Cicero Policy Briefer

Issue 6, November 2006

Insurance Contract Law and the End of Buyer Beware:
What do the Law Commission proposals mean for caveat emptor?

By Mark Twigg

Back in 2004, the Treasury Select Committee inquiry into restoring confidence in long-term savings concluded that the retail financial services industry has something of a poor record when it comes to hiding behind small print and exclusions hidden deep in the terms and conditions. Even if a consumer took the time to read all the small print, the Committee argued that the over-reliance on jargon would often render such an exercise pointless to all but the most savvy consumer. While the FSA talks of "information asymmetry" and the solution coming in the need for financial education, that's a long-term aspiration. Is there a quicker end in sight?

Recent developments might suggest so. During the summer Ed Balls, the Economic Secretary to the Treasury, announced a review of travel insurance sales questioning whether it is fair “to put all the pressure on ordinary families to read the small print and ask the right questions”. Given that he was talking about a product sold largely without advice this was indeed a significant statement. It seems the Law Commission has a ready answer: No!

Under the Law Commission's proposed reforms to insurance contract law consumers would still exercise some responsibility, to act lawfully and not submit fraudulent claims for example. However, the review of has thrown up some important questions in an attempt to rebalance the rights and obligations of firms and consumers and do something that the FSA has never been so bold to do: namely, to define what, if anything, caveat emptor actually means in practice and who is ultimately responsible for ensuring whether the consumer buys the right product.

Of crucial importance are the Law Commission's proposals on the duty of disclosure. Here the Commission argues that insurers should shoulder greater responsibility. The insurer "should ask clear questions about any matter that is material to them and that, if they do not ask questions on a particular point, the insurer should be regarded as having waived its right to such information". Now compare that approach with the market for Payment Product Insurance (PPI), where a recent market evaluation by the FSA revealed yet again—it carried out a similar exercise in 2005—that there are persistent problems with consumers having claims rejected because of factors, which the consumer had not disclosed at the point of sale. Not exactly restoring confidence!

In contrast, by making insurers responsible for what they don't ask rather than making consumers responsible for what they don't disclose, the Law Commission could do more to stamp out mis-selling, or mis-buying, than any fine imposed to date by the FSA enforcers. Perhaps the Law Commission is a much better bet for bringing greater accountability and consumer confidence into the sales process.

Mark Twigg can be contacted on +44 (0)20 7665 9537 or click here to email.

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