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Consumer Insurance (Disclosure and Representations) Bill [HL]

Volume 733: debated on Tuesday 20 December 2011


Clause 2 : Disclosure and representations before contract or variation

Amendment 1

Moved by

1: Clause 2, page 2, line 9, leave out subsection (5)

My Lords, I beg to move Amendment 1, which leaves out Clause 2(5). This subsection was added to the Bill following acceptance of an amendment in Committee. I will also speak to Amendment 2, which proposes an alternative and—I hope that the House will agree—improved approach to addressing the Committee’s concerns about renewal of insurance contracts. Having considered the amendment accepted by the Committee, we felt it was necessary to come forward with alternative drafting to achieve what noble Lords had in mind through the original amendment.

Taken together, these two amendments will mean that insurance companies are expected to have to show that they told their policyholder that answering questions on renewal was important. However, they also avoid some unintended consequences of including this requirement in its current form as part of Clause 2.

These amendments address something which the Bill Committee touched on extensively in its deliberations. There was much discussion of the implications of the Bill for consumers renewing insurance. Renewal involves entering into a new contract and consumers are therefore under the same obligation as when first purchasing their policy—that is, they must take reasonable care to answer the insurer’s questions, or the insurer may be entitled to refuse a later claim. Noble Lords were concerned that consumers might not recognise the significance of questions asked on renewal, as they may not understand that it is a new contract, and as a result might not take sufficient care to answer these questions.

The Government agree that insurers should take measures to ensure that their consumers are aware of the importance of responding to questions which they are asked at renewal. However, as I mentioned, to ensure that the effect of this change to the Bill reflects the wishes of noble Lords, we felt that it was necessary to come forward with alternative drafting. There are some relatively small drafting points.

The inserted text splits subsections of the current clause which need to run together, and the phrase “make clear” may be a difficult standard. However, most importantly, it leaves no remedy for an insurer who has not included the right wording, even if the consumer’s failure to reply was a deliberate or reckless misrepresentation. I am sure that the Committee did not intend to give consumers a “get out of jail free card” in circumstances where they knowingly and deliberately deceived their insurer. The amendment therefore removes the drafting accepted in Committee stage and substitutes an alternative in Clause 3. That explicitly adds to the list of factors that a court may take into account, when determining whether a consumer acted reasonably, whether the insurer communicated the importance of answering questions on renewal. Both the Association of British Insurers and the Investment and Life Assurers Group agree that that is a more suitable approach.

There are many ways in which an insurer may communicate the importance of answering questions at renewal. The Committee discussed whether wording which explicitly told the consumer that they were entering into a new contract would achieve that. That is indeed one way in which an insurer may communicate the importance of answering questions as required by the amendment.

It might be helpful if I set out for noble Lords current market practice at renewal and the effects of the amendment in this context. An insurer will often send the consumer a letter to say that their insurance is up for renewal. Market best practice is usually to send a list of the facts that the consumer told them the last time. The consumer is asked to read and consider the list, and to contact the insurer if the facts have changed.

In motor insurance, it is common practice for insurers to renew the policy even if the consumer fails to reply. It is now a criminal offence for a motorist to allow their car insurance to lapse without notifying the Driver and Vehicle Licensing Agency and we therefore welcome any practice which makes renewal a simple process for the consumer. If nothing has changed, there is no need for the consumer to reply, but if something has changed and the consumer fails to respond, this is capable of being a misrepresentation. As my noble friend Lady O’Cathain stated during the last Committee sitting, it may be that nothing has changed in relation to your car insurance. Alternatively, you may have been convicted of a new driving offence which you should tell your insurer about. As a result of this amendment, the insurer should clearly communicate the importance of mentioning such changes. If the letter is poorly laid out or in very small print, or if it fails to tell the consumer that failing to mention changes may lead to claims being refused, then a consumer may act reasonably in overlooking it.

In circumstances where the consumer fails to respond because they did not understand the implications, the insurer would be expected to show that they told the consumer how important it was to respond to the questions at renewal time. The insurer would know that it could not just point to the consumer’s oversight. This last important point was teased out in Committee and was, I believe, noble Lords’ real intention. I believe that the amendment addresses the concerns raised by noble Lords during those discussions.

My Lords, as I have stated throughout our proceedings, we on this side of the House fully support the Bill as a measure which makes a major improvement to the relationship between insurer and insured in consumer insurance. We have sought to improve the Bill, making clear elements of the drafting which were unclear or which, on careful examination, did not correspond to the declared intentions of the Law Commission and therefore required amendment. Accordingly, in Committee I proposed the amendment to which the noble Lord has referred and which in due course the Committee passed almost unanimously, the only dissenting voice being that of the Minister himself.

Before dealing with the substance of the Minister’s amendments, I first ask him whether he consulted the Companion before tabling them. Paragraph 8.133 states that,

“an issue which has been debated and voted on in committee can be reopened, provided that the relevant amendment is more than cosmetically different from that moved in committee”.

When we look for the meaning of “cosmetically different”, earlier in the same paragraph it is stated that amendments must not be identical or of identical effect. Consequently, the Minister cannot argue that this amendment has identical effect. If he does, he must withdraw the amendment.

I wonder whether it would be helpful at this stage to confirm that the government amendments have been drafted in full recognition of what the Companion says. As I tried to explain in setting out the rationale for the amendment, I do not believe that it has the same effect because it provides greater clarity and, I believe, delivers what, in Committee, noble Lords wanted to achieve. My understanding of the process is that, if there had been a problem with the technical raising of the amendment, the Public Bill Office would have raised questions on it. Therefore, I believe that both in substance and in form the right things have been done.

I think that the noble Lord is contradicting himself. He said that it was what noble Lords wanted to achieve when they voted on the amendment in Committee, yet he says that it is not identical in effect. That does not seem consistent. However, let us move on.

Turning to the substance of the amendment, I accept that its placement in the Bill is superior to that which I proposed in Committee, and for that I am grateful. However, the intention of the Committee was that insurers would be required to make clear to consumers that when a policy was renewed, it would in fact be a new policy, and consequently the importance of questions asked would be of the same order as when new business was written. As many noble Lords argued in Committee, they were not aware of this—indeed, I believe that the Minister himself admitted that he was not aware of it—and they could well understand a consumer failing to be aware of it too. This lack of awareness might result in the consumer taking insufficient care in answering questions posed by the insurer.

The Government’s amendment does not refer explicitly to the fact that a renewal is a new contract and hence this is not of identical effect. Instead, it proposes the vague test of,

“how clearly the insurer communicated the importance of answering those questions (or the possible consequences of failing to do so)”.

That is a very vague rendition of what was intended by the amendment in Committee. Instead of being explicit, the matter is now to be left to the courts to decide. However, I note that the Minister stated that explicitly telling the consumer that they were entering into a new contract would be “one way” in which the insurer could communicate the importance of the questions asked at renewal. I fully expect that the ABI and the ILAG will draw this passage in Hansard to the attention of their members and that it will form a background to any subsequent court proceedings. On that basis, I shall raise no objection to the government amendment.

Finally, I would be grateful if the Minister would clear up the matter raised in Committee by the noble Lord, Lord Goodhart, and not subsequently resolved. That is the relationship between Clause 5(1) and Clause 5(3). As the noble Lord, who is in his place, pointed out, they seem to duplicate one another and hence, potentially, they are a source of confusion. As we still have a chance to sort this out at Third Reading, perhaps the Government could enlighten us about the reasoning behind this dual oddity of drafting.

My Lords, I am very glad to hear that the noble Lord, Lord Eatwell, is not objecting to the amendment. Whether it is something new or exactly the same in a different form does not matter so much, but I am glad that the amendment proposed will not be opposed by the noble Lord.

While on my feet, perhaps I could say a word about the Law Commission and the part that it has played in bringing us to this point. The report was originally published in 2009. It followed three years of intensive research and a great deal of evidence-taking, as one can see from the report. The commission then succeeded in reconciling the many divergent interests and produced, as a result, a draft Bill, which is the Bill before us with only a few alterations. It is unquestionably the most important reform of the law of insurance since the Marine Insurance Act 1906. The draftsman of that Act was Sir Alfred Chalmers, who is always referred to in this part of the law as the “legendary Chalmers” because he was a brilliant draftsman. It seems to me that this Bill is a worthy successor to the Chalmers Act of 1906. We owe a great debt of gratitude to the Law Commission and, in particular, to David Hertzell, who was in charge of the report. I hope that we may have many more Bills from that stable and I gather that there is already one in the offing, but as it relates to some rather obscure matters of trust law I assume that we shall not have the pleasure of the noble Lord, Lord Sassoon, taking it through the House.

My Lords, I would like to mention one matter as the noble Lord, Lord Eatwell, has referred to the amendments that I put forward in Committee. As I said then, there was basically a pedantic reason for what I did. I thought what I did was slightly better but, quite frankly, it was not a serious problem at all. As they were not automatically accepted in Committee, there is no point in raising the matter again now. I am quite happy that it no longer appears.

My Lords, I share the view of the noble Lord, Lord Goodhart, and, therefore, share the view of my noble friend Lord Eatwell today in raising again the duplication that there seems to be in Clause 5. I do not think that anyone wants to press the point. In addition to the thank you to the Law Commission and the usefulness of this Bill, to which the noble and learned Lord, Lord Lloyd, has just referred, I express thanks for the excellence of the chairmanship of the noble and learned Lord.

My Lords, thank you for that short and focused discussion. On the specific point about the interlinkage of Clause 5(1) and Clause 5(3), I think that my noble friend Lord Goodhart has answered the question. Frankly, if the amendment had come forward again, in the Christmas spirit I and the Government might have accepted it. For goodness’ sake, I hope that it is now too late to table a handwritten amendment, but it was a fine bit of drafting either way.

I would rather stay with the noble and learned Lord, Lord Lloyd of Berwick, in welcoming the importance of this small but targeted measure. I echo my thanks to him as chairman of our committee under this special procedure, to the Law Commission, and in particular to the commissioner, David Hertzell. I will not say that I wish I did not have to deal with more Law Commission matters because your Lordships may have seen the fourth, topical Question tomorrow morning, which touches on recent Law Commission work on intestacy. As the Question refers to inheritance tax, it is down to me, so I cannot escape Law Commission matters even this week.

Amendment 1 agreed.

Clause 3 : Reasonable care

Amendment 2

Moved by

2: Clause 3, page 2, line 31, at end insert—

“( ) in the case of a failure to respond to the insurer’s questions in connection with the renewal or variation of a consumer insurance contract, how clearly the insurer communicated the importance of answering those questions (or the possible consequences of failing to do so),”

Amendment 2 agreed.