The Case of Customer Insurance - Essay Example

Insurance Introduction The Law Commission of England and Wales and the Scottish Law Commission in June 2007, presented a Joint discussion Paper on ‘Insurance Contract Law which was disputed on the basis of falsification, Non-revelation and violation of Warranty by the Insured’. In this Joint Consultation Paper 2007, the important focus was a potential law reform on misrepresentation and non- revelation at pre-contractual phase with the assured and mediators and as well violation of insurance warranties. Response to the proposals of the concerned parties have been called for and further step was to expand the consultation procedure to other difficult areas of insurance law, for example post contractual good faith, insurable concern and compensations for the delayed payment of claims, with the publication of a different discussion paper in 2008.The objective of the Law Commissions is to put up a final Bill to Parliament for endorsement in 2010. Though, the Law Commission’s intended legislative improvement did not materialize as the insurance industry persuaded the administration that the case for legislation was prevailed over by the benefits of self-regulation. It is a fact that customers find it complicated to know their lawful rights and responsibilities under insurance agreements in isolation contracts are regulated by an intricate patchwork of rule, policies and plans. Consumer protection is one of important agenda among the European Communities and there is a likelihood that the Community may proceed to harmonize the law across Europe or perhaps make a European rule of insurance contracts. Several have the opinion that the law does not defend rational prospects of business patrons disheartening confidence in the market place. Bearing in mind the fast evolving of fresh financial centres, if not attended to, endanger the level of London Market as a most important global insurance centre. The intention of this paper is to study the improvement suggestions prepared by the Law Commissions on re-contractual responsibility of utmost good faith when considering various fiscal hypotheses those have been powerful over the years in the progress of different values in insurance law. It is thought that fiscal hypotheses have lot to give not merely in offering particular insight regarding potential outcomes of planned modifications while as well in foreseeing unplanned consequences that could effect from such suggestions. Potential Law Reform Suppose the recommendations of the Law Commissions accepted, in terms of pre-contractual responsibility of utmost good faith obligation the law will differentiate among consumer and trade agreements. The planned changes both in the background of consumer and business insurances will be adequate to say that it will not be possible to contract out of the new rules prevailing misrepresentation and nondisclosure in customer insurance except in favor of the customer. On the other hand, it is suggested that the parties to a trade insurance contract must be free to contract out of the default system. But, the Law Commissions are recommending a number of control methods checking the right of the parties to contract out of the default regime. Such as, in the situation of pre-contractual duty of utmost good faith, the parties to a business insurance agreement will be free to contract out of the default regime proposed only if the policy or associated paper contains a written term that the insurer would have one or more precise remedies for misrepresentation although the proposer was neither deceitful nor sloppy in providing the information. In addition, the Law Commissions’ suggestions reflect controlling the use of normal conditions. Therefore a articles which appears in the insurer’s written ordinary terms of business and claims to provide the insurer superior rights than the default regime would permit to decline claims on the base that the assuror’s failure to give precise pre-contract information must not be allowed if the existence of such an article would defeat the rational prospect of the assured. It is pointless to say, such a regulation has the possibility of failing into a subjective investigation and might have an unfavourable impact on confidence that should be the eventual objective for any trade transaction. Known that customer and business insurance contracts will be issue to diverse legal rules, it is a grave challenge for the Law Commissions to make certain that any embarrassed boundary disagreement is evaded. The objective of the Law Commissions is to identify the customer similarly as the FSA describe a ‘retail customer,’ in the sense a person acting for the reasons those are exterior to his trade, business or profession. Conversely, no effort has been prepared to describe the term businesses in the Joint Consultation Paper 2007. Law Commissions are proposing that the business insurance proposals must be relevant evenly to marine, aviation and transport insurance and as well to reinsurance. Law Commissions that the projected regime for business insurance offers flexible test that can be valid across the board. It is not obvious at present how the modification would be put into practice. The feeling across the public is that a new Insurance Act would be indispensable so as to bring the projected modifications together to the extent that the consumer insurance is concerned. The range of the new Insurance Act possibly will cover business insurance as well substituting some sections of the Marine Insurance Act (MIA) 1906 or the entire Act. It would be a very grand scheme, if it is resolute to codify insurance law more in general. Important suggestions of the Law Commissions and pros & cons Even as the Law Commissions are ready to do away with the consumers’ residual duty of revelation, the central observation is that the duty ought to be maintained in business contracts. When taking into account the reason for the continuation of the disclosure necessity in insurance contracts, both financial and otherwise, this part propose to examine the suitability of the Law Commissions’ suggestions on the future of the revelation commitment at pre-contractual phase. Individual could recognize three functions that the pre-contractual obligation of disclosure serves in insurance contracts. First, it is tendered that the responsibility of disclosure is fundamental in making certain that the proposed risk is appropriately rated. The information necessary for ratemaking procedure is primarily in the ownership of the assured and the disclosure duty at pre-contractual phase plays a critical role in tackling the information asymmetry. Therefore additional interest must be dedicated taking into account the connection involving rate-making procedure in a specific insurance product and the extent of revelation commitment at pre-contractual phase set in legal system. Whether insurance rates are calculated on a class or entity base depends on the type and nature of the risk in question. The instances where the features relevant to the insurer’s decision are adequately well-known and expected, it is probable that rates will be computed on a class basis. This is probable to be the case in the majority types of customer contracts, for instance buildings, contents, vehicle, medical and life insurance. On the other hand, an individual risk basis will be more appropriate in instances where the features affecting losses are rather unique for every risk and circumstances affecting the risk are continually shifting possibly because of the fact that the risk has a global aspect. The entity rating method gives the insurer autonomy to increase rates in any manner he thinks fitting for every risk. Personal risk rating is used in the majority business insurance contracts, particularly in the situation of marine insurance. In view of that insurers go through diverse risk rating procedures for different types of insurance contracts, one might argue that eliminating the disclosure duty is improbable to have the same impact on customer insurance contracts like it would on business insurance agreements. Further, it might be disputed that if the disclosure duty is eliminated or controlled to a major extent, this will lead insurers to invest additional time and capitals in examining the risks projected to them. Lastly, the disclosure duty in insurance contracts can be seen as an efficient mechanism in dipping the risk of the insurance market from distress from poor choice. The poor selection hypothesis assumes that people’s personal knowledge of their own risk will be a vital aspect while choosing to buy or give up insurance. The important issue is that to what extent insurance markets will be uncovered to the complexities envisioned by the ‘adverse selection’ hypothesis, the disclosure duty should be stopped. It is suggested that adverse selection may not pose such a serious threat in customer insurance marketplace although the duty of disclosure at pre-contractual phase is stopped. It is uncertain whether an average citizen might reach a precise estimation of his own riskiness by considering and aggregating the personal information. Different empirical researches shed serious uncertainty whether persons are correct judges of their own riskiness. The disclosure prerequisite is essential in the perspective of business insurance in order that insurers can guard themselves against the risk of adverse selection caused by probable consumers who are expected to be well-informed concerning their own riskiness. Even though insurance contracts are considered as contracts of utmost good faith and there is a common sentiment that the law should need ‘full’ revelation while going into such contracts. In addition, an information excess is probable to raise transaction expenses on both parties considerably diminishing the competence anticipated of the agreement. Because of this, it is important for any disclosure rule to prioritize in choosing what to reveal. This is accomplished through the ‘materiality’ examination set in the MIA 1906. In the present test procedure, facts have to be revealed if it would control the decision of a sensible underwriter in fixing the premium or deciding whether he will take the risk. The Law Commissions are suggesting that the present test of ‘materiality’ ought to be changed by a ‘reasonable assured’ test in order to defend the honest and careful assured. The planned change in the ‘materiality’ test is a rational one that can be protected both on hypothetical and sensible basis. The ‘reasonable insurer’ test is intended to facilitate the insurer to get the pertinent information he needs to rate the planned risk devoid of any considerable cost for exploration. Since information is usually in the control of the assured, this could be seen as a proficient way of balancing the information irregularity. But, the proposal turns out to be uncertain under cautious analysis. The major advantage of accepting the ‘reasonable assured’ test is that it is easier for any assured to envision the sort of information that needs to be revealed at pre-contractual phase devoid of essentially having knowledge of the insurer’s business. Deciding materiality from the assuror’s viewpoint could as well decrease the difficulty of over-disclosure as the assured will be more certain in evaluating the nature and degree of disclosure necessary of him. The good feature of the pertinent provisions of the MIA 1906, the lone solution for a material non-disclosure or misrepresentation in violation of the duty of utmost good faith is evasion of the insurance agreement. Given that the insurer can show that a material violation of the duty has taken place, the solution of avoidance can be deployed although the assured has acted sincerely and rationally. The recent thoughts of the Law Commissions is alongside the lines that the solution accessible to the insurer for violation of pre-contractual duty of utmost good faith ought to depend on the state of mind of the assured, that is whether he acted falsely, carelessly or unknowingly. The Law Commissions suggestions on solutions for violation of utmost good faith obligation can be enumerated. One of the suggestions is that in consumer insurance an insurer ought to have the right to evade the policy where he has trusted on a misrepresentation by the proposer at the pre-contractual phase and the insurer proves that, the proposer made the depiction as intentionally false, or being irresponsible and intentionally pertinent to the insurer, or being irresponsible. The Law Commissions appear to favour a rule that will permit the insurer to hold the premium where a consumer assured has made a intentional or irresponsible misrepresentation. In addition, in business insurance contracts, the Law Commissions are ardent to consent to an insurer to evade the policy in case of intentional or irresponsible violation of the pre-contractual duty of utmost good faith by the assured. The present thought of the Law Commissions is in agreement with fundamental fiscal values. The s. 20 of the MIA 1906, the insurer can evade the policy although the assured was not at fault in giving wrong or partial pre-contractual information. The Law Commissions are at present recommending that insurer ought not to be capable to depend on a misrepresentation protection if the assured was performing sincerely and rationally in the situation whilst he prepared the misrepresentation. Deciding what is ‘rational’ for the assured will rely on the details of every case. In view of the financial and social function of insurance contracts in contemporary culture, it is believed that the projected changes the Law Commissions are very suitable. In the case of customer insurance, the discussion has a diverse aspect that the insurance is not merely a mechanism which offers a degree of safety for persons against misgivings of the future however it as well gives an extent of mental haven for those persons. The likelihood that the contract an assured committed into for serenity may be evaded at a later stage owing to truth that he understood nothing concerning is a very upsetting notion which might remove the mental advantage anticipated of such a contract. Consequently, there is a social advantage to be attained by not stopping a customer from revival for a material misrepresentation prepared given that he has acted rationally and in good faith. According to the tendency in a few other jurisdictions, the Law Commissions recommend to initiate a compensatory solution in customer cases where the policyholder has prepared a careless misrepresentation. The Commissions have not yet prepared a solid vision as to how to treat careless nondisclosure and misrepresentation in business insurance agreements. Even though there would be complexities for courts in several cases in allotting an exact proportion on the decrease in premium, it is believed that the proportionality principle would work reasonably well in consumer insurance. Conclusion It is expected that the discussion on the outline and extent of law restructuring in insurance law assures to be an exhilarating system for the future. Different segments of the insurance sector have reacted to the suggestions in diverse ways. For instance, insurers for customer risks have been somewhat obliging. As long as agreed to the better consequence of customer security, both in the EU and UK, the common sentiment are that these proposals will effect in law restructuring to the extent of customer insurance contracts are concerned. The fiscal evaluations conducted in this study provide substantial support for the projected modifications in the field of customer insurance. At the same time, the Law Commissions would face further opposition from the sector to a change in trade insurance contracts. Yet, this study argues that the Law Commissions are, in a general sense on the correct trail. On the other hand, it would not be defensible, particularly from the viewpoint of fiscal hypotheses, to initiate a proportionate solution for careless violations of pre-contractual duty of utmost good faith (Soyer, 2007). References Soyer, B. (2007) Reforming Pre-contractual Duty of Utmost Good Faith in Insurance Contracts- An Economic Perspective Available from: < http://www.academia-research.com/files/instr/347683_insurance%20coursework%20doc.pdf > [Accessed 17 December 2009]. Read More