6.1 It is not intended in this report to list comprehensively all suggestions for law reform made in relation to the common law rules the subject of this report. However, since similar problems have been encountered in other common law jurisdictions we refer to a limited number of such proposals.

England

6.2 In October, 1980 the report of the Law Commission of England entitled Insurance Law - Non-Disclosure and Breach of Warranty”¹ was presented to Parliament. The report concluded that the law of non-disclosure and of warranties was deficient in important respects:

• The creation of various warranties as to past or present fact by the operation of a “basis of the contract” clause on answers in a proposal form constitutes a major mischief in the present law ...²
• Where the insured has committed a breach of warranty which consists, wholly or in part, of the making of a non-fraudulent misrepresentation, the insurer should not be entitled to rely on the misrepresentation as such but should be confined to his rights and remedies (if any) for breach of warranty...³

  There should be no change in the law relating to fraudulent misrepresentation ...⁴

6.3 The report of the Law Commission recommends that the duty of disclosure be modified so that a proponent should be required to disclose a fact material to the risk, if it is either known to the proponent or is one which he or she can be assumed to know, or if it is one which a reasonable person in his or her position would disclose to his insurer having regard to the nature and extent of the insurance and the circumstances in which it is sought It can be seen that these recommendations include the significant suggestion that the test of materiality should be made dependent on the perceptions of the reasonable insured rather than the prudent insurer. This would mean that a proponent would not be in breach of the duty of disclosure unless he or she had, in failing to disclose relevant information, fallen below the standard of a reasonable person in the position of the insured. These recommendations of the Law Commission bear a distinct similarity to the principles embodied in section 137 of the Consumer Credit Act 1981. The Law Commission points out that this change in the law would not of itself provide sufficient protection for an insured person but would do so if combined with a clear and explicit warning to the insured at the time of completing the proposal.⁵ The report also recommends that copies of completed proposal forms be supplied to insured persons. Similar recommendations are made in relation to renewals.

6.4 The Law Commission also considered the possibility of recommending the introduction of the “proportionality principle“. This principle, which has been introduced in certain European countries, involves a reduction in the amount for which an insurer is liable proportionate to the premium that the policy holder should have paid if he or she had declared the risk correctly, as compared with the premium which he or she in fact paid. The Law Commission after careful analysis of the operation of the proportionality principle in practice, rejected it.⁶

The Australian Law Reform Commission

6.5 The Australian Law Reform Commission (ALRC) received a major reference entitled “Insurance Contracts” in 1976 requiring it to report, inter alia, upon the adequacy of the law governing all contracts of insurance (with the exception of marine insurance, workers’ compensation and compulsory third party insurance). The report of the ALRC⁷ was presented to the Commonwealth Parliament on 14 December, 1982, but prior to presentation we had the benefit of examining it in draft form.⁸

6.6 The ALRC is also of the view that reform is called for on the subjects here under discussion. Its report supports the following reforms:

Non-disclosure:

• a statutory statement of the extent of the duty of disclosure, limiting that duty to facts which the insured knows or a person in his circumstances ought to know to be relevant to the insurer;
• the imposition upon insurers of a duty to advise proponents of the nature and effect of their duty of disclosure;

Misrepresentation:

• the imposition of a duty not to misrepresent facts which the insured knows or a person in his circumstances ought to know to be relevant to the insurer;
• a failure to answer a question set out in a proposal form, or an obviously incomplete or an irrelevant answer, not of itself to amount to misrepresentation;

Basis of contract clauses:

• warranties of existing fact to cease to have effect as warranties and to be treated as representations subject to the usual rules concerning misrepresentation;

Remedies:

• abolition of the right to avoid the contract for innocent non-disclosure or misrepresentation, and the substitution of a right to damages;
• maintenance of the right to avoid the contract for fraudulent non-disclosure or misrepresentation subject to the court’s discretion to award damages instead.

6.7 The ALRC favours the concept of an exclusive code, that is, the introduction of statutory provisions which will exclude all other rights. Our recommendations are consistent with those presented by the ALRC. The implementation of our recommendations will therefore not prejudice the revision of the general law of insurance in accordance with the ALRC’s recommendations.

FOOTNOTES

1. Law Commission, Insurance Law - Non-Disclosure and Breach of Warranty (Cmnd. 8064, 1980, Law Corm. No. 104). See also Law Reform Committee. Conditions and Exceptions in Insurance Policies (Fifth Report, Cmnd. 62, 1957).

2. Law Commission, note 1 above, para 10.39.

3. Ibid., para. 10.42.

4. Ibid., para. 10.44.

5. Ibid., para. 4.60.

6. Ibid., paras 4.2-4.17.

7. Insurance Contracts (1982, ALRC 20).

8. We wish to record that we are greatly indebted to the Australian Law Reform Commission and, in particular, to the Commissioner in Charge of the reference, Professor David St. L Kelly, for generous advice and providing the fruits of their research for our consideration.