rose to ask Her Majesty's Government whether they will state their views on the draft EEC Directive on insurance contracts and on the conclusions of the Sixty-fourth Report of the European Communities Committee (H.L. 348).

My Lords, I must begin by declaring an interest. I am a director of a life and pensions subsidiary company of a firm of Lloyd's Brokers and although life assurance and pensions are excluded from the directive which we are considering this evening, the parent company has, of course, an interest in the subject matter of this particular directive.

The House would wish to thank the noble Lord, Lord Plowden, and his committee for the work which they have done in producing this report which is both concise and comprehensive. I should like too, if I may, to thank the noble Lord for the way in which he has put the Question to the Government this evening.

I regard myself as a federalist, somebody who wants to see a politically united Europe, and that must involve a further application of the supra-national principle in the government of Europe, in the government of the Community. That supra-national principle affects the way in which decisions at the centre are taken. It does not necessarily mean that there should be a multiplication of such decisions, but it does mean that they are taken in a particular way. Certainly very important matters would have to be transferred from national Governments to the centre if we were to proceed, as I hope one day we shall, to economic and monetary union. In those circumstances, it becomes more than ever necessary to avoid any unnecessary centralisation or any unnecessary harmonisation.

It is against that background that I would question whether this draft directive on the co-ordination of laws, regulations and administrative provisions relating to insurance contracts, is really necessary, and I wonder whether the Government are convinced that it is. Is harmonisation of insurance contract law necessary in order to promote freedom of services in insurance and to make it possible to have a free choice of law by which an insurance contract is governed? It is not essential to the functioning of a common market that there should be a common legal system throughout that market. The lack of harmonised law of sale of goods in the EEC has not prevented the creation of a common market in manufactured and agricultural products. The United Kingdom has been a single market for both goods and services for centuries, but the English and Scottish legal systems continue to exist side by side.

The memorandum from the British Insurers' European Committee, which is included in the evidence in the report, states that they feel that:

"co-ordination is not strictly necessary for freedom of services".

Mr. Alan Teale, on behalf of the United Kingdom Insurance Brokers' European Committee said in evidence:

"We would share the view of the insurers that to a large extent the directive has no real merit".

We have heard from the noble Lord, Lord Plowden, of the criticisms of the Law Commission. It seems to me that the Select Committee themselves have had similar doubts, but they conclude, as the noble Lord told us, that "on balance" the draft directive would be useful, particularly if it accelerates the adoption of the Linked Services Directive which the Committee regard as essential, as the noble Lord made clear. That is a somewhat limited welcome. Still, I sympathise with what they say about the services directive. Anything which helps to get that into operation deserves some kind of welcome. The directive is also committed to the idea of consumer protection, which again one would welcome.

If we were to accept the view that, "on balance", the directive would be useful, we then run up against the point made by the committee, and emphasised by the noble Lord, that the directive contains serious shortcomings. In that connection, I am not quite clear as to the status of the rapporteur's amendments. They are shown in the annex as amendments which the rapporteur intends to put forward. The rapporteur himself in evidence said that they had been approved by the Legal Committee of the Parliament. I wonder how far they have gone now. Are they incorporated in the draft directive or at least in the Parliament's version of it?—I am not quite clear about that.

The rapporteur's amendments would deal with some of the specific objections raised by the committee and by others, including Lloyd's Underwriters. As the noble Lord explained, one of the major innovations, so far as this country is concerned, in the directive would be the introduction of the principle of proportionality. As he has explained to us, if all the facts have not been disclosed, then the insurer calculates the premium he would have charged, and the proportion of that premium, which the premium actually paid represents, is the proportion of the sum insured paid out. One of the objections raised to that—and it is only one of them—can be summed up in the question: what if the insurer would have declined the risk? The directive originally did not deal with that position. The rapporteur's amendment does, and says that:

"If the insurer can show that a prudent insurer would not have accepted the risk if he had been aware of the circumstances which the policyholder should have disclosed, or if the insurer can show that a prudent insurer would not have accepted the risk unless certain conditions were complied with, he shall not be bound to pay any claim".

That is only one of the objections that have been raised, but I give it as an indication of how the rapporteur's amendments in fact offset many of the objections that have been raised in detail, not to the principle of the directive, but to the details of the directive.

Then there is the question of risks outside the EEC. The report says that the directive is not clear on that point. The rapporteur's amendment would seem to make the directive apply only to risks within the EEC. If that were so, then there is the difficulty to which the report draws attention of two legal frameworks for the same type of contract, not merely for different classes of insurance as would otherwise be the case.

The suggestion is made that the directive should be incorporated into the United Kingdom law when it would apply to all risks in the same class. But the insurers say that if the principle of proportionality—and this is to be seen in the evidence in the report—were in fact adopted in this country for all risks, for risks overseas outside the EEC, then that would create chaos. So there is a difficult problem there, and one would be glad to know what the Government think about that.

Then there is the question of warranties. These do not seem to be covered satisfactorily by any amendments put forward by the rapporteur, so far as I can see. The practice of including warranties of various kinds which are described in the report is a particular feature of insurance in this country, and insurers would need to know what the position of these would be under any new directive.

In conclusion, may I briefly say three things. First, I repeat that I doubt whether the directive is necessary. Secondly, I hope that at least the rapporteur's amendments will be included, if they are not already included in the draft. Thirdly, I agree with the committee that the draft directive should not be adopted until the services directive has been adopted, or alternatively that they should be introduced together.

My Lords, I should like to congratulate the noble Lord, Lord Plowden, on the very persuasive way in which he introduced this debate. Unfortunately, for reasons over which nobody has any control, the debate comes at a time when it is extremely easy for the Government to give just the sort of answer which ordinarily nobody would wish to hear. They will be able to say with great force that they have not yet reached any views on the draft directive, and they will certainly be able to say with equal force that they have not yet reached any conclusions on the 64th Report of the Select Committee.

The reason for that is one of timing. The Select Committee reported in August of this year at a time when the only record of Law Commission thinking was in their working paper. Now in October of this year, two or three months after the report of the Select Committee, the Law Commission have published an extremely thoughtful, thorough, and lengthy final report on insurance law, non-disclosure and breach of warranty, and in that report they deal at length and in detail with the draft directive with which we are concerned tonight.

I have, as best I can in the time available, studied the Law Commission Report. With all respect to the noble Lord, Lord Plowden, it cannot just be brushed aside as an indication of a preference for a state of the law other than that which is recommended by the draft directive. That report contains a detailed refutation of the validity in a United Kingdom context of the so-called proportional rule which lies at the very heart of this draft directive. I could not, as a lawyer with some experience in these matters, suggest to the Government that they ought to reach any conclusions on the applicability of the draft directive before they have considered carefully, and consulted with others, upon the Law Commission Report.

I hope I shall not weary your Lordships if I indicate very shortly indeed the Law Commission view. Of course, the Law Commission agrees with the Select Committee, and indeed with all others who have studied our present law, that our present insurance law bears far too harshly upon the policyholder. If the duty of disclosure is not fully met by the policyholder, even in a matter which does not touch the risk that has eventuated, the insurer can refuse payment against the risk. Similarly, if the policyholder has entered into a so-called warranty and that warranty has been broken even though the breach of the warranty has nothing whatever to do with the loss that has arisen, the insurer can rely on that breach of warranty to withhold payment.

The harshness of this law is ameliorated only by the very fair-minded practice which UK insurers follow, which is not unreasonably to withhold payment even though they are under no obligation to do so. I agree with the noble Lord, Lord Plowden, with the Select Committee, with many others, and indeed with the Law Commission, that that is not a satisfactory state of the law. Reform, therefore, is necessary. The problem to which the Law Commission had to address itself was simply: Do we reform the law along the lines of the draft directive, or do we reform the law along the lines which the Law Commission itself then develops? Reforms which are consistent with the historical pattern of our law, and reforms which would not include the proportionality rule.

The case against the proportionality rule is that although superficially attractive it cannot be enforced in the way in which it would appear from its formulation to be capable of being enforced. I shall not repeat it again—the noble Lord has told us what it is—but the superficial but false simplicity of the rule is that it appears to permit of an arithmetical calculation, based upon the difference between the premium actually paid and the premium that ought to have been paid, in order to achieve how much of the loss the insurer should pay where there has been this non-disclosure.

If it could operate in that way there might be something to be said for it, but in no country in which it operates does it in fact operate as a mathematical formula. If you look at the French law—and it is essentially a French rule—you will find that it reduces to, "Well, the insurer will have to pay whatever the judge thinks is just in all the circumstances". Learned French commentators have said it is an arbitrary, discretionary rule. That of course is the reason why Sweden, which has had the strict proportional rule, has recently passed an Act of Parliament ending it for consumer insurance, and as from 1st January next year it will not be part of the Swedish law so far as consumer insurance contracts are concerned.

I shall not take up time developing the reasons for the Law Commission view. They are all set out in the Law Commission Report. Just two matters I will mention which indicate what a badly tailored rule it is. It assumes that the insurer would have dealt with the new situation which was not disclosed to him merely by increasing a premium. But, of course, there are many other options open to an insurer; he might decline the risk altogether, he might put an excess on the policy, and there are other things he can do. None of those matters can get within the mathematical calculation which lies at the heart of the proportional rule, so it is not surprising that the Law Commission reached the conclusion that the proportional rule was not an adequate or sufficient way for reforming our own law.

Whether the Law Commission is right or wrong is not a question which I think any of us today can answer. All I would say is that we must look at it very carefully. The Law Commission has published this report and includes as an appendix to the report a draft Bill of 15 clauses reforming our law in this field. This material was not available to the Select Committee and, speaking from experience as a lawyer and judge, I would not recommend this House to indicate approval, even in principle, of this draft European directive until we have had a very full opportunity of considering the recommendations of the Law Commission.

I must declare an interest. I was the first chairman of the Law Commission, and I am not going to have my Law Commission dealt with too summarily, even in your Lordships' House, and I am certainly not going to have their views dismissed as a matter of preference when they have spent pages and chapters arguing the matter. There is much more to be investigated here than we have yet been able to investigate, and I would not advise the House to introduce into English law a continental principle which has never found any place in it merely because our law needs reforming. We have a law reform body and it has given its views as to the way the law should be reformed. Therefore, since I have not been as kind as I might have been to a rule of French law, I end in the French language: Mes seigneurs soyez prudents.

My Lords, I must at the outset declare an interest in two respects, first that I am an underwriting member at Lloyd's and secondly that I represent an area in North West London many of whose electors work in the insurance industry. It is in this second respect that I congratulate the noble Lord, Lord Plowden, and his colleagues on the Select Committee who have brought their traditional and usual expertise and care to bear on a very serious and complicated problem of European legislation.

As usual, the Select Committee, or part of it, has come up with an excellent document, one with which I substantially agree, and I support those who have spoken for some sort of doctrine of linkage between the present draft directive on insurance contracts and the far more important draft directive of principle on insurance service contracts, because it is the second proposal that strikes at the root of the matter and which could mean tens of millions of pounds per year for the British Exchequer. It is that which really matters to the people of this country rather than, if noble Lords will forgive me, the commas and fullstops of the present directive, carefully and necessarily though it has been considered.

The Prime Minister and my noble friend the Foreign Secretary have emphasised in recent weeks the importance of the draft Services Directive and I suggest it is time, in the context of this special debate on the current directive, to point out that we are supposed to have a Common Market, that we are supposed to have a Treaty of Rome and that we are supposed to have Article 59 and the articles that follow it guaranteeing, at the end of a transitional period, freedom of services. We cannot surely have our European Community and its treaty, its constitution, when significant parts of it are simply being passed over, ignored and pushed on one side year after year, meeting after meeting. The transitional period ended more than 10 years ago. There have been more than 30 two-day meetings dealing with the draft Services Directive, and, if anything, we seem to be going backwards rather than forwards on it. I therefore strongly urge my noble friend Lord Lyell to consider the idea that we should link the draft directive which is before us with the more fundamental one and indicate, as other noble Lords have done, that the one that is first should come first or at least simultaneously with the one we are at present discussing.

The restrictions placed by certain member states on the choosing of an insurance company of an insurer, seem to me to run contrary to the Treaty of Rome and I doubt very much whether any insurer or policyholder who made a contract contravening those national laws could in effect be called to account in the courts of national Governments. I wonder whether at the end of this debate my noble friend would indicate whether it is the Government's view that the restrictive laws of certain member states, such as France and Germany, are or are not in conformity with the treaty. Is it his view in fact that the European Court would probably override the decision of a national Government convicting an insurer or policyholder of such a violation?

I believe that the way to clarify a doubtful law is to test it, especially when we are dealing with such a new code of law as that of Europe. I therefore urge the Government to treat this matter as a bargaining counter to consider the fact that in insurance we in this country have a most valuable national asset bringing us across the exchanges hundreds of millions of pounds in surplus—about £900 million per year in surplus—and that if we had a services directive that was in conformity with the law of Europe and in conformity with the ideals and constitution of Europe, as it happens this country would benefit considerably. We would benefit, I am advised, to the tune of some £50 million in the first year and larger sums thereafter. The fact that our member state stands to gain from such a directive should not deter us from pressing for it. It is helpful and encouraging sometimes to be able to stand up and press for a more European approach because, as it happens, it would bring our member state greater benefit. I am reminded of another services matter, namely the airlines, which we debated a few months ago in this House, where again it is the British sector of the European market which is the most efficient, which has the best profit record and where a more European approach would benefit this country to the tune of many millions of pounds per year.

I see the directive which is before us as perhaps a necessary hurdle along the track leading to the finishing line of an insurance Services Directive. It may be necessary, but it is probably a hurdle, and I hope the Government will note the lack of enthusiasm expressed in your Lordships' House for this document tous court as it stands. It does not seem to have very much merit other than as a means to an end, and only in that very modest respect can I express the hope that it will become the law of Europe.

My Lords, it is, I believe, generally accepted that the draft directive is welcomed in this country by both insurance companies and brokers, for the obvious reason that they expect to benefit from greater freedom to operate throughout the Community. However, in certain of the member states the restrictions, or the restrictive conditions, are more severe than they are in this country, and therefore to some extent the enthusiasm of the insurance industry is dictated by certain aspects of the draft directive.

However, having said that, I must point out that the main problem is the question of what is the best course for us. Is it for the United Kingdom negotiators to continue with their efforts to greater liberalisation at the risk of further delays, or to take a softer line in the hope that the directives could be adopted in the foreseeable future?

In particular—digressing for a moment—I am very concerned about the situation which exists at present in connection with those who are earners of considerable foreign currency for this country. I refer to the professional consultants—engineers, surveyors, and so forth—who are operating abroad. It appears to me that as they stand things make it very difficult, if not impossible, for them to be provided with adequate liability insurance across a frontier, because as professional individuals they do not come under the category of traders. This is a point which requires examination. It might be possible to undertake such insurance under the law of the country in which the risk was situated, but I understand that so far as United Kingdom insurers are concerned they would find the requirements of the insurance laws applicable in some member states so complex that they would be unable, without undue risk, to enter into contracts subject to those foreign laws. Insurance coming under this heading has substantially increased in recent years, largely due to increased costs both at home and abroad. In my view, insurance of this kind should be—and I hope will be—liberalised without conditions.

It is, I hope, well understood that the idea of the services directive is to create a common market in non-life insurance. The United Kingdom has always been strongly in favour of this. It is of course natural that in the Community member states are in favour of opening up a common market in areas where they are particularly strong, and are not quite so anxious perhaps in areas where they are weak.

In this country we have probably one of the strongest, if not the strongest, most competitive, and extremely efficient insurance industries, and therefore we stand to gain very considerably if we are able to provide insurance in a common market without having to establish companies in other member states with all the costs that that obviously would involve. It would be much easier for Lloyd's, for instance, based in London, to insure risks in other member states without having to think of establishing themselves elsewhere.

I have heard it said—and I think that the noble Lord, Lord Bethell, referred to this—that the United Kingdom could expect to earn between £55 million and £60 million net each year if the services directive were adopted. It is only natural that the prospect that we should gain in this way leads other member states to fear that we might encroach upon, or invade, their preserves. I believe that only the Dutch, the Irish and ourselves are in favour of the services directive in its present form. But, my Lords, other member states who are not in favour of this particular proposal cannot expect to control the Common Market purely for their own ends and to exclude competition from outside. That was not what the Treaty of Rome and the Community were all about in the first instance.

Perhaps some noble Lords may be wondering what relevance this has to the insurance contracts directive on which the Select Committee reported. There were those who were not enthusiastic about having the services directive. To them I would say that if we are to have a common market in non-life insurance, we must standardise contracts so that competition is fair. The fate of the two directives is therefore linked. We in the United Kingdom have no particular incentive to change the law, or to change our law, on insurance contracts if that is not accompanied by opening up the common market in which insurers can compete, and perhaps other member states who do not care for the services directive might be reassured to some extent if it were accompanied by a harmonisation of contracts.

It would seem that so far very little progress has been made with regard to the services directive. The noble Lord, Lord Bethell, referred to these delays. As I think he mentioned, and as I believe, it has been discussed at more than 30 meetings of a working party of the Council of Ministers; it has been discussed by the Committee of Permanent Representatives, yet so far nothing appears to have materialised.

As has already been said by the noble Lord, Lord Plowden, both directives should be adopted at the same time, because they are linked. On the other hand, if it were impossible to proceed with both directives together, I would dare to suggest that it would be more important for the services directive to be adopted first, and it would be helpful if Her Majesty's Government could give us some indication as to whether they feel that there is any likelihood of that happening in the foreseeable future, or whether in fact very much progress has been made.

I should like to end by saying that at last it would appear that in connection with the Common Market something is being considered which might be of benefit to this country. I have heard it suggested that we should not see this as any great development, nor make too much of it, nor press too hard for it to be brought to fruition. But I hope that your Lordships will feel that that is not so. It seems to me that this is the first step, and a very important step. It could, and should, open up the whole of the commercial and industrial risk market, including marine, aviation and transport business, to British insurers, to be covered from London. It is, I agree, a first step, but it is nevertheless a very important step indeed.

My Lords, I apologise for intervening unannounced at this rather late hour. I should mention that for health reasons I was unable to attend Sub-Committee A's discussions on this subject during July, but some 50 years ago I spent five years working for a British insurance company in an EEC country, and so I have a residual interest in the matter.

The effects of this directive on the insurance industry in this country could be very wide and very complicated. It is therefore extremely important that the directive should be considered with great care, both in its general implications and in the detailed drafting. The Select Committee's report examines a number of the general implications, setting out the arguments on both sides. It also makes various criticisms of the drafting, to which attention should be paid. The drafting is in some places obscure, or at least uncertain.

Much has been said this evening about proportionality, and I should like to add just one word. The noble Lord, Lord Plowden, and others, referred to the arguments in favour and against. There is considerable conflict of evidence on both desirability and practicality, and also—and this is a point which I wish to emphasise—on its effect on international business generally. It would seem to be a change which benefits the policyholders. On the other hand, it is argued that it would be confusing and that in practice it would make little difference because insurers in this country are normally ready to make reasonable compromises. The committee conclude in principle in favour of the proposals. I personally feel that what the noble and learned Lord, Lord Scarman, said has a great deal of force, particularly when he says that the application of this proposal would need a great deal of further discussion before it was definitely accepted.

My Lords, I should like to refer briefly particularly to paragraphs 21 and 22 of the report, and to the position of the United Kingdom insurers' business outside the EEC, on which the noble Lord, Lord Banks, made some pertinent observations. This world-wide business is of course very large and very important to the British insurance market. It is much more important than British insurance business in the other EEC countries. On this question—the question of geo-graphic limitation—the directive is perhaps naturally silent. Presumably, a directive from Brussels could not directly affect non-EEC business, and would therefore cover only business where both insurer and insured were within the EEC. But to implement the directive there would have to be legislation in this country. It seems likely that this could lead to three or more types of insurance law operating in this country; namely, the general insurances—motor vehicles, property, et cetera—within the EEC under this directive; risks outside the EEC under our common law; and possibly life insurance under other EEC directives. Marine, aviation and transport insurance are, anyhow, outside the directive.

Thus there could be three or four insurance laws, with the inevitable problems of definition of the categories. Some differences in the law applying to the different types of insurance may be desirable. There is, for example, already a statute governing marine insurance. But, generally speaking, until now the United Kingdom insurance law has been pretty well uniform. So that harmonisation of the law within the EEC might in fact lead to less harmonisation within the United Kingdom, and to a certain amount of confusion in international business. As is the case in so many proposals from Brussels, harmonisation is a generally desirable end, but it can often cause a good deal of local difficulty.

There seems to me to be a problem here which needs very careful examination. Either non-EEC business would be left as it is, with the complications to which I have just referred of three or four different bases of law, or it might be decided in drafting the United Kingdom legislation to extend the terms of this directive to cover other forms of insurance on a more general basis for the sake of more uniformity. Anyhow, it is extremely important that the competitive position of British insurers outside the EEC, particularly in the USA, should not be prejudiced. Interference with existing practice might well reduce the freedom and flexibility for which our market has had such a good name for so many years throughout the world. I shall be particularly glad to hear any comments which the Minister is able to make on this point, which seems to me to raise important and difficult issues.

My Lords, I support what Lord Plowden said in introducing this report, particularly that it would be wise to keep the draft directive to the imposition of minimal standards. Future legislation to improve the rights of policyholders should not be prevented so long as it does not prejudice the competitive position of British insurers. The link with the draft services directive is essential; so is clarification of the territorial limits of the directive. Subject to these points and to various amendments suggested in the report, and to some clarification of the drafting, the committee concludes that the directive should on balance prove useful. I agree with the noble and learned Lord, Lord Scarman, that it is extremely difficult for Her Majesty's Government to take a very definite position at this moment, but we shall be very much interested to hear anything which the Minister can tell us.

My Lords, I am an unadvertised nuisance, but I say in mitigation that at best I can claim to bring a breath of refreshing ignorance to this interesting discussion. I find that the House has a certain problem in having to choose between the recommendations of its Select Committee, as expounded to us today, and the very weighty words of the noble and learned Lord, Lord Scarman, with his vast experience of the law. I am myself deeply in the debt of Lord Plowden, as well as his committee, but particularly Lord Plowden, because of the temperate, lucid and persuasive way in which he presented this issue. But I have to speak with timidity bordering on, or more than bordering on, trepidation in that I find myself preferring the recommendations of the noble Lord, Lord Plowden, to the approach of the noble and learned Lord, Lord Scarman, who has brought the weight of his immense standing and erudition to bear on this matter. I should like to tell the House why.

It seems to me that the noble Lord, Lord Plowden, and his Select Committee approached this question in the right spirit and, with the deepest respect, that the noble and learned Lord, Lord Scarman, approached it in the wrong spirit. I am myself a lawyer, and I practised at the Bar for many years, and I must say that my heart beats more quickly when the noble and learned Lord, Lord Scarman, refers to the great historic traditions of the English law. I wish very much that the Community had incorporated in the Treaty of Rome that, when we came in, the historic traditions of British law would apply throughout the Community; but by some odd happening they did nothing of the sort. They intended that the law which was to operate in co-ordinating the Community's efforts would be the collective effort, which would I hope pay due respect to the contributions we would make, inspired by our traditions.

Of course, the very breadth of Lord Scarman's speech, with great respect, was inspired by a spirit which has not taken into account the new world to which we are attaching ourselves in the European Community. Of course every one of us would prefer to do our own thing, but that is the very antithesis of co-operation. It is even more the antithesis when you are dealing with other nations. The whole point of the European Community is that it is a vast and potentially noble and creative development of the postwar period to make the peoples of Europe learn to live with more co-operation—co-operation in the field of politics, co-operation in the field of economics and finance, co-operation in defence and matters of that kind. That is the spirit which I think has been behind the Select Committee's report, and it is the only spirit in which we can approach this matter.

I think the noble and learned Lord is entitled to ask us all that we go home and in due time study with deep care the case for the Law Commission's better improvement of the law. But we are not dealing with a law which is to apply only to our country: we are dealing with a law which is to apply throughout the European Community, and if we want to trade with our insurance policies throughout the European Community it is no good saying that we think that our law would be better in some minute or even important particular. We have to come to a decision as to whether we really mean to be members of the Community and play a part in the co-ordination of its economic and commercial co-operation—making the kind of concessions which cannot be made if you are absolutely infatuated with the notion of doing your own thing, and doing it as it has been done for centuries past, which may have been infinitely superior to the way it has been done by anybody else. But the trouble is that you have to make that simple decision, and I do not think that the noble and learned Lord, Lord Scarman, has made it.

I wish he had raised the curtain of his affright at what is proposed, as compared with the Law Commission's proposals, a little more than he did. I fear that the bogeyman who emerged from his own lifting of the curtain has not scared me. He says that perhaps somebody will want to refuse the risk altogether. As I understand it, if anybody can show a reasonable case that he would have refused the risk altogether and it is not merely a specious way of implementing the existing commonly-accepted harsh effect of the present law, that the genuine insurer could say, "Had I known they were Greeks, or whatever, I would not have insured the risk and nor would any prudent, reasonable insurer"—then I think he appears to be covered by the rule of proportionality.

The noble and learned Lord, Lord Scarman, said that there would be difficulties in interpreting it and that it could not be reduced to the kind of mathematics that could be worked out on a pocket computer. Horror of horrors!—the decision about what the proportion is might end up being at the discretion of a judge. If any noble Lord considers anybody, apart from me, ending up before the noble and learned Lord in a criminal trial, the law here confides to him a considerable exercise of discretion as to whether he binds me over with a rebuke or incarcerates me for the rest of my life. That is all within the discretion of the judges; and nobody regrets it.

I would tell the noble and learned Lord, if he were here—very flatteringly I hope he would think—that I prefer (and that the best of insurance companies would prefer) that this matter of proportion should be left, with all its perils, at the discretion of a judge rather than at the discretion of an insurance company which inevitably feels itself partial in exercising that discretion; whereas in the case of a judge it would be wholly impartial.

I have studied the details provided and the afterthoughts of those who wanted to make my flesh creep with other horrors of the proportionality rule, such as saying that you could not have an excess taken into account so that if somebody is suing for £1 million and there might have been a £50,000 excess or some such, this can be taken into account in assessing the premium; but if you are dealing with motorcar policies, the commonest type of excess, or theft, where modest excess is provided, it is so irrelevant as to be hardly worth considering. I do not accept from what I read of the matter that the proportionality rule excludes specific warranties upon specific points but deals with the point of warranties of knowledge which are innocently inaccurate and therefore must not be allowed to have the present harsh, inevitable result.

I am a little troubled about the minimum standards of the future being affected. I hope we may leave it open if we want to make our law better than the Commission now wish. I must remind noble Lords that the present rule has been in force without change for a great length of time. I do not think we have to be afraid that we are denying the British public some extra benefits of a speculative kind which are not yet on offer. I mention the final point that the directive is obscure and uncertainly drafted. This is, to say the least, very interesting coming from the noble and learned Lord, Lord Scarman, because I have had occasion to study some of our modern legislation and I must confess that the interpretation of the results of inspection of the Delphic oracle would have been less complicated than the accurate interpretation of some of our statutes. So uncertainty, with the best will in the world and the most detailed mock-Elizabethan drafting by our parliamentary draftsmen, always exists in the interpretation of law. That is what the judges are there to clarify.

My Lords, I come back to the beginning. This is where the British Insurance Association appears to stand. They have recognised that co-operation is a two-way business. If we want the kind of co-operation which would permit our successful insurance people to trade in Europe, then we must accept that we cannot do so if we are offering terms which infringe the general will of the Community about what should be offered to their citizens. If we do insist that our law, which may be superior in a minor particular, is to be the rule, then our prospect of trading there will be remote. I very much welcome Lord Plowden's urge that we should seek to get the other directive applied at the same time. I very much welcome the report of the committee. I find it inspired by the right spirit of Community purpose, by a national contribution to that Community purpose which entitles us to scrutinise, examine and weigh up these things. I am grateful to the committee and to the noble Lord.

My Lords, we on this side of the House would like to join in the tributes which have been paid, justifiably, to the noble Lord, Lord Plowden, and to Sub-Committee "A" which has produced the report on this subject. If I may, I should like to compliment the noble Lord and his committee on the report itself, the 64th Report of this particular Session. It has been drawn up with its usual clarity, which has become one of the hall-marks of the reports that come from the Select Committees of this House. We ought also to express our appreciation to the permanent staff of these committees who are in the main responsible for the marshalling and presentation of the conclusions and of the opinions of the committee itself. We are well served by them and that is one of the reasons why, as I am sure the noble Lord, Lord Bethell, will confirm, the reports which emanate from this House, particularly on European subjects, are very widely read in Europe.

It is a little extraordinary for me to find myself in agreement with practically every noble Lord who has spoken save (for reasons that I will presently explain), my noble friend Lord Lever. I wish therefore to come straight to the concluding and, in my view, decisive opinion of the committee which recommends in paragraph 26:

"They consider that the draft Directive should not be adopted until the draft Services Directive has been, or that the two should be adopted at the same time".

This is one of the courses I shall urge on the noble Lord opposite for the Government to follow for reasons which I will explain.

The Treaty of Rome, in Articles 59 and 60, permits and encourages the freedom of each member state to provide services in other member states. As the noble Lord, Lord Bethell, pointed out, this is one of the cardinal principles on which the Community is based—just as valid as (dare I mention the words?) the common agricultural policy. If the Community means anything outside the common agricultural policy, it means also Articles 59 and 60, which extend to, among other things, the service industries the right to conduct businesses across frontiers, if necessary, from their headquarters in London, Paris or wherever it may be, and across the national barriers. There have been several drafts of the directive. Eventually on 30th December 1975 there was a proposal for a second Council directive stipulating exactly that member states should be allowed to provide services across frontiers. This from my own experience in the European Parliament, in Common with that of the noble Lord, Lord Bethell, is a proposal which would have greatly benefited the British insurance industry had it been enacted and followed, but it has been systematically and deliberately filibustered and postponed.

Every conceivable device has been used by at least two of the member states—and I will name them: Germany and France. Every conceivable endeavour has been made to avoid the second directive being passed and put into European law in conformity with Articles 59 and 60. For two years this directive was before the Economic and Monetary Affairs Committee of the European Parliament, where it had to be considered. It was missed from the agenda from time to time; the rapporteur was absent from time to time; and it needed the utmost pressure, taking nearly two years, to get the directive discussed intelligently at all. All this was quite deliberate. I will be quite frank about it: the insurance industry in Germany and France—and this is common knowledge in Brussels, Luxembourg, Strasbourg and everywhere else—is scared stiff of having competition from Lloyd's of London and the other principal insurance companies of the United Kingdom, and is using every conceivable device to ensure that the second directive does not come into operation.

All that the British insurers have been asking for is the right to provide services in other EEC countries in accordance with the laws of the particular countries. They are not asking to export British law into Germany or France. They are asking for the right to sell insurance in France according to the provisions of the French law, and they are asking to be able to conduct insurance business of the type specified in the directive, which is of course non-life, according to German law in Germany. Every conceivable device has been tried in order to avoid this.

The original directive was dated 30th December 1975, and after nearly three years—on the 21st February 1978—a weighty series of amendments to the second directive was brought out and now, once again, we are in the process of detailed discussions on this matter. Even though the European Parliament ultimately agreed with the contents of the amendments contained in the proposal of the 21st February 1978, it is still impossible to get the agreement of France and Germany to it.

It is within this context that I feel that we ought to approach the whole question of this new directive. I entirely concur with the noble Lord, Lord Banks, that it is not necessary for the purpose of the conduct of services in other countries to have a standard form as to the services provided, any more than it is necessary, as the noble Lord cogently pointed out, to have standard goods that are produced in every country for sale in the Community. There is no real necessity for it at all.

If I may put a somewhat jaundiced view about it—and I do it with much sorrow—I am hound to say that the new draft directive which is before us, does not stand a chance of coming into operation anyway, because of course it has been introduced precisely as a further delay to prevent the services directive coming into operation. This is the whole reason for its introduction. The members of Sub-committee A, and their distinguished chairman, have done this new draft directive more than honour in even considering it. I firmly believe that events will prove me right when I say that it was never intended to come into operation anyway.

That still leaves us with the problems that have been raised concerning the defects in our own insurance laws. I am not expert in insurance law but I know enough about it to know that an insurance contract is a contract uberrima fides, of the utmost good faith, and any inaccurate fact on a proposal form, whether or not it is material in regard to the risk, is nevertheless the law, as the noble and learned Lord, Lord Scarman, indicated. In those circumstances, the insurance contract should not be capable of being avoided by the insurers. Therefore the course of action that I would respectfully urge on Her Majesty's Government is this: they should decline to give further consideration to this directive save for internal purposes until and unless they have complete agreement on Britain having her rights within the Community under Articles 59 and 60, by the passing without further undue delay of the second directive which I have in front of me.

There is no point at COREPER level, parliamentary level, commissioner level or any other level, in giving consideration to this particular item of harmonisation legislation which—and I entirely concur with the noble Lord, Lord Banks—is probably of dubious value anyway in terms of harmonisation, before they give further consideration to other matters. This is not to say that we do not have some lessons to learn domestically from the directive itself and some of the thought that lies behind it. Indeed, I feel the Government should give very serious consideration to the report of the Law Commission on this subject; and, after having considered that report, and after having considered within that context the provisions of the draft directive, they might then see fit to bring forward their own Bill, applicable in the United Kingdom only, for the purpose of the reform of certain aspects of insurance liability without which I feel that most noble Lords, and not least my noble friend Lord Lever, are somewhat uneasy. This, I think, would be the sensible course: it would be without prejudice.

After all, if we improved our own domestic legislation very much on lines that we took from the draft directive and also from the law Commission's Report, and if at some later stage we suddenly apprehended that our colleagues in the European Community were prepared to work a genuine Community, as distinct from a common agricultural policy, with a lot of small, peripheral items of very little national consequence, it would put us in a much stronger position so to do.

What I have said does not prevent Her Majesty's Government from pressing forward with the utmost degree of co-operation with our colleagues in Europe on matters upon which we can agree, but the time has long since passed—and the insurance industry is one example of it—where we can continue to acquiesce in policies that are now of proven disadvantage to us in money terms (such as the common agricultural policy) and when we can acquiesce without receiving a proper and due degree of consideration for industries in this country, including insurance, which are just as vital in many ways as agriculture and its benefits are to France. We ought to get our European colleagues to appreciate that we are just as interested in the extension of our invisibles, particularly in the field in which we are so expert—the field of insurance—as they are concerned to preserve their advantages under the common agricultural policy. May I say, across party boundaries, that any efforts made by the noble Lord's right honourable friend the Prime Minister to assert Britain's rights along these lines will receive the support of all of us on this side of the House.

My Lords, first of all this evening I believe that the Government, and indeed the whole of your Lordships' House, would like to thank, and indeed should thank, the European Communities Committee under the very able chairmanship of the noble Lord, Lord Plowden, who introduced the debate this evening, for producing the report on the draft European directive on insurance contract law and also for affording us the opportunity to have what I personally have found to be a fascinating debate, both in the details that have been discussed and in the oratory, the eloquence and the passion that have been expressed by noble Lords in every part of the House.

As your Lordships will appreciate, the directive itself and all its implications are certainly not simple matters. The Government believe that the clarity of the report in dealing with some of the directive's major issues is of great value, though that is not its only virtue. At this stage I hope the House will allow me to declare a small personal interest, in that I am an underwriting member of Lloyd's. I understand that this is in no way incompatible with my duties in your Lordships' House and elsewhere. That is the position as I understand it but your Lordships, I believe, ought to know that I have a small interest to declare.

Five speakers—indeed, probably all those who have spoken—have referred to the recent report of the Law Commission and I should like, on behalf of the Government, to express our gratitude for this substantial and very thorough piece of work. The Government's attitude towards this draft directive takes into account the position of the directive within the development of the insurance market of the European Community. The Treaty which has been mentioned, certainly by the noble Lord, Lord Bruce, and by my noble friend Lord Bethell, provides for freedom of establishment for insurers within the Community and, above all, for those insurers to be free to provide their services throughout the Community.

Despite some notable decisions of the European Court, progress on establishing a common European market has been slow. Those are the words I am advised I should use without arousing further passion. It has now reached the stage where the rules making freedom of establishment effective cover most insurance; but the rules making freedom to provide services effective cover certain limited areas. Your Lordships may be aware that those areas are reinsurance, insurance intermediaries and coinsurance. The next step will be the long-overdue adoption by the Council of Ministers of the insurance services directive. I use fairly calm and, I hope, unemotional language, but I hope the House will accept that there is a driving commitment on the part of this Government to see that the insurance services directive is adopted as speedily and effectively as possible.

We believe that this measure is long overdue and is one which will allow insurance to be provided across frontiers in Europe, in accordance with Articles 59 and 60 of the Treaty. We also believe that the directive will be of considerable importance to policyholders and for business insurance of all kinds, though of considerably less importance for domestic insurance such as the private citizen's car or house insurance in the member states.

The draft of this insurance services directive provides for some limited freedom of choice of contract law, limited in particular to business insurance. The noble Lord, Lord Plowden, and indeed your Lordships' House, would wish to have my comments on the directive we are discussing today, and they would wish me to be relevant. This particular directive has evolved as part of the programme for providing freedom of establishment and services for insurance. However, so far as United Kingdom interests are concerned, both insurers and policyholders, we do not see the directive as directly important. Harmonisation of laws on the points it deals with will not, we believe, sensibly reduce the specialised knowledge or advice needed by a United Kingdom insurer or policyholder, when contracting under a law other than that of the United Kingdom. In other words, harmonisation in the way proposed does not seem likely to reduce important barriers to trade in insurance services. Also, there does not seem to be any clear evidence of United Kingdom policyholders suffering from different protection of interests under other laws. I would emphasise that in the United Kingdom we have greater experience than there is in many other member states of freedom of choice of law for insurance contracts.

But that is not the whole story, because introduction of the insurance services directive will allow some freedom of choice of the laws applying to insurance contracts, and this will be an innovation in some member states. Moreover, we see the Community's common insurance market continuing to develop beyond the services directive. It is not reasonable or practicable to ignore the possible arguments of others that they should be sure their policyholders have some defined protection when contracting under a foreign law, wherever it may be. While, therefore, we should be content to see the draft insurance contract law directive dropped, we are prepared to co-operate in further discussion on its adoption, subject to three criteria.

First, that the interest expressed by other member states in its adoption is clear and substantial enough to justify the very considerable efforts involved. The second criterion which we insist on is that there is in the EEC Treaty a proper juridical basis for the directive. Thirdly, we insist that United Kingdom interests are met adequately in the final text of the directive. These three criteria are, we believe, basic to the adoption of this directive and, indeed, to further progress. I do not think any Members of your Lordships' House can believe that there is any lack of continuing European co-operation or commitment in requiring these three criteria, because we want to see this directive adopted.

But reference to the United Kingdom's interests takes me to the second part of the noble Lord's Question, which asks for the Government's views on the conclusions of the Select Committee's report. The Government have, in some way, dealt with these in their initial reaction to the report of the Law Commission. They have said that they want to give all those who are concerned in this directive, in the report of the Committee and, indeed, in the Law Commission's report time to comment on the Law Commission's report. Some comments have already been received on the report, but others will not be in this year and we believe that it is too early to give any kind of considered view.

But the Government have done more than merely be polite. The Department of Trade has prepared a note setting out its initial reaction to some of the points raised by the Law Commission. The Government take the line that the note has been sent to every one of the numerous representative bodies who had earlier been consulted about the draft directive, and those bodies include representatives of insurers and consumer interests.

The note has also been sent to everyone who gave evidence to the Law Commission, as well as being submitted to the Select Committee of your Lordships' House on the European Communities. I would emphasise that the note was merely a preliminary reaction and not a final position. But it would not be unreasonable to rehearse some parts of the department's note for, in its tentative way, it meets some of the main points in the Select Committee's report.

First, the Government believe that the directive would be useful, particularly if it accelerated the adoption of the insurance services directive. The Government believe that the adoption of the services directive is long overdue. I stress that and will continue to stress it. The Government are far from convinced that adoption of the insurance contract law directive is a necessary adjunct to adoption of the services directive, but are, as I have said, not opposed in principle to the adoption of the contract law directive which we are discussing this evening.

It may be that one factor which influenced the Select Committee was the attraction, on their merits, of some parts of the directive. Reform of United Kingdom law would, however, be possible without a directive. I would not want to go further on this than to refer to the department's view that reform of the United Kingdom law on the duty of disclosure by an insured to an insurer, and of the law of warranty in relation to insurance contracts, is necessary and desirable. Secondly, the Committee considers that the draft directive requires amendments or clarification on a number of important matters, such as territorial scope and warranties. I think that the Department of Trade's note shows considerable sympathy with most of these points which are made by the Committee and, above all, with the point about not preventing Parliament from legislating in future to improve the rights of policyholders.

The noble Lord, Lord Plowden, in the course of his excellent and concise introduction to the debate this evening, raised a point about the ability of the United Kingdom Parliament to legislate. I think it would be right for me to add that the Department of Trade's note states:

"The Department proposes in further Community discussions on the proposed directive to seek to get its scope clear and to take a critical line on the requirement for uniformity".

I hope that that will go some way to answer that point made by the noble Lord, Lord Plowden.

The important point of proportionality was raised by most of your Lordships who spoke this evening. The department is very mindful of the criticisms from many quarters of your Lordships' House which gave evidence and, above all, from the law Commission, and would reserve its position. It is interesting to note that the European Parliament has proposed limitations on the operation of proportionality that would seem to avoid most of the difficulties which were seen by the. Law Commission.

I wonder whether I may go through some of the points that have been raised this evening. I hope that I shall clear up most of them, but if I miss any perhaps I may write between now and when we next meet in your Lordships' House. I hope that I have covered the two queries of the noble Lord, Lord Plowden. I should like to thank the noble Lord, Lord Banks, for his strong support for what I would call the European ideals. I think that the noble Lord, Lord Lever, put it as European co-operation. But the noble Lord, Lord Banks, left no doubt in our minds that he and, I think, his party are very much in support of co-operation in fields of European commerce. But we were very grateful to hear that he gave a great deal of support to the reservations of the Law Commission.

I applaud and congratulate the noble Lord, Lord Lever, on his courage in differing from the noble and learned Lord, Lord Scarman. I certainly found the noble and learned Lord's exposition admirably clear. Perhaps the noble and learned Lord had a slight interest as the founder of the Law Commission, but I think your Lordships will agree that he made a particularly clear and lucid speech which I, and I suspect your Lordships, certainly appreciated. He made one point which bears repeating, which was that the best practice concept, which I think was first mentioned by the noble Lord, Lord Plowden, is used wherever reasonable by insurers, and that the harshness of the law is not too much in evidence so far as insurance contracts and services around Europe are concerned.

My noble friend Lord Bethell asked me about the European Treaty and referred to Article 59. This was referred to by the noble Lord, Lord Bruce of Donington, who referred also to Article 60. My noble friend Lord Bethell asked whether an aggrieved person could take his case to the European Court. I hope that the House will accept that the Commission have been reluctant to take member states to the European Court in advance of the adoption of any directive. The decision would not be certain and would make progress on any directive, especially progress on the services directive which we have been discussing this evening, difficult. The services directive is needed in order to obtain effective freedom. I hope my noble friend will accept hat were a consumer to take his case to the European Court it would not have the effect which is desired by my noble friend, by the whole House and by the Government.

The noble Lord, Lord Cobbold, raised a valuable point. I hope he will accept that the Department of Trade's note to which I referred earlier suggested that he starting point for considering any change in insurance contract law should be that it should apply to all contracts of insurance, including contracts of life insurance. The noble Lord, Lord Cobbold, raised a slightly technical point, but I hope that my answer will go some way towards meeting it.

Every Member of your Lordships' House who has spoken referred at some stage to the services directive. The noble Lord, Lord Bruce of Donington, made a very powerful speech and asked what further strong action we should be able to take to speed the implementation of the services directive. Perhaps both he and the House will note the comment of my right honourable friend the Prime Minister at the meeting of the European Council last week in Luxembourg. The Prime Minister said:

"I draw attention to the very slow progress being made on questions such as insurance and air fares where the Community has yet to show its readiness to have freer competition in the service sector".

I believe that the Prime Minister is committed to the desire which has been expressed in your Lordships' House that the second services directive should be pushed through speedily.

Your Lordships will know that the noble Lord, Lord Bruce of Donington, and I dealt with the matter during the last session of Parliament, and indeed earlier today. The Government believe that the service directive is a bell-ringer of European co-operation. I hope that the noble Lord, Lord Lever of Manchester, accepts that the Government's commitment to co-operation in this field is especially strong. However, we believe that our interests are being frustrated, whether or not wilfully, or involuntarily, or needlessly, by this directive. The noble Lord, Lord Bruce of Donington, pointed out the long-time gap—all but five years—since the proposals were first presented.

I hope that this explanation of the Government's view upon the directive which was discussed by the Committee under the chairmanship of the noble Lord, Lord Plowden, and upon the allied directive and other matters has been of some help to the House. I have been unable to give the Government's final view on the directive points raised by the committee, but I hope that what I have said will be sufficient to show that the reaction so far, and the way that that will develop, is aimed at meeting the interests of both United Kingdom insurers and the policyholders whom they serve.