There are 4.5 million Micro-businesses in the UK, being businesses with nine or fewer employees. Such businesses are far less likely to have access to specialist insurance expertise whether in-house or through brokers and are often no more sophisticated than consumers. The Law Commission has therefore proposed that Micro-businesses be treated as consumers. As a result, such businesses would no longer be under a duty to volunteer information, responding instead to the questions asked by insurers.
The Law Commission received 49 responses to their Issues Paper, with 20% coming from insurers and insurance associations and the largest number, 53%, from business insureds and business associations.
The Commission’s investigations revealed that many of the smallest businesses are unaware of their disclosure obligations under the present law and of the consequences for their insurance contracts if this duty is breached. Perhaps unsurprisingly therefore, over half the consultees agreed with the proposal that Micro-businesses should be treated as consumers. Some insurers were concerned about the potential cost implications of a change in the law. Others felt that any Micro-business that bought group risk insurance products should not be given the same consumer protection.
With respect to Small businesses (ie those with between 10 and 49 employees), the majority of consultees felt that these should not be given the same protection as consumers.
In relation to warranties, most consultees were in favour of a causal connection test, with the result that when a Micro-business breaches a warranty, an insurer will only be discharged from liability if the breach and the loss claimed were causally connected.
If Micro-businesses are to be placed within the consumer insurance regime, a clear definition is needed. Two of the options for a definition put forward by the Commission, based on turnover and number of employees, were rejected by the majority of consultees as too simplistic. There was however significant support for a definition based on the FOS jurisdiction limit which involves a two limb test of fewer than ten employees and a turnover of less than €2 million.
The Law Commission also questioned consultees on the most appropriate way to exclude sophisticated businesses from the Micro-business regime. While the majority of consultees appreciated the need for filters, a significant number expressed concerns about how they could work in practice. Most agreed that when calculating the number of employees or the amount of turnover, the number or amounts of associated businesses should be included.
The next significant milestone in this project will be the publication of the 2009 Consumer Bill and Final Report in December. We will advise of this publication through a further post on InsureReinsure.com.
