REFORMING INSURANCE LAW: - Law Commission

4.24 The practical effect of s 21A as it stands is to require insurers to ask specific questions
rather than to rely on disclosure with regard to prescribed policies. That will be confirmed by the
draft amendments. Although the duty is framed as one to disclose, in effect the duty is not to
misrepresent. The question then becomes whether insurers should be under a duty to ask the right
questions in respect of all policies and not simply in respect of prescribed policies. The
Australian approach has been to maintain this distinction, the assumption being that specialist
commercial risks and life are more difficult to assess by insurers unaided by disclosure on the
part of the assured and that the variable relevant factors are far more numerous in commercial
cases than could be contemplated by the insurers in framing their questions. The distinction was
criticised as illogical by some Australian lawyers interviewed by the author, although the
evidence to the Treasury Review confirmed the need for the distinction and for the right of
commercial and life insurers to rely upon disclosure of factors of which they could not possibly
have been aware and in respect of which they were not in a position to raise questions. The
balance of the argument appears to be in favour of retaining a residual duty of disclosure for
bespoke commercial policies and in the life industry and not precluding a general question as
other matters which might be covered by the duty of disclosure. That approach was specifically
confirmed by the Treasury in its explanatory documents accompanying the draft Insurance
Contracts Amendment Bill 2007.
4.25 That said, it is also to be noted that, in the English market, brokers place the vast majority
of policies which would be classified as non-prescribed. If the law remains as it is at present and
the broker is treated as the agent of the assured for placement purposes, there is a powerful
argument that a broker who failed to ask the right questions or to encourage disclosure would be
in breach of duty to the assured, so that if the assured’s failure to disclose was the fault of the
broker (as opposed to that of the assured in withholding facts known or which ought to be known
to be relevant) the insurers would be off risk but the broker would face liability.
Misrepresentation
Materiality and inducement
4.26 As has been seen above, the duty of disclosure as retained by the Insurance Contracts Act
1984 is a greatly restricted principle: the prudent assured test has replaced the prudent insurer
test as the touchstone for what must be disclosed, there is no duty of disclosure in the absence of
clear warnings and in the case of “eligible” policies the insurers must ask questions if they wish
to have any information. The focus for information-gathering has accordingly switched to
misrepresentation. The 1984 Act has dramatically altered the law on misrepresentation, in
particular by abolishing the long-established requirement that the insurers must prove that the
judgment of a prudent underwriter would have been affected by the misrepresentation and its
replacement with a prudent assured test which echoes that applicable to disclosure. Under s
26(2), a false statement is not to be taken as a misrepresentation unless its maker knew, or a
reasonable person in the circumstances ought to have known, that the statement would be
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