By Mr Paul P Subramaniam, Partner, Zaid Ibrahim & CO (a member of ZICOlaw)
Introduction
When Robert Wallace and Alexander Webster devised a scheme based on actuarial tables to compensate the widows of Scottish clergyman in 1742, little did they know that their Scottish Ministers’ Widows & Orphans Fund, arguably the world’s first insurance fund, would grow into a behemoth with over 100 billion pounds under its care. Today, insurance companies have become the world’s biggest institutional investors.
It is therefore not surprising that the large financial muscle that insurance companies have the capability to wield has led to them being brought under stricter financial regulation in a post-Global Financial Crisis world.
In Malaysia, the strictures of Basel III have been given life by the repeal of the Insurance Act 1996 and, in its stead, the coming into force of the Financial Services Act 2013 (“FSA”) on 30 June 2013. In the process certain principles of insurance law, once thought sacrosanct have now been abandoned in the interest, ostensibly, of protecting consumers by reining in profitability.
In the process, a significant legal concept has been compromised: the effect of the basis clause reflecting the nature of the insurance contract founded on utmost good faith.
The Consumer Insurance Contract
The FSA introduces a new type of insurance contract. Defined as a “consumer insurance contract” in Schedule 9 paragraph 2 of the FSA, it refers to a contract of insurance entered into, varied or renewed by an individual wholly for purposes unrelated to the individual’s trade, business or profession. The definition would cover the vast number of personal life and general insurance contracts taken out by individuals and households.
Under the paragraph 10 of Schedule 9, any representation made before a consumer insurance contract is entered into, varied or renewed cannot be made a warranty by a term of the insurance contract or any other contract. In effect, the standard basis clause in insurance contracts, which treats such representations as warranties entitling the insurer to repudiate liability for omission or misstatements of material facts, will no longer be effective for personal insurance policies.
What then are the remedies of an insurer, should the insured have not disclosed material facts? The insurer is has two options under the FSA. It can either refuse liability but would then have to repay all premiums collected on the policy, or it would have to make payment of any claim and offset any increase in premium it would have charged had the material fact been disclosed.
Unless the insurer can prove that the failure to disclose the material fact was done recklessly or deliberately, the insurer would not be able to decline the claim and retain the premiums. Given that the policy would, in all likelihood, have been entered into some time before the claim was made on it, the chances of procuring evidence to establish recklessness or maliciousness would be slim.
The upshot is that the profits of insurance companies would have to honour all claims made notwithstanding the non-disclosure of material facts relevant to the assessment of risk and the premiums to be charged, or have its revenue statements in a constant state of flux – a position that would be most upsetting to its shareholders and financiers.
It is insurance as we have never known it.