Every business needs insurance of some kind or another and many businesses have a multitude of different and complex insurance policies. But insurers have an unfair advantage when it comes to claiming against a policy.
Having taken out a policy, many business owners, especially small business owners, believe that they don’t need to worry further and can concentrate on other aspects of their business.
Unfortunately, it often doesn’t pan out that way. Insurers will often refuse to pay out on a claim in whole or in part, and for small businesses, taking on an insurance company based on a contract dispute is onerous and very high risk, based on relative resources.
So, in practical terms, the insurer has a big advantage and this is compounded by the current legal position.
In short, under the current law, which has been in place for over 100 years, an insured is under a duty of utmost good faith to disclose everything material to an insurer which would allow a prudent insurer to decide whether to take on the risk. The onus is on the insured to satisfy the requirement, and it’s far from clear, especially for small businesses, what they need to disclose. Failing to disclose something material gives the insurer the right to void the contract completely.
This in effect means there is a double whammy :-
- It’s very difficult to take on an insurer who claims an insurance contract is void because they have such huge resources and it’s very risky to sue
- The law significantly favours insurers, offering the insurer a right to void a contract, which goes against general proportionate contract law remedies
When we talk about proportionate contract remedies, it is important to understand that in contracts generally, most breaches do not enable the wronged party to simply cancel the contract as if it never existed. Contract remedies are based on proportionality in general contract law principles. This is not the case with commercial insurance contract law.
Business insurance contracts also often include another catch for the unwary – insurers will often require warranties from the insured about past, present or even future factual statements – breach of such warranties, even minor breaches, may give the insurer the right to cancel the contract, which is again a disproportionate remedy. This situation is exacerbated by the fact that insurance policy terms and conditions are often lengthy and written in complex legal language. A small business may well not even read the policy terms and those that do may not appreciate that individual words or sentences can result in legal ramifications which are not obvious from the words themselves.
In short, insurers are holding all the cards and this has led to an ongoing debate, which is still taking place, at the Law Commission, over changes to business insurance.
It appears that recommended changes to the law will include :-
- a default system of proportionate remedies except where the insured has acted dishonestly, in which case the insurer can still avoid the contract.
- Retaining the pre-contract duty to disclose material circumstances which an insured knows or ought to know will enable the insurer to a fair assessment of the risk. In the case of a failure to disclose it will then be up to the insurer to show the breach induced it to enter into the contact and whether it would have declined the risk or only offered different terms.
- Where information is disclosed it will be up to the insurer to raise any additional enquiries based on any issues of concern and if it does not, there should be a statutory provision that the insurer will not be able to avoid liability based on non-disclosure. This is another shift in onus to the insurer.
- an insured should not be required to disclose matters which are within common knowledge for the trade or profession. The insurer will be expected to be aware of such practices and risks.
- Generally, disclosure duty on the insured ought to be proportionate to the size, nature and complexity of the business.