Introduction
The Marine Insurance Act 1906 (MIA) stands as a critical piece of legislation that established fundamental principles for marine insurance contracts. At its core, the Act codified the doctrine of utmost good faith, requiring the insured party to disclose all material circumstances to the insurer. This principle, derived from the case of Carter v Boehm, imposed a significant pre-contractual duty on the insured. The traditional regime under the Act required the insured to reveal every piece of information that could influence a prudent insurer's judgment, a standard that often proved difficult to meet in practice. This formal legal framework governed insurance agreements for over a century, until the introduction of the Consumer (Disclosures and Representations) Act 2012 and the Insurance Act 2015, which have significantly altered these obligations and introduced a distinction between consumer and commercial insurance contracts.
The Traditional Regime Under the Marine Insurance Act 1906
The Marine Insurance Act 1906 established the pre-contractual duty of disclosure based on the principle of uberrima fides, or utmost good faith. Section 17 of the MIA explicitly states the requirement for good faith, while section 18 mandates the disclosure of all material circumstances known to the insured. This placed a considerable burden on the insured, who was required to anticipate and reveal information that a "prudent insurer" would consider relevant when assessing the risk. This requirement was assessed from the viewpoint of the insurer, without providing specific parameters for determining what was material, and was applied to both marine and non-marine insurance contracts [6], as established in Lambert v Cooperative Insurance Society. This broad application led to significant criticism because it demanded a level of knowledge and understanding of insurance practices that most insured parties, especially individual consumers, did not possess. The consequences of breaching this duty were severe; even innocent non-disclosure allowed the insurer to avoid the policy ab initio, effectively treating the contract as if it never existed, without any alternative recourse for the insured.
The Test of Materiality and Its Shortcomings
The assessment of what constitutes a "material circumstance," as defined in section 18 of the Marine Insurance Act 1906, has been a complex and controversial area of insurance law [5]. A circumstance was considered material if it would "influence the judgement of a prudent insurer in fixing the premium, or determining whether he will take the risk.” This test was applied objectively from the insurer's viewpoint. The courts initially interpreted "influenced the judgment" as referring to any piece of information an insurer would have liked to know, regardless of whether it would have altered their decision to provide coverage or the premium amount [8]. This was further clarified in Pan Atlantic Ins. Co v Pine Top Ins. Co, which confirmed that the test related to circumstances that an insurer would want to know about when assessing the risk but not necessarily acted on. This subjective test put insured parties in a position where they were required to know what the insurer would think, a standard many could not meet [7]. To mitigate this harshness, the courts added a requirement for the insurer to prove inducement, which is the demonstration that a specific circumstance had led the insurer to enter the contract [10]. This led to complicated cases, as shown in Marc Rich v Portman, where an insurer's testimony was deemed unsatisfactory [12]. Though the inducement test added complexity, cases such as Drake Insurance Plc v Provident Insurance Plc show that it did sometimes limit the use of policy avoidance by insurers [13]. Even so, the subjective test remained overwhelmingly insurer-centric and failed to provide clarity and fairness.
Other Deficiencies of the 1906 Act
The Marine Insurance Act 1906 failed to distinguish between different forms of non-disclosure, including innocent, negligent, and fraudulent concealment. Therefore, an insured could fail to disclose a piece of information, despite acting in good faith, and still be subject to policy avoidance. This was highlighted in Schoolman v Hall, where the court rejected a claim because the insured had prior convictions that were not disclosed even though the proposal form did not ask about such convictions [17]. Additionally, the Act provided only one remedy: policy avoidance ab initio. This resulted in a situation where even minor breaches of disclosure obligations could allow insurers to cancel the policy, and pay back all premiums as if the policy had never existed, a remedy described by the courts as "disproportionate" [19]. Furthermore, the law made no distinction between consumer and commercial insureds, leading to an uneven playing field. Consumers were particularly vulnerable to the stringent requirements and harsh remedies under the MIA, a state described as "archaic, unclear, and unfair” [18, 21, 23].
The Current Legal Framework: Consumer and Business Insurance
The legal landscape of insurance contracts has undergone significant changes following the introduction of the Consumer (Disclosures and Representations) Act 2012 and the Insurance Act 2015. These Acts introduce a distinction between consumer and business insurance, creating two separate legal regimes that address the inadequacies of the Marine Insurance Act 1906. The Consumer Act 2012 provides far greater protection to consumers, while the 2015 Act introduces modifications to the duty of fair presentation for commercial parties.
Consumer Insurance: The Consumer (Disclosures and Representations) Act 2012
The Consumer (Disclosures and Representations) Act 2012 applies to all consumer insurance contracts, where the insured is contracting “wholly or mainly for purposes unrelated to the individual’s trade, business, or profession" [24]. This Act completely abolishes the pre-contractual duty of disclosure for consumers, which was previously established by the Marine Insurance Act 1906. Instead, it imposes a duty on consumers to take reasonable care not to make a misrepresentation [25]. This shift significantly reduces the burden on the insured as it is assessed against an objective standard of a reasonable consumer, rather than against the impossibly high standard of the prudent insurer [25].
Furthermore, the Act introduces proportionate remedies for ‘qualifying misrepresentations’. Only misrepresentations that are deliberate, reckless or careless allow for remedies [25]. The Act states that innocent and reasonable misrepresentations will not allow for policy avoidance [25]. If there has been a careless misrepresentation, insurers cannot avoid the policy if they would have entered into the contract with different terms, or if they would have charged a higher premium [25]. The insurer would then be considered to have contracted on the different terms or be responsible for paying the proportion of the claim against the actual premium paid by the insured [25]. The ability for the insurer to terminate the contract prospectively indicates a major improvement from the traditional regime [25]. This distinction between innocent, reasonable and careless misrepresentations represents a significant step forward in protecting consumers from exploitative treatment.
Business Insurance: The Insurance Act 2015
The Insurance Act 2015 applies to all non-consumer insurance contracts [26]. It supplements, rather than replaces, the Marine Insurance Act 1906 by introducing the concept of a ‘duty of fair presentation’ [27]. This Act retains the core test of materiality, but incorporates additional provisions and case law developments. In addition to the original disclosure requirements under section 18(1) of the MIA, the 2015 Act provides additional guidance on materiality. This allows insured parties who fail to disclose a material circumstance to still be compliant if they provide "sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances” [28]. This represents a shift from the insurer-centric traditional regime and shows a move towards a more balanced standard of disclosure [29]. Section 8(1) codifies the Pan Atlantic subjective materiality test, which served as a form of protection for the insured in practice [30].
The remedies available for breaching the duty of disclosure have also been altered. The Act introduces proportionate remedies, similar to the Consumer Act 2012, distinguishing between deliberate or reckless misrepresentations, and careless misrepresentations. The distinction is that the 2015 Act does not distinguish between innocent and negligent breaches, with the insurer still entitled to a remedy in the event of such breaches [33]. This approach aims to address the imbalance of the traditional regime and provide a more equitable outcome in cases of non-disclosure [31].
The Doctrinal Basis for Divergence
The Law Commission made a clear distinction between consumer and business insurance contracts because the rules that are appropriate for mass-market consumer insurance are not suitable for businesses with specialized needs, which are generally well-informed. The doctrine of utmost good faith as set out by Lord Mansfield in Carter v Boehm had become impractical in a market where a wide range of insurance contracts were being concluded very quickly [35, 36, 40, 41].
Rationale Behind Separate Regimes
The asymmetrical bargaining position of consumers and the complexity of business risks meant that a single set of rules could not be applied universally [38]. Businesses frequently did not use proposal forms, undertook a variety of unusual risks, and often utilized professional intermediaries [38]. The Financial Ombudsman Service (FOS) was also more effective at protecting consumers than businesses. The FOS did not always follow the law and would not enforce the duty of disclosure if no question was asked [37]. To reflect this, the law has been brought into line with industry practice, with the burden of finding out information being shifted to insurers [38]. In addition, the changes in the market, including telemarketing and canvassing, removed many fears about ‘sharp practices’ by consumers [39]. Retaining a duty of disclosure would have increased litigation and the workload of the FOS [39].
Issues with the New Framework
The Insurance Act 2015 does not explicitly define ‘business,’ meaning that smaller enterprises, such as sole traders, fall under the provisions of the Act, despite being more akin to consumers [42]. Although these businesses can access the FOS, the Law Commission compromised its recommendations to address the insurance industry's resistance to reform [42]. The fact that the 2015 Act is relatively new also means that there is potential for commercial uncertainty, particularly due to the lack of clarity on the meaning of ‘fair representation’, which may increase litigation [43]. The concept of proportionate remedies was also previously rejected by the Law Commission as being too difficult to apply [40]. It is expected that the risk will be determined, not by the market, but by the judgment of judges, exercising a discretionary and potentially arbitrary judgement [43, 44, 45].
Conclusion
The reforms introduced by the Consumer (Disclosures and Representations) Act 2012 and the Insurance Act 2015 have addressed many of the inadequacies and imbalances of the traditional regime under the Marine Insurance Act 1906. The complete removal of the consumer's duty of disclosure, coupled with the shift towards proportionate remedies, ensures that the disclosure duties are less stringent and more reasonable [42]. The alterations to the business disclosure obligation provide a clearer and more balanced approach. The move away from the draconian remedy of complete policy avoidance in favor of proportionate remedies represents a shift towards more equitable outcomes for the insured [43]. These legislative changes represent a move in the right direction, providing better protections to both consumer and business insureds [31]. Although the new law is still being tested and refined in practice, the Law Commission’s approach to reform has been very effective in rebalancing the traditional power structure between insurers and insured parties.
