Impact of Unfair Contract Terms Directive on Insurance: House of Lords' Pine Top Ruling, Summaries of Law

Download Impact of Unfair Contract Terms Directive on Insurance: House of Lords' Pine Top Ruling and more Summaries Law in PDF only on Docsity! 14. Luxembourg: Implementing legislation is expected to be adopted in the next two/three months. The Insurance Commissioner has, however, stated that, as of 1st July 1994, EU/EEA insurers will be treated as though the Directives had been incorporated into Luxembourg law. 15. Norway: Implementing legislation is expected to be adopted by October 1994. 16. Spain: In accordance with agreed transitional arrangements Spain is not obliged to implement the Directives until the end of 1996. In practice legislation may be adopted and come into force by February 1995. 17. Sweden: Implementing legislation is being prepared and it is anticipated that it will enter into force in January 1995. Transitional arrangements were agreed by Decision of the EEA Joint Committee of 21st March 1994 in relation to the maximum amount of investments which can be required in negotiable securities under the Third Life Directive. PAN ATLANTIC INSURANCE CO. v. PINE TOP INSURANCE CO. - THE IMPLICATIONS OF THE DECISION IN THE HOUSE OF LORDS by Jonathan Gilman, Q.C. This talk is a sequel to one which I gave earlier this year. For those of you who missed the first instalment, I was invited to speak at a BILA Seminar on "Avoiding Legal Pitfalls" in Managing Claims in May of this year, on the implications of the Pine Top decision. There was one slight snag - or pitfall - as far as my lecture in May was concerned, which was that the House of Lords had failed to oblige by delivering their judgment. They eventually did so in late July - and now I have been asked to talk to you about the real thing. Fortunately, I was careful enough in May not to chance my arm with any very precise predictions, beyond saying that I was fairly sure that avoidance for misrepresentation and non-disclosure would not be made any easier by the House of Lords. That at least is clearly part of the outcome. Pan Atlantic v Pine Top was expected to be and has proved to be a landmark decision. Its importance has been recognised (which is not always so with important cases, unfortunately) by the Law Reports' editors. You can find it already reported in more than one series. For today's purposes, I will use the W.L.R. reference - 67 [1994] 3 W.L.R. 677. In substance, as Lord Mustill's speech confmns (p, 692), the case was -an appeal from the C.T.!. decision. To set the background, with which I expect you are all familiar anyway, in C.T1. v Oceanus [1984] 1 Lloyd's Rep. 476, the Court of Appeal decided (i) that it was not necessary to show that the actual underwriter was influenced by the misrepresentation or non-disclosure for which he subsequently avoids the policy,and (ii) that the test of materiality is whether a prudent insurer (in practical terms, the expert witness called by the Defendant) would take the relevant matters into account as part of the process of forming his underwriting decision ­ sometimes called the "want to know" test, whether or not the prudent insurer would in fact have reached a different decision. In rejecting the actual underwriter test, Kerr LJ recanted from his earlier decision in Berger v Pollock [1973] 2 Lloyd's Rep. 442 where he had held the opposite. In introducing the "want to know" test, as the sole test, the Court of Appeal in C.T.!., many people think, opened a Pandora's box. This aspect of the decision, in particular, met with a chorus of criticism - Lord Mustill deals with it in some detail. Whether in fact the C.TJ. case meant that insurers and reinsurers succeeded in any borderline avoidance cases, where they would not have succeeded anyway, I venture to doubt; I also doubt whether C.T.!. was to blame for the fact that avoidance has been more frequently invoked since the mid '80s, which is more obviously due to market circumstances. But it is certainly the case that C.T.!. was widely regarded as tipping the balance unduly in insurers' and reinsurers' favour. So the background to the Pine Top appeal was that the House of Lords were being asked to rethink the principles governing the right of avoidance in a context where the existing state of law was widely seen as unsatisfactory - including, by the Court of Appeal in Pine Top itself. The menu ala carte for the House of Lords was as follows:- (i) Should there be an actual underwriter test; and if so, must it be shown that the actual underwriter would probably have reached a different decision, if the material facts had been disclosed, or accurately represented, or would something less than decisive influence be enough? 68 impress. At two points in his speech, Lord Mustill refers to there being a "presumption of inducement" once materiality is established (at p. 705; and at p. 712). This is not developed, but it is a point of some potential importance. In most avoidance cases, the actual underwriter or at least the leading underwriter gave evidence anyway; not to call him when he was available to be called, might suggest lack of merit in the case. As Kerr J. said in Berger v Pollock, except in the most obvious cases the underwriter should be called. The practical importance of a presumption - which can plainly only be a rebuttable presumption, or a factual inference to be drawn­ is that it caters for those cases where the underwriter cannot be called or where he has no recollection (which is more common). It would, I think, be unwise for any prospective defendant to rely on the presumption in a case which was in any way borderline as an excuse for not calling an available witness; but that is not to say that there will not be cases which ultimately turn on a presumption or inference, materiality having been proved by expert evidence, of what the actual underwriter's attitude would have been. Although the Pine Top decision has largely settled the law, for at least the foreseeable future, it will be clear from what I have said that I do not think that the restoration of the actual underwriter equipment coupled with the retention of the C.T.!. test for materiality will make a great deal of practical difference to the way in which avoidance disputes are actually handled and litigated in practice. One difference may be that it will be necessary now to call underwriting witnesses from the following market as well as the lead syndicate; plaintiffs may now be less inclined to simplify the task for defendants in cases of this type by an agreement to be bound or a representative action, and may find it to their advantage to put the Defendants through the hoop of having to call numerous underwriters. Apart from that factor, I would summarise the effect of Pine Top as being that the legal requirements for a valid avoidance have been tightened in what I regard as a satisfactory way, but restricting avoidance to cases where the actual underwriting decision was affected by misrepresentation or non-disclosure, but that the practical considerations which any insurer or reinsurer should take into account before embarking on the serious step of avoidance, and before taking the serious decision to stand and fight in Court with all its attendant publicity remain essentially the same as they were before. If any insurers are now deterred from avoiding in unmeritorious cases, where they merely made a bad underwriting decision which 71 they would have made anway, that is no bad thing; but most cases have more substance to them, or at least the insurers sincerely believe they were misled before they resort to avoidance, and the Pine Top decision should not discourage meritorious cases or make them more difficult for insurers. In practice, an insurer who has a proper case should not notice the difference. UNFAIR CONTRACT TERMS DIRECTIVE by Keith Long, DTI You have invited me to speak to you today on the Unfair Contract Terms Directive. This directive was adopted in April last year and is due to come into force at the end of this year. The directive has, I know, provoked a good deal of concern amongst insurance companies, for whom legislation in this field is something new. What I want to do now is not to explain the ins and outs of the Directive itself - I assume you will all have read the two consultative documents published by the Department in October 1993 and September this year - nor to give a detailed Government reaction to the responses that the Department has received to the second Consultative Document - after all, the closing date for comments was only last Monday - but to give you some thoughts on the underlying reasoning for why insurance is included in the directive and what the implications may be. The purpose of the Directive is to change the balance between suppliers and consumers in consumer contracts by "eliminating unfair terms", that is, terms that act unfairly towards consumers. In the European Commission's own Explanatory Memorandum in 1990 explaining their proposal, the problem of unfair contract terms had already been recognized by a number of member States. Since 1974 most States have adopted unfair contract terms legislation. The Commission noted specifically that "British law differed from the law of other member States in that itexcludes contracts of insurance from the application of the Unfair Contract Terms Act 1977, whereas insurance is not excluded by the law of other countries". The Commission did not refer to the alternative of the voluntary ABI Statement of Recommended Practice that has stood alongside the UCTA, but even if it had it is doubtful whether this would have altered their position. It was always the Commission's intention therefore that the 72