UK: Good faith vs qualifying misrepresention

Question

Consider the following in the context UK contract law, insurance and consumer rights.

When you (a person or legal entity) buys insurance there is some expectation that you properly value the item or items insured.

If at the time of a claim, the valuation is found to be incorrect (too low = underinsured) the insurer may avoid the claim or apply an averaging clause, effectively meaning they pay less than they would if you had valued the item(s) correctly and paid a higher premium as a result. This is I believe termed a qualifying misrepresentation.

However, there is also an expectation from the consumer that if they acted in good faith they should not be penalised.

Many complaints are made to the financial ombudsman and resolved by weighing these up.

See for example:

• https://www.financial-ombudsman.org.uk/data-insight/insight/insight-in-depth-underinsurance-misrepresentation-non-disclosure
• https://www.financial-ombudsman.org.uk/decisions-case-studies/ombudsman-decisions/search?Keyword=buildings+insurance+underinsurance+&Sort=relevance

How might this work in the context of changes to the insured value made over time? Specifically, if you consider a claim on buildings insurance with:

• A significant undervaluation is being made by the original managing agents.
• Different managing agents involved over time.
• Different insurance brokers used over time.
• Different underwriters used over time.
• The current managing agent claims that they acted in good faith to review the rebuild cost with various insurers.
• Some records of increases in rebuild costs significantly beyond inflation levels backing up the claim that this was discussed but nonetheless leaving the property undervalued.

To my mind mistakes were made by multiple parties:

• Previous agents did not value the property correctly
• Subsequent actors acted in good faith assuming the valuation to be correct
• The client queried the valuation at least once and as a result the insured amount increased (but there may be no record of these conservations)
• However, no one made or asked for a proper valuation by the surveyor

Has the client acted in "good faith" or made a "qualifying misrepresentation" and how could this be determined (by the ombudsman or anyone else)?

Does it make a significant difference if the managing agent (client) is a 'professional' property management company that might be expected to know these things vs a right to manage company or owners association?

Likewise would earlier claims made under a previous insurer where the under-insurance issue was not noted be factored in? (for example, if a loss adjustor visited in regards to say an escape of water claim would they be reasonably expected to note the under insurance issue at the time and would that even be relevant if it was for a different broker or underwriter).

It is also unclear (to me) who is responsible for the valuation with buildings insurance. If you consider car insurance. The valuation of a car is typically determined by the insurer using a "glass" guide. A consumer might reasonably expect something similar to apply for building insurance based on property values. For items like jewelry, it appears the person taking out the insurance is expected to get it professionally valued.

Answer 1

If at the time of a claim, the valuation is found to be incorrect (too low = underinsured) the insurer may avoid the claim or apply an averaging clause, effectively meaning they pay less than they would if you had valued the item(s) correctly and paid a higher premium as a result. This is I believe termed a qualifying misrepresentation.

A qualifying misrepresentation is the consumer's "misrepresentation for which the insurer has a remedy against the consumer" (s4 Consumer Insurance (Disclosure and Representations) Act 2012).

This is available when the consumer misrepresented a fact deliberately or recklessly, or carelessly (s5 CIDRA).

s5 (4) It is for the insurer to show that a qualifying misrepresentation was deliberate or reckless.

(5) But it is to be presumed, unless the contrary is shown—

(a) that the consumer had the knowledge of a reasonable consumer, and

(b) that the consumer knew that a matter about which the insurer asked a clear and specific question was relevant to the insurer.

If a qualifying misrepresentation was deliberate or reckless, the remedy is that "the insurer may avoid the contract and refuse all claims, and need not return any of the premiums paid, except to the extent (if any) that it would be unfair to the consumer to retain them." (Schedule 1 CIDRA).

At the time of application for or renewal or mid-term adjustment of a policy, the consumer must take reasonable care to answer the insurer's questions. Including what is the value at that time (not 15 years ago).

s3 Reasonable care

(1)Whether or not a consumer has taken reasonable care not to make a misrepresentation is to be determined in the light of all the relevant circumstances.

(2)The following are examples of things which may need to be taken into account in making a determination under subsection (1)—

(a)the type of consumer insurance contract in question, and its target market,

(b)any relevant explanatory material or publicity produced or authorised by the insurer,

(c)how clear, and how specific, the insurer's questions were,

(d)in the case of a failure to respond to the insurer's questions in connection with the renewal or variation of a consumer insurance contract, how clearly the insurer communicated the importance of answering those questions (or the possible consequences of failing to do so),

(e)whether or not an agent was acting for the consumer.

(3)The standard of care required is that of a reasonable consumer: but this is subject to subsections (4) and (5).

(4)If the insurer was, or ought to have been, aware of any particular characteristics or circumstances of the actual consumer, those are to be taken into account.

Necessarily the Financial Ombudsman makes its findings on a case-by-case basis. The Ombudsman corresponds with both parties about who said what when. If this case hinges on an insurer's question, the Ombudsman reads the question to determine if it was a clear question. The Ombudsman examines the evidence - letters, phone call recordings, emails, websites.

A few of the case studies at the link you supplied involve changes to property or policy over time.

https://www.financial-ombudsman.org.uk/data-insight/insight/insight-in-depth-underinsurance-misrepresentation-non-disclosure

Case study 3: 15 years ago the consumer got cover for a watch valued at the time at £1,500; when she was asked at renewal times if she wanted to make any changes to her claim limit she said she didn't (and presumably paid for the policy on that basis). Years later she lost the watch; at the time of her claim it was valued at £5,000 and the insurer refused to offer her more than £1,500. The consumer complained she should have been offered more - the Ombudsman disagreed.

Case study 5: there was no evidence to suggest the consumer knew that the previous owner of her car had added alloy wheels. The fact that the insurer's expert was able to spot the alloys was not a reasonable argument to "avoid" the policy on the grounds that the consumer claimed the car had not been modified in any way. The Ombudsman disagreed with the insurer's position that the consumer knew or didn't care that the information she provided was wrong.

Case study 6: the consumer replaced his VW Polo with a VW Golf and contacted his insurer to make a mid-term adjustment. The insurer asked him if the VW Golf had been modified in any way from the manufacturer's original specification, for example with alloy or sports wheels. He said no, it hadn't been modified in any way at all. Subsequently he made a claim on the grounds his car was stolen; he told the insurer that the car had sports wheels fitted when he bought it that he thought added a minimum of £1,000 to its value. The insurer decided to "avoid" the policy because the consumer deliberately misrepresented the car had been modified. The Ombudsman agreed with the insurer that the policy could be "avoided".

Buildings, contents, vehicle and jewelry policies tend to be provided on an annual basis and (among other things) what it could cost to replace them at application or renewal time. What it was worth 15 years ago is irrelevant (and might well be too little or too much).

It is also unclear (to me) who is responsible for the valuation with buildings insurance.

The consumer is responsible for taking "reasonable care" about it.

If you consider car insurance. The valuation of a car is typically determined by the insurer using a "glass" guide. A consumer might reasonably expect something similar to apply for building insurance based on property values.

Buildings insurance providers ask "how much it would cost if you had to rebuild your home?" They don't ask how much you could sell your home for. Some providers suggest you could hire a residential property surveyor or use their 'calculator' or 'comparison tool'.

Expensive jewelry: if you bought it recently then have you got a receipt? If you haven't got a receipt then get it professionally valued.

Car insurance: you answer the insurer's questions about your car, e.g. make, year of manufacture, transmission, modifications, the insurer puts your car into one of 50 insurance groups that are a factor insurers use to price your policy. Some providers go into much detail about this kind of thing.