The Law Commission has published an Issues Paper considering the insured’s post-contract duty of good faith, in particular, the law of fraudulent claims, focusing on what remedies should be available to insurers if policyholders act fraudulently.

The Commission examines the law where a policyholder suffers a legitimate loss but then adds a fictitious claim to that loss. In practice, the policyholder will lose its entire claim but any previous legitimate claims are unaffected. This approach is at odds with Section 17 of the Marine Insurance Act 1906 which entitles an insurer to avoid the contract from the start. In theory, this entitles an insurer to require the policyholder to repay all past claims under the policy even though all of those claims are genuine. The Law Commission proposes that Section 17 be amended to reflect the current common law position. In addition, it suggests that the insurer should be entitled to damages from a policyholder for the costs of investigating a fraudulent claim.

The Issues Paper also considers fraudulent claims in joint and group insurance. With respect to joint insurance, the Commission suggests that where one insured party commits a fraud, it should be open to an innocent insured party to rebut the presumption that the fraud has been committed on behalf of all the insured parties. With respect to group insurance, it queries whether there is the need to make special provision for fraudulent claims by group members to give insurers similar remedies to those available where a policyholder acts fraudulently.

Lastly, the Commission queries whether UK law should follow the Principles of European Contract Law and recognise an on-going duty of disclosure by the policyholder in the absence of a specific contract term.

The Law Commission has requested responses to its proposals by Monday 11 October 2010. If you would like to view the Issues Paper, please click here.

We will be considering this latest paper from the Law Commission in our September 2010 issue of the Insurance and Reinsurance Review.