CALL FOR CONSUMER REFORM OF INSURANCE LAW IN SINGAPORE

• Published date: 01 December 2014
• Author: YEO Hwee Ying1 LLB (Singapore), LLM (London); Associate Professor, Faculty of Law, National University of Singapore.
• Date: 01 December 2014

The technical doctrine of good faith (uberrima fides) relating to pre-contractual disclosure and representation in insurance law has for a long while been operating in a notoriously unfair manner both in England and Singapore. Recently in England, the Consumer Insurance (Disclosure and Representations) Act 2012 has abolished in one legislative stroke the duty of disclosure for the consumer insured who now only has a duty to take reasonable care not to misrepresent facts. Singapore cannot remain insulated and should consider reforms in response to these new legislative developments.

I. Introduction

1 Tracing its roots back to the mid-18th century, insurance law essentially developed from a commercial context — the shipping business. Although the insurance industry subsequently extended coverage services to consumers, the courts proceeded to employ in consumer disputes rules that were similar to those applied in commercial cases. Over the intervening 25 decades, the doctrines were inflexibly applied in favour of the insurance companies.1 As such, many of the insurance doctrines which had been forged centuries earlier have since evolved to become increasingly unpopular and politically unacceptable (especially vis-à-vis consumers).

2 Of particular concern are the doctrines relating to disclosure, representations, warranties and intermediaries, all of which operated in a notoriously unfair manner. The UK recently sought to reform these doctrines in the consumer regime via the introduction of the Consumer Insurance (Disclosure and Representations) Act 2012 (“CIDRA”).2 As a

legatee jurisdiction which inherited many of the inherent problems associated with these doctrines, Singapore needs to consider whether there are any insights that can be gleaned from this new legislation enacted by the UK Parliament. This paper will argue that the way forward for Singapore is to create a separate consumer regime by considering the following areas:

(a) the unfairness of the doctrines of disclosure, representations and warranties;

(b) how the UK has dealt with it in the CIDRA;

(c) the present position in Singapore and its problems; and

(d) the applicability of the UK reforms in Singapore's context.

II. Developments in the UK

3 English commercial law has left its legacy over practically the entire ex-Commonwealth, with many countries having adopted variations of the UK-based common law jurisdiction. In particular, the influence of the Marine Insurance Act 19063 has spread far and wide but the latent inequities have over the years become increasingly unacceptable in many of the legatee jurisdictions.

4 Although the UK Law Commission had dutifully raised the call for parliamentary action as long ago as 1957 (because “[t]here is general recognition that the law is overly harsh and unsuited to a twenty-first century consumer market”),4“successive UK Governments have not given these particular matters the attention which they deserve”5 and the “consumer insurance market evolved over decades which were characterised by a lack of legislative action”.6 Instead, the UK authorities

allowed the insurance industry to experiment with “less than wholly successful attempts at self-regulation”:7

(a) During the 1980s, the UK insurance industry sought to ameliorate the worst of the doctrines through self-regulation, primarily in the form of soft law via voluntary codes of conduct. These codes contained certain statements of practice by which many insurance companies undertook not to strictly enforce their legal rights (originally concerned with the consequences of non-disclosure and misrepresentation as well as breach of warranties and conditions). Accompanying this was the establishment in 1981 of an insurance complaints bureau (in the form of the Insurance Ombudsman Bureau (“IOB”))8 for individual consumers. The key feature of this industry-initiated tribunal was that legal technicality was deferred to general principles of good insurance practice, regulatory guidance and statements of practice, especially if they favoured the lay complainant. Armed with the remit to reach a fair and reasonable result,9 the IOB could recommend more flexible remedies when the consumer insured was in breach and disallowed the insurer to capitalise on any unreasonable terms.

(b) During the 1990s, there was a gradual take-over by regulators culminating in the creation in 2001 of a one-stop ombudsman service (Financial Ombudsman Service (“FOS”), established under the English Financial Services and Markets Act 2000)10 that supplanted the IOB. The remit became broader, extending beyond insurance to cover financial services such as mortgages, savings and credit. With regard to insurance, the FOS was a compulsory scheme for insurers and its awards could be enforced through the courts; in contrast, individual consumers did not need to accept any decisions and could opt for the court system instead. The FOS's key feature is to resolve

disputes by reference to what is “fair and reasonable in all the circumstances of the case”;11 in doing so, it is enjoined to draw on legal rules, regulatory guidance and codes of practice.

5 However, the practice of relying on such paralegal measures gave rise to confusion due to inconsistencies in the decisions for insurance-claim disputes. To obviate the worst excesses of the pre-contractual insurance doctrines, there has been increasing protection for consumers over the past three decades or so, with rules made by the UK Prudential Regulation Authority12 and a body of growing consumer law that incorporated best industry practice which would operate in a fairer manner vis-à-vis the consumer. This law for consumers has since become very distinct from that of commercial law. In addition, such multi-layered tiering of the law, together with the fact that strict legal doctrines are not applied, lends itself to a very untidy situation; eg, for disputes where the claims exceed the £100,000 limit or where the issues require cross-examination of witnesses, the insured cannot approach the FOS or its new equivalent for adjudication as the insurers have recourse to the courts which naturally remain bound by strict technical law.

6 In the modern era of heightened jurisdictional competition for the position of having the most optimal and progressive laws which best address modern business requirements, several of the legatees have already forged ahead to improve on what they have deemed as outmoded doctrines. Indeed, certain of these former legatees (eg, Australia and New Zealand) have even proposed much friendlier regimes to temper the worst excesses of the existing law.13 Likewise,

various bodies in the UK have lobbied for serious reform of insurance law not only for consumers but also for businesses. These clarion calls for reform have generated many reports and proposals, resulting most recently in the CIDRA (which is the first major legislative reform).

7 Legislating what is essentially good industry practice and the consumer-friendly soft law already encapsulated in the FOS scheme, the UK Parliament has taken the long-awaited step forward to “update the law relating to pre-contractual disclosure and misrepresentations and simplify the existing legal framework by removing layers of case law, guidance and voluntary codes”.14 The CIDRA has specifically been designed to address, inter alia, problematic areas of pre-contractual disclosure and representations, remedies for breach of the duty of disclosure, basis of contract clauses as well as statutory guidelines for identifying intermediaries. In addition to providing a minimum standard that all insurers must adhere to, the CIDRA prevents the parties from contracting out of this base standard in any manner that will place the consumer in a worse position vis-à-vis his position under the Act.15 The disclosure and misrepresentation provisions in ss 18-20 of the Marine Insurance Act 1906 no longer applies to consumer insurance contracts16 now that the CIDRA has come into effect.

III. Current situation in Singapore

8 The present legatee situation in Singapore regarding pre-contractual disclosure and representation remains outdated, uncertain and unduly skewed in favour of the insurer. It may be argued that an even balance must similarly be sought by way of a separate consumer regime as in UK. The ensuing subsections will explore the relevance of specific CIDRA reforms to Singapore and discuss their potential efficacy in addressing the problems of pre-contractual disclosure and representation here.

A. Pre-contractual disclosure duty

9 The pre-contractual duty of utmost good faith arises before the conclusion of the contract as well as at the point of any subsequent renewal. In principle, either party may avoid the contract ab initio if utmost good faith is not observed by the other party17 but such a remedy is hardly of any practical utility to the insured who will invariably prefer the coverage to remain in force.

10 The proposer breaches his duty of utmost good faith if he fails to disclose any material fact18 (regardless of the questions included by the insurer in the proposal form), or makes an untrue representation of some material fact.19 The test of materiality is the same for both non-disclosure and misrepresentation.20 In contrast to the post-CIDRA situation in UK, Singapore still insists that a material circumstance is one which would have an effect on the mind of the prudent insurer21 in assessing the risk. In addition, the particular insurer must have been induced by the non-disclosure or misrepresentation to enter into the policy on the agreed terms;22 evidence must be adduced to show that the insurer relied on the representations in determining the risks.23

11 However, the problem is that lay consumers are often oblivious to the existence of such a duty; unfamiliar with insurance terms and conditions, many of them may not even have been properly...