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Insurance Bill [Lords]

Volume 592: debated on Tuesday 3 February 2015

Considered in Committee

[Mr Christopher Chope in the Chair]

Clause 1

Insurance contracts: main definitions

Question proposed, That the clause stand part of the Bill.

Part 1 sets out some definitions for the Bill and is purely technical but, with your indulgence, Mr Chope, may I say again that this is a non-controversial Law Commission Bill, on which we had a constructive debate last week in the Second Reading Committee, and which has been scrutinised by a special Public Bill Committee in the other House? I hope that we can agree that clause 1 should stand part and move on to discuss the substantive clauses, taking each part in turn.

As the Minister has outlined, this is a non-controversial Bill overall, and we did indeed debate and discuss it last week. I have no issue with clause 1 and think that it is important to get on to the other areas of the Bill on which the Minister might wish to answer some questions.

Question put and agreed to.

Clause 1 accordingly ordered to stand part of the Bill.

Clause 2

Application and interpretation

Question proposed, That the clause stand part of the Bill.

With this it will be convenient to discuss the following:

Clauses 3 to 8 stand part.

That schedule 1 be the First schedule to the Bill.

As I explained to the Second Reading Committee, part 2 concerns the duty on prospective policyholders to disclose information to the insurer, which allows the insurer to assess and price the risk accurately. However, the existing law can be difficult to understand and even more difficult to comply with fully. A failure to provide all material information allows the insurer to refuse all claims under the contract.

Under the Bill, policyholders still have a duty to disclose information, and they should make an active search for relevant information, but insurers might need to ask the policyholder questions if they require further clarification. If a policyholder fails to make a fair presentation of the risk, there is a new system of proportionate remedies for the insurer, under schedule 1 to the Bill, based on what the insurer would have done had the failure not occurred.

There is nothing particularly controversial in clause 2, or indeed in clauses 3 to 8 and schedule 1. As the Minister said, the clause provides that the duty of fair presentation, which is set out in the remainder of the part, applies in the event of a variation to a non-consumer insurance contract as well as upon the initial agreement or the contract.

Clause 3 introduces a requirement on the insured to

“make to the insurer a fair presentation of the risk”

before the contract is entered into. That replaces existing duties in relation to disclosure and representations contained in the Marine Insurance Act 1906, but retains essential elements of those provisions in ensuring that the insured provides insurers with the information they require to decide whether to insure a risk and on what terms.

Clause 4 relates to an issue that we debated last week in Committee. The clause defines what the insured knows, and ought to know, for the purposes of the duty of disclosure in clause 3, based on the insured’s duty in section 18 of the 1906 Act to disclose every material circumstance known to them, including everything which,

“in the ordinary course of business”,

ought to be known to them. There was some difference of opinion about the scope and applicability of the Bill’s phraseology, particularly the definition of “senior management” as

“those…who play significant roles in the making of decisions”.

We debated whether that definition was perhaps too narrow. Helpfully, the Minister told us that the Government had

“amended the explanatory notes to make it clear that the senior management is likely to include the board, but can also go beyond it, depending on the corporate structure of the relevant policyholder.”—[Official Report, Second Reading Committee, 26 January 2015; c. 8.]

She also gave us information about stakeholders who have commented on this and agree that the Bill’s drafting is appropriate. I welcome the move by the Government to tighten up the explanatory notes to deal with that question.

Clause 5 deals with the knowledge of the insurer. Clause 6 provides that what an individual knows includes not only what they actually know but “blind-eye” knowledge—that is, knowledge that they ought to have but have deliberately neglected to acquire. Clause 7 serves to ensure that a company or other principal is not fixed with knowledge of a fraud practised against it by its agent or office. Clause 8 provides the insurer with remedies if there is a breach of the duty of fair representation. Schedule 1 sets out the insurer’s remedies for “qualifying breaches” under this clause.

Given the assurances that we received and the changes that were made when we raised these points in Committee, I have no difficulty with these clauses.

Question put and agreed to.

Clause 2 accordingly ordered to stand part of the Bill.

Clauses 3 to 8 ordered to stand part of the Bill.

Clause 9

Warranties and representations

Question proposed, That the clause stand part of the Bill.

Part 3 deals with insurance warranties and similar terms. An insurance warranty is typically a promise by the policyholder to do something that mitigates the risk. Under the current law, any breach of warranty completely discharges the insurer from liability from the point of breach. That is so even if the breach is remedied before any loss is suffered and if the breached term had nothing to do with the loss. The insurer’s remedy therefore often seems unsuitable and too punitive. The Bill provides that an insurer will be liable for insured losses arising after a breach of warranty has been remedied. It also prevents an insurer from refusing payment on the basis of a breached term that could have had no bearing on the risk of the loss that actually occurred, such as where a warranty concerning a fire alarm is breached and the insured then suffers a flood in the insured property. The Bill also abolishes “basis of the contract” clauses. These clauses convert every statement made by a policyholder on a proposal form into a warranty.

Again, it has been helpful to hear the Minister’s comments. We have no difficulty with these clauses.

On clause 9, under the current law, an insurer may add a declaration to a non- consumer insurance proposal form or policy, stating that the insured warrants the accuracy of all the answers given or that such answers form the “basis of the contract”. That has the legal effect of converting representations into warranties. The insurer is discharged from liability for claims if the insured made any misrepresentation, even if it was immaterial and did not induce the insurer to enter into the contract. The Law Commission gave the example of a claim for flooding being refused, as the Minister suggested, because the insured had failed to install the right model of burglar alarm. The clause seeks to put an end to this practice by abolishing “basis of the contract” clauses in non-consumer insurance. Clause 10 replaces the existing remedy for breach of a warranty in an insurance contract.

Clause 11 was initially not included in the Bill. That gave rise to the introduction in the other place of a new clause that replicated a similar clause originally included by the Law Commission pertaining to situations in which an insured had breached a term of contract but could show that

“its breach of the term could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred.”

In the Lords Committee, some expressed the view that this omission was an error. The Minister, Lord Newby, explained that the clause as originally drafted was

“too controversial to go through the special procedure for uncontroversial Law Commission Bills.”

He did, however, admit that it was

“difficult to argue against the policy and to say that insurers should be entitled to refuse liability for a loss that is of a completely different nature from that contemplated by the breached term.”

At the Government’s prompting, the Law Commission submitted a new draft, which became the current clause 11 and which was

“intended to minimise the uncertainty inherent in the first formulation”.

The clause acts to rectify the situation prior to the Bill when the actual nature of a breach of term was irrelevant. This has been a helpful process to ensure that that piece of tidying up was done. On that basis, we have no problem with these clauses.

Question put and agreed to.

Clause 9 accordingly ordered to stand part of the Bill.

Clauses 10 and 11 ordered to stand part of the Bill.

Clause 12

Remedies for fraudulent claims

Question proposed, That the clause stand part of the Bill.

Fraud is a serious and expensive problem for insurers and innocent policyholders alike. According to industry statistics, policyholders currently pay an additional £50 on every insurance policy because of the cost of fraud to insurers. The Bill therefore strengthens and clarifies the civil law aspect of the Government’s drive to combat fraudulent claims by policyholders. The Bill sets out clear statutory remedies for the insurer where the policyholder has made a fraudulent claim. It affirms the common law position that the policyholder forfeits the fraudulent claim. The insurer has no liability to pay any element of it and can reclaim anything it paid before it knew about the fraud.

The Bill also clarifies an area of uncertainty, in that the insurer may choose to refuse any claim arising after the fraudulent act. However, previous valid claims should be paid in full. Finally, the Bill gives the insurer the equivalent remedies against a fraudulent member of a group insurance policy.

The Minister has again clearly outlined what the clauses do. As she said, clause 12 sets out the insurer’s remedies where the insured makes a fraudulent claim. It puts the common law rule of forfeiture on a statutory footing. Where the insured commits a fraud against the insurer, the insurer is not liable to pay the insurance claim to which the fraud relates. Where the insurer has already paid out insurance moneys on the claim and later discovers the fraud, the insurer may recover those moneys from the insured. As we have heard, that provides the insurer with a further remedy giving it an option to treat the contract as if it had been terminated at the time of the “fraudulent act”. That does not apply where a third party commits a fraud against the insurer or the insured, such as where a fraudulent claim is made against an insured party who seeks recovery from its insurer under a liability policy.

Clause 13 gives the insurer the remedies where there is fraud by one member of a group scheme. Again, we have no difficulty with these clauses standing part of the Bill.

Question put and agreed to.

Clause 12 accordingly ordered to stand part of the Bill.

Clause 13 ordered to stand part of the Bill.

Clause 14

Good Faith

Question proposed, That the clause stand part of the Bill.

Part 5 deals with two separate matters: the principle of good faith and the ability of parties to contract out of the provisions of the Bill.

Clause 14 retains the statutory and common law principle that a contract of insurance is one predicated on good faith. However, the clause abolishes avoidance of the contract as the remedy for breach, recognising that avoidance is capable of operating very harshly against policyholders.

The provisions are a default regime for business insurance contracts. They are expected to be appropriate for the majority of insurance contracts, but there may be circumstances when parties prefer to set out their own bespoke arrangements. However, if an insurer wishes to rely on a term that will operate more harshly against the policyholder than the Bill otherwise provides, clauses 16 and 17 require it to act transparently when the contract is made, by ensuring that the meaning of the alternative provision is clear, and by drawing the attention of the policyholder to it. In so far as the Bill applies to consumers rather than businesses, it is a mandatory regime. Insurers are not entitled to contract out of its provisions to the detriment of consumers.

Under the Marine Insurance Act 1906, insurance contracts are ones of “utmost good faith”. Clause 14 removes avoidance of the contract as a remedy for breach of that duty of good faith, both from the 1906 Act and at common law. The intention of clause 14 is that good faith will remain an interpretative principle, with section 17 of the 1906 Act and the common law continuing to provide that insurance contracts are contracts of good faith.

Clauses 15 and 16 prohibit insurers from inserting in an insurance contract terms that would leave the insured—be they a consumer or a non-consumer—in a worse position than that required by the Bill.

Clause 16 defines transparency in respect of what an insurer must do to draw the insured’s attention to the disadvantageous terms of the contract. Clause 17 sets out the transparency requirements. For example, the insurer should take sufficient steps to draw disadvantageous terms to the insured’s attention within a reasonable time frame prior to their entering into the contract, but when an insured has knowledge of the term, they may not claim that the insurer has not brought it to their attention. Clause 18 deals with the insurer’s remedies where a member of a group insurance contract makes a fraudulent claim. Again, we do not think that these clauses are controversial and we are content for them to stand part of the Bill.

Question put and agreed to.

Clause 14 accordingly ordered to stand part of the Bill.

Clauses 15 to 18 ordered to stand part of the Bill.

Clause 19

Power to change meaning of “relevant person” for purposes of 2010 Act

Question proposed, That the clause stand part of the Bill.

Part 6 covers a topic that is distinct from insurance contract law. It amends the Third Parties (Rights against Insurers) Act 2010 and will assist injured parties who have claims against parties that are now defunct where insurance was in place to cover such claims. As I said in the Second Reading Committee, part 6 will make it easier for mesothelioma sufferers to obtain compensation due from insolvent employers.

The Bill allows the Secretary of State, by regulations, to add or remove circumstances in which a person will fall within the provisions of the 2010 Act. The intention in the first instance is to use this power to add insolvency and other similar events to the 2010 Act. Draft regulations are being prepared by the Ministry of Justice. Once the first set of regulations are made, the 2010 Act can be commenced. The Government are committed to bringing the 2010 Act into force as soon as practicable.

In the Second Reading Committee, I welcomed the fact that part 6 gives mesothelioma sufferers the opportunity to be dealt with in a timely fashion and to receive the justice they deserve. It is a terrible condition that many people have suffered as a work-related illness. We should do everything possible to support them.

Clause 19 inserts a new section into the 2010 Act. It enables the Secretary of State to make regulations adding or removing circumstances in which a person is a “relevant person” for the purposes of the Act, provided that the Secretary of State considers that the proposed circumstances involve dissolution, insolvency or financial difficulty, or are similar to those for the time being prescribed in sections 4 to 7 of the 2010 Act. That seems sensible and we have no problem with the clauses or the schedule standing part of the Bill.

I refer the Committee to my entry in the Register of Members’ Financial Interests.

Will the provision affect third-party cover under the Road Traffic Act 1988 and the level of insurance premiums taken out for motor insurance? May I also ask the Minister, en passant, to pay tribute to the Law Commission, on whose work this Bill is based?

My right hon. Friend will appreciate that this part of the Bill is designed to assist those who have insurance claims against parties that are now defunct, where insurance was originally in place to cover such claims. In theory, that could cover a motor insurance claim, but it is certainly not designed specifically to that end. Likewise, the cost of motor insurance will be determined by claims by the insurance companies themselves, so it is not envisaged that this will affect the cost of motor insurance.

I entirely agree with my right hon. Friend that the Law Commission has done an excellent job. Essentially, the Bill makes the insurance market more effective and fairer.

Question put and agreed to.

Clause 19 accordingly ordered to stand part of the Bill.

Clause 20 ordered to stand part of the Bill.

Clause 21

Provision consequential on Part 2

Question proposed, That the clause stand part of the Bill.

Part 7 deals with technical matters such as commencement, territorial extent and consequential amendments to existing legislation. The Bill repeals or amends various sections of the Marine Insurance Act 1906, which are superseded by provisions in parts 2 and 3. Clause 23 provides that the Bill extends to the whole of the United Kingdom, and that the provisions on insurance contract law will come into force 18 months after Royal Assent.

From a practical perspective, the new provisions will not apply to existing insurance contracts, but rather to new contracts and variations agreed after the Bill comes into effect. The regulation-making power on the Third Parties (Rights against Insurers) Act 2010 will come into force two months after Royal Assent.

As the Minister has said, clause 21 makes provisions consequential on part 2 and amends or repeals various sections of the Marine Insurance Act 1906, the Road Traffic Act 1988 and the Road Traffic (Northern Ireland) Order 1981, as well as the Consumer Insurance (Disclosure and Representations) Act 2012. She has also confirmed that clause 22 ensures that those provisions relating to fair presentation and good faith apply only to insurance contracts entered into after the end of the period of 18 months from the Bill’s entry into force. Clause 23 ensures that the Bill extends to the whole of the UK, apart from consequential provisions in clause 21 relating to Northern Ireland. Again, we are happy for these clauses to stand part of the Bill.

Question put and agreed to.

Clause 21 accordingly ordered to stand part of the Bill.

Clauses 22 and 23 ordered to stand part of the Bill.

Schedules 1 and 2 agreed to.

The Deputy Speaker resumed the Chair.

Bill reported, without amendment.

Third Reading

I beg to move, That the Bill be now read the Third time.

I am grateful to hon. Members for the useful debates on the Bill, and glad to have taken it forward based on proposals by the Law Commission and the Scottish Law Commission, to whom I reiterate my thanks. The Bill was rigorously scrutinised in the other place, and demonstrates the usefulness of the special parliamentary procedure for Law Commission Bills.

Together with the Consumer Insurance (Disclosure and Representations) Act 2012 that preceded it, the Bill marks the biggest reform to insurance contract law in more than a century. It is the product of careful consultation and consideration, and as a result it is well supported. It demonstrates the Government’s commitment to maintaining and growing the UK’s insurance industry both at home and abroad. I am grateful to all insurers, businesses and others who have supported the Bill, and to those who have participated in the Law Commission’s project and the legislative process. I am also grateful for the contribution made by the Opposition in both Houses towards the smooth passage of the Bill.

I, too, thank everyone who has worked on this important Bill, including the Law Commission and the Scottish Law Commission. It has been interesting to follow the special procedure. There is no doubt that the Bill was rigorously scrutinised in the other place, and a number of amendments were tabled. That perhaps makes our task in Committee and on Third Reading somewhat easier, and will help to ensure that the Bill safely completes its passage through the House.

I raised one issue that was originally suggested in the Law Commission reports but did not make it into the Bill: late payment. I want to give the Minister the opportunity to reply, but to recap briefly, the Law Commission report states:

“We consider that a policyholder should have a remedy where an insurer has acted unreasonably in delaying or refusing payment.”

It recommended

“an implied term in every insurance contract that the insurer will pay sums due within a reasonable time”,

with appropriate caveats. Those points were deemed too controversial to be included in a Law Commission Bill, and as I have said before, although the recommendations have merit, I recognise that a Law Commission Bill may not be the appropriate vehicle for putting such provisions into statute because of the way that “controversial” is interpreted.

I asked the Minister whether she would consider legislating for late payment by some other means. She offered encouragement on that and also said that

“evidence presented to the Law Commission, the Treasury and the Special Public Bill Committee demonstrated that the problems in the existing law are worse in theory than in practice.”––[Official Report, Insurance Bill Second Reading Committee, 26 January 2015; c. 9.]

Although the Minister provided some encouragement, she perhaps also suggested that such measures would not be a priority for the immediate future. It would be helpful if she clarified that point and said whether the Government have plans to take the issue forward and to what time scale. In general terms, the Bill has taken us forward and is largely technical in how it updates insurance law in statute. We have given it a good airing and should see it successfully enacted.

I am grateful to the hon. Lady for giving me the chance to put on the record the fact that the Government support the principle that insurers should make payment of valid claims within a reasonable time, and that they should be liable for compensation where appropriate should they fail to do so. The Government are always looking at ways to support and improve the position of the UK insurance industry, and it is hoped that legislative opportunities will arise to include that measure with other insurance-related provisions.

As the hon. Lady will know, the Government undertook a targeted consultation of insurance industry stakeholders in summer 2014 to assess support for the Bill and for a provision on late payment. The results of the consultation suggested that the late payment provision was not suitable for a Bill going through Parliament under the special procedure reserved for uncontroversial Law Commission Bills. The main arguments against such a provision were that it could lead to speculative litigation, or have the unwelcome effect of being used to exert undue pressure to expedite claim settlement, and those costs have not yet been quantified. Furthermore, adequate customer protections already exist, so the problems of late payment are worse in theory than in practice. The Financial Conduct Authority is currently undertaking a thematic review of the handling of commercial claims, and the issue is being considered from a regulatory angle.

As the hon. Lady recognised, not all recommendations made by the Law Commission are suitable for the special procedure for non-controversial Bills, and that provision was omitted from the Bill specifically to ensure that the special procedure was not abused. I repeat, however, that the Government support the principle that insurers should make payment of valid claims within a reasonable time.

Question put and agreed to.

Bill accordingly read the Third time and passed.

National Insurance cOntributions Bill (Money)

Queen’s recommendation signified.

Resolved,

That, for the purposes of any Act resulting from the National Insurance Contributions Bill, it is expedient to authorise the payment out of money provided by Parliament of any increase attributable to the Act in the sums payable under any other Act out of money so provided.—(Mark Lancaster)

National Insurance Contributions bill (programme) (No.2)

Ordered,

That the following provisions shall apply to the National Insurance Contributions Bill for the purpose of supplementing the Order of 8 September 2014 (National Insurance Contributions Bill (Programme)):

Consideration of Lords Amendments

(1) Proceedings on consideration of Lords Amendments shall (so far as not previously concluded) be brought to a conclusion two hours after their commencement at today’s sitting.

Subsequent stages

(2) Any further Message from the Lords may be considered forthwith without any Question being put.

(3) The proceedings on any further Message from the Lords shall (so far as not previously concluded) be brought to a conclusion one hour after their commencement.—(Mark Lancaster).