Consumer Insurance (Disclosure and Representations) Bill [Lords]
The Committee consisted of the following Members:
† Baldwin, Harriett (West Worcestershire) (Con)
† Barclay, Stephen (North East Cambridgeshire) (Con)
† Birtwistle, Gordon (Burnley) (LD)
† Bradley, Karen (Staffordshire Moorlands) (Con)
† Crouch, Tracey (Chatham and Aylesford) (Con)
† Cruddas, Jon (Dagenham and Rainham) (Lab)
† Hands, Greg (Chelsea and Fulham) (Con)
† Harrington, Richard (Watford) (Con)
† Hemming, John (Birmingham, Yardley) (LD)
† Hoban, Mr Mark (Financial Secretary to the Treasury)
† Leslie, Chris (Nottingham East) (Lab/Co-op)
† McKenzie, Mr Iain (Inverclyde) (Lab)
† Meacher, Mr Michael (Oldham West and Royton) (Lab)
† Murphy, Paul (Torfaen) (Lab)
† Sharma, Alok (Reading West) (Con)
Wilson, Sammy (East Antrim) (DUP)
Kate Emms, Alison Groves, Committee Clerks
† attended the Committee
Second Reading Committee
Tuesday 31 January 2012
[Mr David Amess in the Chair]
Consumer Insurance (Disclosure and Representations) Bill [Lords]
4.30 pm
The Chair: Before we begin, I want to point out that this is an unusual procedure. This is a Second Reading debate, not a Committee sitting, which means that no Member may speak more than once, although the Minister who moves the substantive motion has the right of reply.
The Financial Secretary to the Treasury (Mr Mark Hoban): I beg to move,
That the Committee recommends that the Consumer Insurance (Disclosure and Representations) Bill [Lords] ought to be read a Second time.
It is a pleasure to serve under your chairmanship this afternoon, Mr Amess.
I am pleased to be able to discuss the Bill which, in sweeping away an obsolete law, not only provides clarity and protection for consumers but benefits insurers. The Bill will reform the Marine Insurance Act 1906 which, despite its title, applies to all forms of insurance. The result will ensure that consumers are not unfairly penalised for reasonable failures to disclose, or accurately to represent, information when they purchase insurance. Clause 2 will change the current legal requirement that consumers must volunteer information to one that will ensure that insurers ask clear and specific questions. The Bill will align the law with both industry practice and the approach of regulators, so it is widely supported. We have taken a high-level approach, updating the principles set out in law to bring them into line with good practice, rather than attempting to set out prescriptive detail. That should help to avoid the law becoming outdated again as market practice develops.
The Bill received considerable scrutiny in the other place, where only one small amendment was made. Clause 3 now reflects concerns about the need for consumers to understand that their duties of disclosure are the same as when they first take out insurance. That is because, in law, a renewal is a new contract. I intend to give more detail about the provisions, but I want to explain to hon. Members why a change of legislation is necessary. When the UK market for consumer insurance began to develop in the middle of the 19th century, it became apparent that the existing law imposed an unfair burden on consumers. Despite regular calls for change, a requirement of the 1906 Act—that consumers must volunteer all information that might
“influence the judgment of a prudent insurer”—
has remained in statute for more than a century.
If the industry had followed the strict legal interpretation of the consumer’s duty, there is no doubt that significantly more insurance claims would have been rejected on clearly unreasonable grounds. To take the example of a consumer purchasing a critical illness policy who does not inform the insurer that he mentioned, during a visit
to the doctor, that he has recurring pins and needles, that symptom may seem irrelevant to many of us, particularly if it had been mentioned only in passing and nothing more had been thought of it. We might view his failure to mention that to his insurer as being completely understandable and reasonable.What happens, however, if that consumer develops prostate cancer and claims on his medical insurance, hoping that it will cover the financial distress caused by being unable to work during his treatment? As it stands, the insurer may legally refuse to pay his claim simply on the grounds that the pins and needles were not mentioned when he entered into the contract. That symptom can in fact be an indicator of multiple sclerosis, a factor that a prudent insurer would have taken into account when agreeing to provide critical illness cover. It is not reasonable to expect that consumer to have the detailed medical knowledge and understanding of underwriting practices needed to recognise that he should disclose the symptom. Yet only by making that disclosure will he meet the current legal requirement to provide the information that would
“influence the judgment of a prudent insurer”.
That is so clearly unreasonable that refusing claims on those grounds is not the industry practice, and it is not treated as acceptable under Financial Services Authority rules or in judgements made by the Financial Ombudsman Service. As a result, a complex and confusing array of rules and regulations has emerged to compensate for the outdated legislation. In some cases, the different legal and regulatory positions have caused problems for both the industry and consumers. At the moment, the Financial Ombudsman Service receives about 1,000 complaints a year about non-disclosure and misrepresentation. About half of insurers’ decisions are upheld, a figure that we would expect to be much higher if there were sufficient clarity about the rules. That indicates that insurers find it difficult to locate and interpret the relevant rules. The Bill aims to clear up the discrepancy between the law and regulation.
The Bill is a consequence of the hard work of the Law Commission, and I am very grateful for its work. It implements the recommendations of the Law Commission and the Scottish Law Commission in their 2009 joint report on pre-contract disclosure and misrepresentation in consumer insurance contracts. It is also a result of extensive consultation and close discussion with the insurance industry, consumer groups and regulators. It is because of that work that the draft legislation is widely supported. That draft legislation has flowed into the limited and targeted Bill, which applies only to consumer insurance contracts and pre-contractual disclosure. It will not apply to insurance contracts solely or mainly covering business, including micro-business. The Law Commission’s review of insurance contract law, which will affect such interests, is still ongoing.
Regarding the central provisions of the Bill, clause 2 will replace the consumer’s existing duty to volunteer information with a duty to take reasonable care to answer the insurer’s questions fully and honestly. It is therefore no longer the consumer’s responsibility to volunteer information: instead, the insurer must seek the information by asking a clear and specific question. As the Bill is principles-based, it does not attempt to guide what questions insurers should ask.
If a consumer makes a misrepresentation, it will be classified as one of three types: reasonable, careless or deliberate and reckless. If the misrepresentation was reasonable, then within the terms of clause 3, the insurer must pay the claim. If the misrepresentation was deliberate or reckless, the insurer may treat the policy as if it never existed and may decline all claims. It is also entitled to keep all premiums paid. Finally, if the misrepresentation was careless, the insurer has a proportionate remedy based on what they would have done had the consumer answered the question accurately, and that is set out in schedule 1. For example, the insurer might have charged a higher premium if the representation had been made properly, and therefore it only needs to pay a pro rata portion of the claim. The FOS has been applying such proportionate remedies for some time, but under the current law, penalties for consumers are harsh—a failure to disclose any information a prudent insurer would take into account when writing a policy means that the policy would be void.
We return to our consumer with pins and needles who honestly and reasonably did not know that they should have disclosed that information to the insurer. In the past, they would not have expected their claim to be paid, because they had not made the disclosure, even though it was not linked to prostate cancer. The contract would be treated as if it never existed. What we will now have is a proportionate regime to ensure that the cases of consumers who make a misrepresentation are looked at carefully, in line with best practice, rather than having the consumers’ claims simply voided.
There has been extensive consultation, the results of which have been reflected in the Bill where possible and relevant. I am pleased to say that the broad consensus of support for the changes comes from consumer groups, including Which?, the British Heart Foundation, Consumer Focus, Macmillan and Age UK, as well as from the industry and the regulator. The Bill before us today has gained widespread consent, and I hope that it gains the consent of the Committee.
4.38 pm
Chris Leslie (Nottingham East) (Lab/Co-op): As always, it is a pleasure to serve under your chairmanship, Mr Amess. Hon. Members may think, “Well, another Committee, another day. Is this a statutory instrument? Here we go again.” However, this Committee is a rare procedure. We are debating a piece of primary legislation on Second Reading under a rather obscure provision of the House’s Standing Orders. The Law Commission has been party to the drafting and the recommendations in the tabling of the Bill. Rather bizarrely, the Bill is debated on Second Reading not on the Floor of the House, where I presumed all debates of primary legislation on Second Reading took place, but upstairs in a Committee Room. I cannot complain too much about that, because the previous Government sometimes took advantage of such provisions. Notwithstanding a minor issue of consistency, I would like to take this opportunity to voice my general disquiet that any piece of primary legislation is debated on Second Reading in Committee. It may well be that there is all-party consensus on many provisions in the Bill, but if what we are debating is primary legislation, my own view is that it ought to be debated on Second Reading on the Floor of the House—[ Interruption. ] My hon. Friend the Member for West Ham is clearly
keen to be written into Hansard today. She said that it is not as though there is an awful lot happening on the Floor of the House anyway. My view has been stated. [ Interruption. ] The hon. Member for Chelsea and Fulham makes my point.That said, the Bill is broadly to be welcomed. It increases clarity in relationships between insurer and consumer. It ensures proper legislation on what is now widely accepted as standard practice: insurance companies ask questions and consumers provide the answers. A lack of clarity results in a lack of faith from each party to contracts. It is important that trust is strengthened to give the consumer and those underwriting an insurable risk a fair deal.
Plenty of problems in the insurance industry are there for all to see, whether they be inflated premiums, disparities between demographics and neighbourhoods or harsh remedies for human error. The Bill will at least go some distance to preventing significant punishments for often minor mistakes, as the Minister has said. All too often, consumers’ claims are denied, or overly unsympathetic implications are placed on them as a result of blurred boundaries of what they should and should not disclose in pre-contractual exchanges of information. The Bill will help to bring about a new relationship.
It is worth congratulating the hard work of the Law Commission in diagnosing the problems and finding solutions. It found consensus from both industry and consumers. It is also worth noting that the Bill has been introduced following recommendations from the Law Commission’s report, which was published in 2009—that date, of course, makes a world of difference. Its report identified several recurring issues, as the Minister has indicated.
First, it identified that consumers who were under a duty of disclosure when volunteering information were often unaware of what they needed to disclose. As the Commission rightly noted, that situation sometimes acts as a trap. Someone might enter into a policy only to find that the necessary information has not been given to the insurance company, resulting in significant alterations or even the cancellation of the policy. The Bill ensures that the insurer must ask the relevant questions, which means that the consumer gives the relevant answers. The improvement in simplicity and clarity must be welcomed.
Secondly, the Law Commission identified that policy holders might be denied claims when they have acted honestly and reasonably. We therefore welcome the Bill’s set of guidelines on different consequences that depend on the nature of the misrepresentation of information.
The third key problem identified in the Law Commission report was that the remedy for misrepresentations and non-disclosure is often overly harsh. In the current system, the insurer can simply deny all payments, including premium payments, even if the customer made an honest mistake. Obviously, that situation is wrong. We welcome that the Bill ensures that insurers will not unduly punish customers for non-deliberate mistakes.
We have welcome cross-party consensus on the responses to those particular arrangements in the Bill, certainly from the industry and from consumer groups. However, the Bill gives us an opportunity to take stock of some of
the wider issues facing consumers of insurance products. The insurance industry has not been as causal in recent financial crises as the banking sector, and it has earned a stronger reputation as a result. However, we urge the Government to consider those areas in which improvements in public policy relating to consumer insurance must be made. Insurance is not always a luxury; it is a legal necessity for car drivers, for example. Getting insurance and thinking ahead is the responsible thing to do, but too often considerable barriers dissuade or prevent people from doing the right thing.For example, the Bill does nothing for families who are unable to insure their houses against flood damage because insurers refuse a policy, and it does nothing for those who face discrimination, such as diligent teenage drivers who cannot afford to insure their cars because of overly high premiums. While the issue of consumer insurance is being highlighted, it seems like a good time to ask the Government what they are doing to make the industry fairer at a time when people’s living standards are being squeezed so significantly.
The Select Committee on Transport recently published a report into the cost of motor insurance, with a follow-up report. It recommended steps that the Government should take to make the system fairer, particularly in relation to referral fees, which have been in the spotlight in recent months. Law firms paying a fee in exchange for contact details of someone who might be interested in legal services has shades of ambulance chasing. The steps taken by Government to ban legal referral fees in the Legal Services Act 2007 will no doubt aid the trust between consumer and insurer, but there is still a lack of significant progress in ensuring that the insurance companies are restrained from passing on contact details to third parties or other non-regulated organisations, such as the claims management companies that have sprung up as middle men in recent years. The reforms from the Government are broadly restricted to referral fees paid by solicitors, but insurers are still selling their customers’ details to those other related third parties.
The Transport Committee recommends that the Government prioritise the implementation of new regulations by the FSA to prohibit insurers receiving referral fees from any other party. I would be grateful if the Minister clarified where the Government stand currently on that aspect of consumer insurance policy. Have the Government considered those recommendations of the Transport Committee? Does he believe there is a need for further increases, at least of transparency, on some of those referral fee arrangements?
The Transport Committee also highlighted the need for insurance companies to honour the spirit, as well as the letter, of the law in respect of data protection. While the banning of referral fees is obviously a significant step towards that aim, there are still those testing the boundaries of the letter of the law. The Transport Committee—along with the Justice Committee—states that it wants increased penalties for breaking data protection laws. Has the Minister looked into the potential for increased penalties in respect of breaches of data protection arrangements by those in the industry? Some of the cold-calling and texting practices are clear breaches of data protection policies. I would welcome the Government
finding a way to build on the work of the Law Society, the Association of British Insurers and others to try to stamp out some of those arrangements.Turning to regulation issues for the industry, will the Minister update the Committee on the progress of the Solvency II regulations, which clearly relate to consumer insurance questions? There are sound reasons for reforming the capital arrangements within insurance regulation, but we, like many in the industry, have concerns over the potential impact—not just on the companies, but on consumers. No one would suggest, after the lessons from the global financial crisis, that we should not have minimum capital requirements and solvency capital arrangements, but we have to reduce any unnecessary risks to the industry, and protect consumers against potential bail-outs, such as AIG in America, where the companies did not hold the required capital against the potential risk to which they were exposed.
What are the Government doing to ensure there are no unintended or unduly adverse consequences of over-burdensome requirements when it comes to Solvency II? Will the Minister ensure that there are no significant negative changes in the availability and affordability of insurance products as a result of the Solvency II arrangements as they stand? We obviously have to work together across parties to ensure that hard-pressed customers are not saddled with the lion’s share of those particular costs.
We could talk further about the impact of the Prime Minister’s phantom veto on the capabilities of the UK around the negotiating table, particularly when it comes to Solvency II, but I fear that might be straying wide of the topic before us. Given representations being made by a concerned and worried insurance sector over our ability to shape the Solvency II arrangements, it is important to know what approach and expectations the Minister has for some positive outcomes, especially if we need to engage as constructively as we can with the European Commission on many of those issues.
The Bill is to be welcomed and is broadly uncontroversial. We look forward to the further stages of consideration, when we can talk about some of the other consumer insurance issues on the table. We do not feel that enough is being done to help hard-pressed families with many of the costs that affect them. Insurance issues are among those questions that can crop up. The Government need to do more to stand up for individuals and families who have to bear many of those costs. Consumer insurance issues are at the forefront of the minds of many people up and down the country. I hope the Minister will respond on the specific points of referral fees and Solvency II, and put the record straight on the Government’s position. Broadly speaking, we welcome the Law Commission’s work on the Bill.
4.50 pm
John Hemming (Birmingham, Yardley) (LD): I shall not delay the Committee, but I have a couple of questions for the Minister. First, I am surprised by the idea of having a Second Reading Committee. My main concern is whether people outside Parliament are aware that those changes are taking place and have an opportunity to lobby the system. Are the Government doing more to ensure that people know what is going on than would normally be the case?
Secondly, I have noticed solicitors competing in shopping centres to offer a cashback arrangement. One firm offers £200 to anyone who makes a claim and another firm offers £400. Given that things have changed over the years—from when solicitors could not advertise to now, when they offer cashback—are the Government monitoring whether, in the end, that adds to the cost of insurance? The cost is quite serious, particularly for young drivers.
4.51 pm
Harriett Baldwin (West Worcestershire) (Con): I had not realised that I would have not only the pleasure of serving under your chairmanship, Mr Amess, but the opportunity to raise before a Treasury Minister a burning issue for my constituents, so perhaps colleagues might indulge me for two minutes while I raise a couple of points.
The Minister will be well aware that the statement of principles on flood insurance expires in July 2013 and that the insurance industry is pressing the Treasury to subsidise insurance more widely for areas that are prone to floods. My constituency of West Worcestershire was, of course, very badly hit by floods in 2007, so that is a pressing concern of many of my constituents.
I want, therefore, to take this brief opportunity to ask the Minister whether, as the Bill passes through Parliament, something on a statutory footing could be included to require the insurance industry to include, as a matter of course when offering household insurance, coverage for flood insurance. The Bill would be a useful statutory vehicle to use during the negotiation process with the insurance industry on providing flood insurance more widely across the country once the statement of principles expires in 2013.
4.52 pm
Mr Hoban: This has been a helpful, and helpfully short, debate. I am sorry that the hon. Member for Nottingham East seems so reluctant to embrace the novelty of the process. I suspect that the Bill would not have found time on the Floor of the House due to the pressure on the Government’s legislative programme, both in the House and in the other place. The Second Reading Committee process is useful when a Bill has been widely discussed and is a product of the Law Commission process.
In answer to my hon. Friend the Member for Birmingham, Yardley, the Bill is the product of extensive consultation and, because of the novelty of the process, there needs to be more consultation, rather than less. The Bill’s endorsement by so many consumer groups, representing a broad cross-section of stakeholders and the industry, is a sign that there has been a collaborative approach, which is welcome.
The Treasury, despite its almost imperial reach under the previous regime, does not regulate solicitors, but I will ensure that my hon. Friends in the Ministry of Justice take note of my hon. Friend’s comment on the way solicitors are advertising trade in supermarkets and offering cashback deals. It is good that solicitors are generally able to advertise, but someone has to pick up the bill for their incentives somewhere along the line.
The hon. Member for Nottingham East and my hon. Friend the Member for West Worcestershire raised the issue of the statement of principles on flooding. We are
working very closely with the industry to consider the appropriate options for targeting support for those at flood risk, particularly those on lower incomes. That work has been principally led by ministerial colleagues at the Department for Environment, Food and Rural Affairs, but the Treasury has taken a close interest.My hon. Friend the Member for West Worcestershire is normally a champion of deregulation and reducing the burdens on business, so I take note of her suggestion that we should impose a duty on insurers to offer such insurance. I understand her point, and one challenge is to ensure that flood insurance is widely available. I think I am right in saying that the UK is one of the few markets in which that is the case, and that in many other European states, the responsibility rests with the state, so it would be good to see the market function properly and effectively. My hon. Friend the Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs is taking a particular interest in the matter at DEFRA, and I am sure he is aware of the concerns of those whose constituencies are most affected by flood risk.
The hon. Member for Nottingham East mentioned the cost of car insurance, which is a concern, and a matter about which I get a number of letters from Members of Parliament. It is not a new phenomenon, but we are taking action. He referred to the Transport Committee’s recommendations on claims management companies. The Government are going beyond those recommendations and we will ban fees in personal injury cases, which is a welcome driver. Some of the referral fees are driving up the costs of insurance, and it is, of course, the diligent teenage driver who pays. Although the costs are spread across the whole insurance population, it is harder and more expensive for those in higher-risk groups. We are implementing the Jackson proposals on the costs of civil justice, which will help.
We are also giving insurers access to Driver and Vehicle Licensing Agency data to tackle fraud, which is again an important driver of motor insurance costs. We take such matters seriously and, as well as the remedies I have outlined, the Office of Fair Trading is looking at costs of motor insurance. Work is going on, therefore, both in Government and in Government agencies, to tackle that important issue.
On texting, I am not entirely sure whether a ban will tackle the problem. I have had cold calls and texts about making a claim on payment protection insurance, even though I have never had a PPI policy. Although a ban may be attractive, I do not think any of us should be under any misapprehension that it would stop the practice of cold calling and texting to get people to make claims. It is widespread already.
We are making good progress on Solvency II, and the Government have been working closely with the insurance industry. I have met chief executive officers from our leading insurance companies and Lloyd’s to discuss it, and we are working very closely with the FSA and the European Commission to get the right outcome. In a rare moment of cross-party bonhomie, I commend the work of Peter Skinner, a Labour MEP, who has taken a particular interest and has been effective in working with the industry to get the right outcome. This is genuinely a cross-party effort, because the additional costs that might be imposed through Solvency II could
be borne by customers through either higher premiums or lack of access to insurance, or through lower annuity rates, depending on the outcome of the matching premium.We are making good progress and it is absolutely vital, as the hon. Member for Nottingham East said, to ensure that a good solvency regime is in place for insurers to help to ensure that they can meet the needs of those who make claims. We are getting the balance right, but it is complex legislation.
With that response to those broader, almost Second-Reading points, in the novelty of such a Committee, which gives us the freedom to roam rather more widely than if the measure were introduced merely by statutory instrument, I hope that Members on both sides of the Committee support the Bill receiving a Second Reading.