REFORMING INSURANCE LAW: - Law Commission

the matter could be resolved by an award of damages to the insurers. It rejected any form of
proportionality, eg, by awarding the assured that proportion of the loss which his actual premium
bore to the premium which would have been charged, or by requiring the assured to pay the
additional premium, on the ground that it might not be easy to work out what the actual premium
would have been. Instead it recommended the contractual measure of damages. All remedies
were, however, to be subject to the overriding need of the insurers to prove that the assured’s
presentation of the assured had a causal effect on the insurers, ie, that they had been induced to
act differently by the assured’s non-disclosure or misrepresentation.
4.41 The ALRC’s recommendations were adopted by the 1984 Act. An initial distinction is
drawn between general and life insurance. As far as general insurance is concerned, the insurers
must initially prove inducement (s 28(1)). If that is shown, then there is a right to avoid for fraud
(s 28(2)) subject to the discretion of the court to disregard the avoidance (s 31), and in the
absence of fraud the insurers are held to damages (s 28(3)). 139 The insurers also have the right to
cancel the policy, but not with retroactive effect (s 60). Life insurance is treated a little
differently: the same basic rules apply, with the modification that even in the absence of fraud a
life insurer who would not have entered into the contract with a fair presentation by the assured
is entitled to avoid within three years (s 29), and cancellation is not possible. Life is considered
separately below. No other remedies, including other remedies potentially available at common
law, can be used in insurance cases. 140
4.42 The ALRC’s subsequent report on the reform of marine insurance law rejected some
elements of the 1984 Act. 141 The right to avoid for fraud, and without return of premium has
been endorsed. If the breach is not fraudulent, the ALRC recommended that the insurers should
have the right to avoid the contract (coupled with a return of premium) if they can prove that it
would not have entered into the contract at all: this was regarded as preferable to damages plus a
right to cancel. In the absence of proof that the insurers would have refused to issue the policy
but it is shown that they would have written the risk on different terms, the insurers are to remain
on risk but they are not liable to indemnify the assured for any loss proximately caused by the
undisclosed or misrepresented circumstances and they may cancel the policy.
The inducement requirement
4.43 At the time of the 1982 Report of the ALRC the common law had not taken the step of
requiring proof by the insurers not just of materiality but also of their inducement in the form of
reliance on the presentation made by the assured. That proposition was not confirmed until Pan
Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd 142 in 1994. The ALRC nevertheless
thought that inducement was a necessary requirement, and chose to incorporate this change in
139
See Pickering “Proving Underwriting Practices in Court on Issues of Non-Disclosure and Breach of Contract”
(1989) 4 Ins LJ 52.
140
Insurance Contracts Act 1984, ss 15 and 33.
141
ALRC 91, paras 10.118-10.120.
142
[1994] 2 Lloyd’s Rep 427.
32