Consumer insurance: insurers’ remedies for misrepresentation 

In one of the few reported cases decided under the Consumer Insurance (Disclosure and Representations) Act 2012, the Commercial Court has held that an insurer was entitled to avoid a policy of insurance on the basis of a misrepresentation by the claimant insured.

The case concerned a claim for an expensive Rolex watch, lost by the insured when skiing. Investigations by the insurer revealed that the insured had misrepresented his claims history by failing to disclose to the insurer a previous high value jewellery loss. Having deemed the insured’s false statement to be a “qualifying misrepresentation” under the Act, the court was required to consider the remedies available to the insurer.

This decision confirms that in the right factual circumstances, the remedy of avoidance remains available to insurers.

Background

In May 2018, the insured sought insurance cover for a Rolex watch valued at £190,000. Through his broker, the insured submitted an initial presentation which stated that he had not made any claims in the previous 5 years, and had no previous claims history at the address provided. The insurer provided a quotation for insurance in the terms of the policy, which included a statement of facts that the insurer made clear formed the basis of the quotation, and requested confirmation of its accuracy as a condition of providing cover. This was confirmed by the insured and the policy issued.

The insured notified a claim for loss of the watch during a skiing holiday in March 2019. Investigations by the insurer revealed that the insured had made a previous successful claim in August 2016 for the loss of a diamond ring with a value of £15,000, which had not been disclosed at any stage.

The insurer declined the claim and sought to avoid the policy on the basis that the misrepresentation amounted to a breach of the insured’s duties under the Consumer Insurance (Disclosure and Representations) Act 2012.

The Act

Section 2(2) of the Act provides that a consumer is under a duty to take reasonable care not to make a misrepresentation to the insurer.

Section 4(1) of the Act provides that an insurer has a remedy against an insured only if the insured has made a misrepresentation in breach of its duty under Section 2(2) of the Act and the insurer can evidence that it would not have entered into the contract at all or would have done so only on different terms.

A misrepresentation that satisfies these requirements is referred to in the Act as a “qualifying misrepresentation”. Insurers’ remedies for qualifying misrepresentations are set out in Schedule 1 of the Act. The remedy that is available depends on whether the qualifying misrepresentation is either (a) deliberate or reckless, or (b) careless. If it is deliberate or reckless, the insurer may avoid the contract, refuse all claims and retain the premium. If the misrepresentation is merely careless, the insurer may only avoid the contract if it can show that it would not have entered into the contract of insurance at all had the insured complied with its section 2(2) duty. In those circumstances the insurer must return the premium. If the insurer would still have entered into the contract but on different terms, or would have charged a higher premium, then proportionate remedies as more commonly encountered under the provisions of the Insurance Act 2015 apply.

Decision

HHJ Pelling QC found on the evidence that in failing to disclose his claims history the insured had made a misrepresentation that was careless, in breach of the duty owed under Section 2(2) of the Act. The judge also found that the misrepresentation was material and would at the very least have resulted in the underwriter varying the terms of the contract. However in order to be entitled to the remedy of avoidance, the insurer was required to demonstrate that it would not have entered into the contract on any terms had the insured complied with his duty under Section 2(2).

The judge acknowledged that the question of reliance in this context was necessarily hypothetical, but was greatly assisted by the availability of detailed underwriting notes, email records and transcripts of telephone conversations between the underwriter and broker, which recorded the underwriter’s concerns over the terms being offered to the insured, even without knowledge of the undisclosed loss. The judge took further account of expert underwriting evidence from both parties on a wide range of issues including pricing, risk appetite and market practice.

HHJ Pelling QC found on the balance of probabilities that the insurer would have declined cover had the claims history been disclosed and therefore concluded that it would not have entered into the contract on any terms for the purposes of section 4(1)(b) of the Act. The insurer was therefore entitled to avoid the policy but was required to return the premium, being limited to the remedies for careless misrepresentation under Schedule 8 of the Act.

Comment

This decision serves as a reminder that under the correct factual circumstances, the remedy of avoidance is still available to insurers. The burden of establishing that the insurer would not have entered into the contract on any terms is, however, a high one, and one which was only possible to overcome in this case by the availability of thorough and detailed underwriting records.

Further reading: Jones v Zurich Insurance Plc [2021] EWHC 1320 (Comm).