The Consumer Insurance (Disclosure & Representations) Act 2012 received Royal Assent on 8 March 2012 (click here for the text). It’s short and tolerably clear, but its effect is wider and deeper than you might expect.

The Act imposes a duty on a consumer to take reasonable care not to make a misrepresentation to an insurer before entering into a consumer insurance contract. If the consumer makes a misrepresentation, and it’s a qualifying misrepresentation, the insurer is given a remedy.

A misrepresentation is a qualifying misrepresentation if (i) it’s made in breach of the duty of care; and (ii) the insurer can show that, if it hadn’t been made, the insurer wouldn’t have entered into the contract; or would only have done so on different terms.

Whether a consumer has breached his duty of care depends on the circumstances, including the contract type, target market, contents of the insurer’s explanatory material and publicity, and the clarity of its questions.

The standard of care required is that of a reasonable consumer. If the insurer was, or ought to have been, aware of the characteristics or circumstances of a particular consumer, they are also taken into account.

The insurer’s remedy depends on the nature of the qualifying misrepresentation. A misrepresentation is deliberate or reckless if (i) the consumer knows or doesn’t care whether it’s untrue or misleading; and (ii) he knows or doesn’t care whether it matters to the insurer. A misrepresentation is careless if it isn’t deliberate or reckless.

If a consumer makes a qualifying misrepresentation deliberately or recklessly, the insurer may avoid the contract and refuse all claims. The insurer isn’t required to return the premiums, save to the extent that it would be unfair to keep them.

If a consumer makes a qualifying misrepresentation carelessly, the insurer may avoid the contract and refuse all claims if it wouldn’t have entered into the contract on any terms but the premiums must be returned. If the insurer would have entered the contract for the same premium but on different terms, those terms will be included in the contract, if that’s what the insurer requires. If the insurer would have entered into the contract for a higher premium, the insurer may reduce the amount it pays on any claims using a set of (complex) rules.

The Act abolishes the rules that allow insurers to treat an insured’s representations as warranties before avoiding a policy because the warranties were breached. It restricts the parties’ ability to contract out of its provisions, and creates rebuttable presumptions to determine who an intermediary acts for when it arranges a contract of insurance. It also includes special provisions for group schemes and insurance taken out on the life another.

The Act will come into force on or after 8 March 2013. Insurers’ proposal forms, contractual terms, and their underwriting, reserving and dispute resolution procedures, are all likely to be materially affected when that happens. Consumers might eventually be treated more fairly, as modern good practice already requires, but one suspects the number of litigated disputes will increase all the same.