REFORMING INSURANCE LAW: - Law Commission

fraudulent assureds: a fraudster may have the policy avoided under s 28 but he may receive the
benefit of avoidance being disregarded under s 31, whereas in the case of non-fraudulent breach
of duty the court may assess damages as reducing the assured’s recovery to zero: this potential
inconsistency was addressed by Treasury Review II, 2004, which recommended that s 31 should
be extended to cases of non-fraudulent breach of duty, so that in exceptional circumstances
innocent or negligent breach of duty could be excused entirely. 174 This recommendation has
been accepted by the Treasury, and the draft Insurance Contracts Amendment Bill 2007 sets out
a new version of s 31 which extends the discretion in s 31 to cases of innocent or negligent
breach of duty. The revised provision applies where “the liability of the insurer in respect of the
loss that is the subject of the proceeding has been significantly reduced (including being reduced
to nil), under subsection 28(3) on the ground of a failure to comply with the duty of disclosure or
a misrepresentation” (revised draft s 31(1)). In those circumstances, under revised draft s 31(1A)
(a) the court may, if it would be harsh and unfair not to do so, disregard the
avoidance or reduction of liability; and
(b) if it does so, the court must allow the insured to recover the whole, or such part as
the court thinks just and equitable in the circumstances, of the amount that would
have been payable if the contract had not been avoided or the insurer’s liability
had not been reduced.
In determining whether or not to exercise this discretion the court, under revised draft s 31(3):
(b) must weigh the extent of the culpability of the insured in relation to the failure or
misrepresentation against the magnitude of the loss that would be suffered by the
insured if the avoidance or reduction of liability were not disregarded;
4.55 Even with the implementation of these proposed amendments, it might be thought that
clearer guidance on what is to happen in the absence of fraud is necessary. Those in the
Australian market interviewed by the author were dismissive, on the ground of undue
complexity, of the Law Commissions’ recommended approach of distinguishing between
innocent and negligent breach of duty and of taking into account proportionality, the availability
of other policies and the like. Their own approach has, to English eyes, equal complexity and,
arguably, undue harshness. The proposals made by ALRC 91 in respect of marine insurance are
more logical, in that they do seem to reflect precisely the consequences of a breach of duty by
the assured: fraud is fatal; non-fraud is dealt with by reference to how the insurers would have
reacted with full disclosure. What is of interest is that both ALRC Reports have rejected the need
to distinguish between types of non-fraudulent conduct in the manner suggested by the Law
Commissions.
Cancellation
4.56 Under s 60 of the Insurance Contracts Act 1984 the insurers (other than life insurers) are
entitled to give notice of cancellation of the policy in the event of the assured’s failure to disclose
174 Recommendation 8.2.
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