Briefly, the objective behind this draft Directive is to provide for a situation where it would be part of the law of the Community that there would be no law in any Member State preventing the exercise of a freedom of choice as to what insurance company one would insure with in a particular area of risk. If this becomes law in the Community the draft Directive is concerned to see that the law applicable in every Member State will have certain common features with a view to preventing distortion of competition in the market and also with a view to ensuring that uniform rules will be operated throughout the Community in relation to certain aspects of insurance by whatever insurance company in the market the insurance is placed with. The elements where the law is to be harmonised and the information to be given relate to where an insurance company, a German, French, British, Irish or, in due course, a Spanish company, will give or be given the same basic information. There will be the same kind of obligation on policy-holders to disclose material facts. The same consequences, neither worse nor better, will apply for any failure by the insured to disclose that information. There will be similar provisions in regard to the commencement and the termination of cover, the payment of premiums and the same consequences, neither better or worse, for the non-payment of premiums. The draft Directive we are reporting on allows the parties to contract out of the terms set forth in the Directive but only in a contract which favours the person who is taking out the insurance, not a contracting for terms more favourable to the insurer. A Member State may adopt a law giving more favourable terms for insurance to the policy-holders but not less. Our report states that by implication this would seem to prohibit contracting for terms more favourable to the insurer but we suggest that it might be better to make this clearer that it is, to express it rather than have it implied.
With regard to disclosure of information, at present contracts of insurance in Irish law operate under a concept known in legal circles as contracts uberrimae fidei which means of the utmost good faith. There is a requirement on the insured as a matter of law, in relation to insurance that he wants to have covered, if he wants to get the risk insured against in a manner that is effective, that he behaves so that it can be said he did show the utmost good faith.
That is reasonably well expressed in one piece of statute law, the Marine Insurance Act, 1906, and the language used in that describes what is the general requirement of an insured here. It is the duty of disclosing every material circumstance which is known to the insured and he is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. What is material is held to be what would influence the mind of a prudent insurer and if that is not disclosed, even though there is no loss resulting to the insurance company from the non-disclosure, if it would have affected his mind if he had known that fact, it entitles the insurer to avoid the contract. The draft Directive provides, with regard to this disclosure of information, that the policy holder should declare to the insurer any circumstances of which he is aware which may influence the insurer's assessment or acceptance of the risk. He is not obliged to disclose circumstances already known to the insured or common knowledge. Any questions asked by the insurer are deemed material in the absence of proof to the contrary.
We consulted a number of people and we referred to and acknowledged their assistance to us in the last paragraph of our report, representatives from the Irish Insurance Association, a member of the Inner Bar, Mr. Niall Fennelly S.C., and Mr. John Fish, Solicitor. The majority of those agreed that the proposed modification about the disclosure of information would favour the policy holder. The majority view was that there would be no obligation on the policy-holder to disclose circumstances of which he ought to be aware. While that was the majority view, and the view of the sub-Committee, there was one important view to the effect that the duty of disclosure as expressed in the draft Directive, in fact, would not involve a change. Our view is that there is no objection to the duty of disclosure being mitigated in favour of the policy holder if such is necessary in the interests of harmonisation. However, we take the view that the article is ambiguous in its wording in so far as it does not make it clear if the policy holder is obliged to disclose circumstances of which he is aware and which may influence the insurer, whether he is aware that the circumstances could have that influence or not. That should be clarified.
The second element being harmonised is the effect of any failure to comply with the obligation to disclose circumstances of which the insured is aware which may influence the insurer's assessment or acceptance of the risk. The present law is that if uberrimae fidei is breached the insurance company or the insurer can avoid the contract. The proposed Directive would alter the law depending on whether the policy holder acted innocently, improperly or with the intention to deceive. Where the non-disclosure is innocent the insurer would then have a right to propose an amendment but he would not have a right to terminate it such as he would have at the moment. A policy holder could accept or reject the amendment within 15 days. If he rejects it the insurer then has eight days to cancel the policy by giving 15 days notice. We have no objection to this proposal except that we think that the periods are too short.
In the second case where there is impropriety or negligence in the way in which the information is provided the insurer has the option of terminating the contract or proposing an amendment within two months of becoming aware of the facts. If he proposes an amendment the policy holder can either accept or reject it within 15 days. This is an improvement of the situation if our view about the meaning of the draft Directive is correct from the point of view of a person taking out insurance. Our only comment on that is that the periods might be too short.
If there is fraud the insurer can terminate the contract within two months of discovering the facts and would be allowed the premiums paid "by way of damages". We have a point here which needs examination. While it is sensible enough that there should be a retention of premiums we do not want the provision to this effect to have any interruption or diminution of the ordinary rights which arise at common law for the tort of fraud. In a case of fraud of that kind an insurer could not merely retain the premiums paid "by way of damages" but, if there was more loss from the fraud, the insurer would be able to recover that loss.
The draft Directive states that if circumstances which were unknown to both parties when the contract was concluded come to light subsequently the insurer has the same rights as he would have in the case of innocent non-disclosure. We think this is unfair to the policy holder. The insurer is in the business of selling protection against the risk of loss and the fact is that neither the person who is taking out the insurance for which he wishes to be covered against the loss nor the insurer knows of the circumstances which come to light subsequently. In our view that risk should be carried by the insurer.
There is a provision about warranties. Article 4 of the draft Directive requires a policy holder after a contract has been concluded, to declare to the insurer any new circumstances or changes in circumstances of which the insurer has requested notification in the contract. Failure by the policy holder to fulfil this obligation has the same consequences as failure to disclose information originally. In other words, they would depend on whether he acted innocently, improperly or with the intention to device the insurer. The Irish Insurance Association raised with the sub-Committee the question of whether this Article would interfere with the current practice of including in insurance contracts conditions which, in insurance parlance, are known as warranties which must be strictly complied with and breach of which may entitle the insurer to repudiate the contract. We did not think that the Article was so intended but we recommend that the matter should be specially examined.
Article 8 deals with the question of salvage. Under this Article the policy holder is obliged to take all reasonable steps to avoid or reduce the consequences of the happening of the event which is insured against, the storm, fire, or water damage or whatever. It states that instructions from the insurer or specific contractual provisions on the point would be deemed to be reasonable and that any costs incurred by the policy holder would be borne by the insurer. The Irish Insurance Association expressed a fear that this provision obliging a policy holder to take all reasonable steps to avoid or reduce the consequences may expose insurers to unlimited liability for the expense of salvaging something which was involved within the range of the experience. They suggested to us that the liability would in practice be limited by the requirement that the policy holder must act reasonably. It might be desirable to have this redrafted to ensure that where the person trying to recover what is involved in the flood, fire or whatever acts and has not time to ring up the insurance company, or he has not got specific directions or cannot make contact, the insurance company would not be liable if his action was unreasonable. A redrafting would clarify that. This may ultimately be of a consumer benefit because, otherwise, liabilities may be piled up on the insurance company which would have to be met by premiums charged to other insured.
Paragraphs 1 to 20, inclusive, agreed to.
Draft report agreed to.
Ordered: To Report accordingly.