission publish their final consultations on business insurance, [Online] [Accessed 5 December 2012] Section 18 of the Marine Insurance Act of 1906, [Online] [Accessed 5 December 2012] < http://www.jus.uio.no/lm/england.marine.insurance.act.1906/doc.html> Section 21 of the Insurance Contracts Act of 1984, [Online] [Accessed 5 December 2012] < http://www.comlaw.gov.au/Details/C2004C00163> Section 24 of the Insurance Contracts Act of 1984, [Online] [Accessed 5 December 2012] < http://www.comlaw.gov.au/Details/C2004C00163> Sections 33 the Marine Act of 1906, [Online] [Accessed 5 December 2012] < http://www.jus.uio.no/lm/england.marine.insurance.act.1906/doc.html> Sections 34 the Marine Act of 1906, [Online] [Accessed 5 December 2012] < http://www.jus.uio.no/lm/england.marine.insurance.act.1906/doc.html> Smith, H., 2012, Update on the Law Commission’s review of insurance contract law, [Online] [Accessed 5 December 2012] Read More