Insurance Bill [Lords]
The Committee consisted of the following Members:
† Baldry, Sir Tony (Banbury) (Con)
† Barwell, Gavin (Lord Commissioner of Her Majesty's Treasury)
† Dakin, Nic (Scunthorpe) (Lab)
† Djanogly, Mr Jonathan (Huntingdon) (Con)
Evans, Chris (Islwyn) (Lab/Co-op)
† Glindon, Mrs Mary (North Tyneside) (Lab)
Hendry, Charles (Wealden) (Con)
† Jamieson, Cathy (Kilmarnock and Loudoun) (Lab/Co-op)
Kane, Mike (Wythenshawe and Sale East) (Lab)
† Leadsom, Andrea (Economic Secretary to the Treasury)
† Lloyd, Stephen (Eastbourne) (LD)
Morris, Grahame M. (Easington) (Lab)
† Nokes, Caroline (Romsey and Southampton North) (Con)
Paisley, Ian (North Antrim) (DUP)
† Sturdy, Julian (York Outer) (Con)
† Wiggin, Bill (North Herefordshire) (Con)
Liam Laurence Smyth, Committee Clerk
† attended the Committee
Second Reading Committee
Monday 26 January 2015
[Mr Dai Havard in the Chair]
Insurance Bill [Lords]
4.30 pm
The Chair: I remind Members that this is a Second Reading Committee. We have an unusual process, so I will explain it. The Bill’s Second Reading is being debated in Committee rather than in the Chamber because it is a Law Commission Bill. Under Standing Order No. 59, Law Commission Bills are automatically referred to a Second Reading Committee.
The Minister will move the motion and speak, followed by the Opposition spokesperson. Members may speak once if they wish to. At the end of the debate, if the Opposition spokesperson wishes to raise something in particular that has come out of the discussion, I will allow for that. The Minister can then respond and we will have a vote. I remind Members that there will be a series of votes in the House at 1730 hours, so if we have not concluded by then, we will be substantially interrupted.
4.31 pm
The Economic Secretary to the Treasury (Andrea Leadsom): I beg to move,
That the Committee recommends that the Insurance Bill [Lords] ought to be read a Second time.
The Bill represents a much-needed reform of insurance contract law, shaking up rules that were developed more than 100 years ago. The existing legislation, which was passed in 1906, is outdated and does not reflect the commercial expectations of businesses purchasing insurance. The Bill modernises the contractual relationship between businesses and insurers, increasing the likelihood that insurance will pay out as expected in the event of a claim. It supports the growth of Britain’s insurance industry here and in the international market.
The Bill is based on recommendations of the Law Commission and the Scottish Law Commission, and I am very grateful for their work. This is the second Bill relating to insurance contracts that this Government have taken through on the commissions’ recommendations. It focuses primarily on business insurance, as consumer insurance was addressed through the Consumer Insurance (Disclosure and Representations) Act 2012.
The policy underlying the provisions has been the subject of eight years of extensive consultation by the Law Commission. A final consultation exercise by HM Treasury in June 2014 confirmed that the draft legislation was very well supported by a cross-section of the insurance market, from interests as diverse as the Association of British Insurers, the Financial Ombudsman Service, the British Insurance Brokers Association, Airmic— the risk managers’ association—and major insurance buyers including Transport for London, BSkyB and InterContinental.
The existing law was developed to protect insurers in a fledgling insurance industry. It is insurer-friendly and gives wide-ranging opportunities to refuse liability for claims where a policyholder breaches an obligation,
even when that seems completely out of proportion to any wrong done by them. That causes disputes between insurers and policyholders, meaning delay, expense and uncertainty. It can significantly hinder UK businesses and wider communities, such as when flooding has affected local businesses and infrastructure. It has the potential to undermine the reputation of one of the UK’s leading industries.Policyholders cannot always predict whether insurers will pay out or rely on technical legal arguments to deny claims. If they cannot assess quality, policyholders will buy on price alone, which could reduce the quality of insurance products available in the market. Insurance is a crucial UK export, so it is important that the law does not undermine international buyers’ confidence in the UK insurance market. The Bill therefore adopts principles from commercial best practice and court decisions in which judges have tried to mitigate the harsh effects on policyholders of existing statutory provisions.
The Bill is short and principles-based. It has been introduced in Parliament under the special procedure for non-controversial Law Commission Bills. The Bill is deemed suitable for that procedure because of the thorough consultation that the Law Commission has already conducted and the general consensus on it among interested parties. The Bill has been referred to this Second Reading Committee, a relatively unusual process for considering primary legislation, under Standing Order No. 59. Its formal Second Reading will take place tomorrow in the Chamber.
Under the special procedure, the Bill was introduced into the other House, where it received considerable scrutiny, with some amendments being made further to improve the position for policyholders. The cross-party Special Public Bill Committee of peers acknowledged the benefit of the special process, which allows a targeted and technical piece of legislation to receive full parliamentary scrutiny without taking up excessive time on the Floor of either House. A Committee of this House will have the opportunity to scrutinise the Bill clause by clause as usual. A full impact assessment has been conducted and the measure is a deregulatory one, in terms of one in, two out.
The Bill updates the default regime for insurance contract law by removing rules that no longer reflect good commercial practice in the vast majority of cases, but it does not impede freedom of contract for commercial parties. It addresses three main areas of insurance contract law: disclosure in business insurance contracts; insurance warranties; and insurers’ remedies for fraudulent claims.
Under the existing duty of disclosure, prospective policyholders must provide the insurer with information about risk before an insurance contract is signed. That allows the insurer to price the risk accurately, and that is particularly important in the London market, which leads the world in the underwriting of large and unusual risks. The existing legal requirements, however, can be difficult to understand, and they can be even more difficult to comply with adequately. A failure by the policyholder to provide all material information allows an insurer to refuse all claims under the contract.
The Bill replaces the existing duty of disclosure with a duty of fair presentation. Policyholders will still have a duty to disclose information, and they should make an active search for information, but insurers should ask questions of the policyholder if they require further
clarification. If a business fails to make a fair presentation of the risk, there will be a new system of proportionate remedies for the insurer, which will be based on what the insurer would have done if the failure had not occurred.The Bill also deals with insurance warranties and similar terms. An insurance warranty is typically a promise by the policyholder to do something that mitigates risk. Under the existing law, any breach of warranty completely discharges the insurer from liability from the point of breach. That is the case even if the breach is remedied before any loss is suffered and the breached term had nothing to do with the loss. Modern insurance contracts are full of warranties, yet policyholders and brokers are often unaware of the harsh consequences of breaching them. The Bill therefore provides that an insurer will be liable for insured losses arising after the breach has been remedied. It will also prevent an insurer from refusing payment on the basis of a breached term that the insured shows to be irrelevant to the actual loss suffered. The Bill abolishes “basis of the contract” clauses, which convert every statement made by a policyholder on a proposal form into a warranty.
The Bill will introduce clear statutory remedies for the insurer when a policyholder has made a fraudulent claim. Insurers are particularly vulnerable to fraud by policyholders, and the law needs to provide clear and robust sanctions that potential fraudsters can understand. A policyholder should not be able to think that fraudulently exaggerating a claim is worth a shot, and that approach complements the Government’s ongoing work to combat fraud against insurers, such as through the recently announced taskforce headed by David Hertzell, a former law commissioner, which met for the first time last week.
The Bill puts into statute a key rule already upheld by the courts: if a claim is tainted by fraud, the policyholder forfeits the whole of that claim. The Bill also clarifies an area of uncertainty, which is that an insurer may choose to refuse any claim arising after the fraudulent act. Previous valid claims, however, should be paid in full. The Bill puts in place a default regime for business insurance contracts, but parties may agree alternative arrangements, if they do so transparently.
The Bill also contains provisions to amend the Third Parties (Rights against Insurers) Act 2010. That assists injured parties who have claims against parties that are now defunct, but when insurance was in place to cover such claims. The Bill will make it easier, for example, for mesothelioma sufferers to obtain compensation due from insolvent employers. The Government are committed to bringing the 2010 Act into force as soon as practicable, and the Bill will achieve that.
The Bill marks the biggest reform to business insurance law in more than a century. It has widespread support and, as I have outlined, it has been subject to much consultation, as well as rigorous scrutiny in the other place. Line-by-line scrutiny in this House will take place in Committee as usual, followed by Report and Third Reading on the Floor of the House. I hope that the Committee will see fit to give the Bill its full support.
4.41 pm
Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op): I thank the Minister for her opening speech and particularly welcome her indication that the Bill will
help to ensure that mesothelioma sufferers are able to receive what they are due. Mesothelioma is a terrible disease and we want to do everything possible for those people. I also express my thanks to the Law Commission and the Scottish Law Commission for their sterling work in producing the recommendations upon which the Bill is predicated.The Bill is the latest in a series of largely technical legislative measures that are intended to update insurance statute law. It is the product of a report and consequent recommendations produced by the Law Commission and the Scottish Law Commission. The report “Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment” was published in July 2014. As the Minister outlined, the report recommended reform in four areas: the duty of disclosure in business and other non-consumer insurance; the law of insurance warranties; insurers’ remedies for fraudulent claims; and late payment of insurance claims—I will come back to that issue shortly. The publication of the report followed detailed consultations with stakeholders over, as I understand it, almost eight years.
I think we can all agree that reform of insurance law is necessary. We would also say that eight years is a reasonable time for consultation. Part of the problem is that much insurance law is not well understood by businesses or consumers, and that lack of understanding has no doubt contributed to some of the mis-selling scandals. Certain elements of insurance law are anachronistic, and although the insurance industry has changed in recent years, it is fair to say that the laws governing it have not. Some of the statutory conditions date back over 100 years, with much current law governed by the Marine Insurance Act 1906, which in turn codified principles developed in the 18th and 19th centuries. It is time for reform, so I join the majority of insurers and insured in welcoming the Bill.
When I read the Bill and the accompanying explanatory notes, I suspected that certain clauses—in particular, clauses 3 and 4 on fair presentation of risk and “Knowledge of insured”—would give rise to interesting debates about the nature and scope of knowledge, and I was not disappointed on reading the transcripts of debates in the other place. However, in keeping with the general practice governing Law Commission Bills, those debates were composed and conciliatory. The Bill before us is in large part the product of co-operation and consensus, and helpful evidence has been given throughout the process.
Although a number of amendments were tabled and agreed to, the three main issues that the Bill covers are similar to those highlighted in the Law Commissions’ report: disclosure and misrepresentation in business and other non-consumer insurance contracts; insurance warranties and other terms; and insurers’ remedies for fraudulent claims. The main effect of the debate in the other place seems to have been to persuade the Government that the bounds of what was controversial, and hence of what could be included in such a Bill, were narrower than they thought. More therefore could be included in the Bill, although not everything that has been recommended, and that was of particular relevance to the warranties issue and, to a lesser extent, remedies against fraudulent claims.
I will resist the temptation to go through the Bill clause by clause, because that is for another day, but I wish briefly to mention one particular area that might
require further debate. Clause 4, which is titled “Knowledge of insured”, seems to focus on what the insured knows and ought to know for the purposes of the duty of disclosure in clause 3. It is based on the insured’s duty under section 18 of the 1906 Act to disclose “every material circumstance” known to them, including everything that ought to be known to them “in the ordinary course” of their business.During the Special Public Bill Committee in the Lords, differing opinion was expressed about the scope and applicability of the Bill’s phraseology. Specifically, concerns were raised about the definition of senior management as those
“who play significant roles in the making of decisions”.
That definition was clarified in the explanatory notes as being
“intended to include (and be more or less limited to) board members”.
It was suggested that the definition in the Bill might be too narrow. Furthermore, it was felt that the clarification in the explanatory notes was not especially helpful.
I understand that an amendment was tabled that would have broadened the definition so that it extended beyond board level and covered those who play a “significant role” in managing a “significant part” of an organisation. It was then argued that extending the definition of senior management would introduce “uncertainty” as it would impute knowledge to too large a number of people, so the amendment was withdrawn. It would be helpful to know whether the Minister believes that the definition currently in the Bill is sufficient.
I also want to make reference to the issue of late payment. Of course, not all the Law Commission recommendations made it into the Bill. It made a number of recommendations relating to late payment, which is when an insurer has unreasonably refused to pay a claim, or paid it only after unreasonable delay. In contrast to the law in Scotland and elsewhere, the existing law in England and Wales provides no remedy for the insured in such circumstances. The Law Commission report states:
“We consider that a policyholder should have a remedy where an insurer has acted unreasonably in delaying or refusing payment.”
It was therefore recommended, with appropriate caveats, that there should be
“an implied term in every insurance contract that the insurer will pay sums due within a reasonable time.”
On the face of it, those recommendations would appear eminently reasonable and sensible. However, I understand that they were deemed too controversial to be included in the Bill.
During the Special Public Bill Committee in the other place, a new clause was tabled that would have reintroduced those recommendations. The new clause raised the problematic question of what constitutes “controversial” in the context of a Law Commission Bill. At the time, the Minister in the Lords observed that it was unhelpful for him that there was
“no precise definition of what does and does not constitute controversy for the purposes of a Law Commission Bill. If the Bill were to include matters that are clearly controversial, as this
is, the question is whether they could reasonably be expected to prejudice its passage through either your Lordships’ House or the House of Commons.”The new clause was defeated on a vote.
I understand the difficulties and restrictions created by the requirement that Law Commission Bills be non-controversial. At the same time, I recognise the merit of the Law Commission recommendations on late payment, which were made after extensive consultation with the industry. As I have mentioned, the existing position in England and Wales is at odds with that in Scotland and many other common-law jurisdictions, where damages are available for late payment. The Bill might not be the appropriate vehicle in which to introduce new provisions on late payment, but has the Minister has given any thought to how they could be introduced through alternative legislative means, if not in the Bill? I will welcome her thoughts. On the general principles, we support the Bill, and look forward to further scrutiny in due course.
The Chair: Does any other Member wish to speak?
4.50 pm
Sir Tony Baldry (Banbury) (Con): I just wanted to congratulate my hon. Friend the Minister on such a clear and concise exposition of the merits of the Bill, and to say that any contribution from the Back Benches would be entirely superfluous.
The Chair: Rhetorical; fine. I call the Minister to respond and to explain the controlling mind.
4.51 pm
Andrea Leadsom: What a fantastic debate. I thank hon. Members, and especially my right hon. Friend the Member for Banbury, for their excellent contributions.
I am pleased that the hon. Member for Kilmarnock and Loudoun generally welcomes the Bill. She articulated the problematic question of what is and is not controversial for the purposes of the special procedure, and I will try to address that in a moment.
The hon. Lady asked specifically about the definition of “senior management”. The Lloyd’s Market Association is concerned that the existing definition is too narrow and refers only to the board of a company, rather than potentially capturing people who are more operational. We have therefore amended the explanatory notes to make it clear that the senior management is likely to include the board, but can also go beyond it, depending on the corporate structure of the relevant policyholder. Other stakeholders who have commented agree that the Bill’s drafting is appropriate, so I hope that that puts the hon. Lady’s mind at ease.
The hon. Lady asked about late payment, which goes to the heart of what can and cannot be included in a non-controversial Bill. As she pointed out, this was a grey area. The Government entirely support the principle that insurers should make payment for valid claims within a reasonable time and that they should be liable for compensation, when appropriate, if they fail to do so. We are always looking at ways in which to support and improve the position of the UK insurance industry, so it is hoped that legislative opportunities will arise in
the future to include that measure with other insurance-related provisions. However, evidence presented to the Law Commission, the Treasury and the Special Public Bill Committee demonstrated that the problems in the existing law are worse in theory than in practice, so it was considered that the requirement for reform was not urgent, although, equally, there was widespread agreement that it would be desirable in future. Further work was also thought to be required to assess the costs and benefits of any reform and to ensure that possible problems, such as the abuse of the provision by speculative claims management companies, were adequately considered.The uncontroversial Bill procedure means that more debate takes place in Committee so that time is not demanded on the Floor of House. It does not, however, mean less scrutiny or debate—it is not a fast-track procedure—so I hope that that sets any concerns she has to rest.
Again, I thank all hon. Members for their contributions. I hope that the Committee will support the Bill.