6.4 Qualifying Breach, Remedies and the Consumer Duty (CIDRA 2012)
Key Takeaways
- Under Insurance Act 2015 section 8 an insurer has a remedy only for a 'qualifying breach', meaning the insurer must show that without the breach it would not have entered the contract at all or would have done so only on different terms
- For a non-deliberate or reckless qualifying breach by a commercial insured, Schedule 1 provides proportionate remedies: avoidance with return of premiums if the risk would have been declined, or treating the contract as if made on the terms (including a higher premium) on which the insurer would have taken it
- For a deliberate or reckless qualifying breach by a commercial insured, the insurer may avoid the contract, refuse all claims and retain the premiums
- The Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA) applies to consumer insureds and imposes only a duty to take reasonable care not to make a misrepresentation, with no general duty of disclosure
- Under CIDRA, remedies for a careless misrepresentation are proportionate (claim reduced or contract treated as if on different terms), while for a deliberate or reckless misrepresentation the insurer may avoid the contract and retain premiums
Section 8 of the Insurance Act 2015 — The 'Qualifying Breach' Gateway
Under the Insurance Act 2015, a breach of the duty of fair presentation (see section 6.2) does not automatically give the insurer a remedy. Section 8(1) provides that the insurer has a remedy only if it shows that, but for the breach, it would either:
- (a) not have entered into the contract at all, or
- (b) would have done so only on different terms.
This mirrors the common-law principle of inducement established in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501. The insurer must prove that the breach actually made a difference to its underwriting decision.
A breach for which the insurer has a remedy is called a 'qualifying breach' (section 8(3)). The insurer bears the burden of showing that the breach was a qualifying breach — that is, that it was induced to act differently.
Deliberate or Reckless vs Other Breaches
Section 8(4) splits qualifying breaches into two categories:
- Deliberate or reckless — the insured knew that it was in breach of the duty, or did not care whether it was. The burden is on the insurer to prove that the breach was deliberate or reckless.
- Neither deliberate nor reckless — sometimes called an 'innocent' or 'careless' breach. Even a careless breach can give rise to a remedy, provided the inducement test is met.
This two-tier structure is important because the remedy depends on which category the breach falls into.
Schedule 1 — Remedies for Non-Consumer (Commercial) Insurance
The actual remedies are set out in Schedule 1 to the 2015 Act. The table below summarises the position for non-consumer insurance contracts.
| Type of qualifying breach | What the insurer would have done | Remedy under Schedule 1 |
|---|---|---|
| Deliberate or reckless | (any) | Insurer may avoid the contract, refuse all claims, and retain the premiums (Sch 1, para 2) |
| Not deliberate or reckless | Would not have entered at all | Insurer may avoid and refuse all claims, but must return the premiums (Sch 1, para 4) |
| Not deliberate or reckless | Would have entered on different (non-premium) terms | Contract is treated as if entered into on those different terms (Sch 1, para 5) |
| Not deliberate or reckless | Would have charged a higher premium | Insurer may reduce the claim proportionately (Sch 1, para 6) |
The proportionate reduction under paragraph 6 uses a straightforward formula: the insurer pays only X% of the claim, where X = (premium actually charged ÷ premium that would have been charged) × 100. For example, if the insurer charged £10,000 but would have charged £15,000 on a fair presentation, the claim can be reduced by one-third — the insurer pays two-thirds. Paragraphs 5 and 6 can both apply, so the contract may be treated as if made on different terms and the claim reduced for a higher premium.
The key reform is the move away from the old 'all-or-nothing' avoidance remedy for non-deliberate breaches. A careless non-disclosure no longer risks the entire policy; the remedy is scaled to what the insurer would have done had the risk been fairly presented.
A Worked Commercial Example
A commercial insured fails to disclose three prior theft claims when presenting a shop policy. The insurer charged a premium of £4,000. On a fair presentation, the insurer says it would still have offered cover but would have charged £8,000 and imposed a £1,000 theft excess. This is a qualifying breach (the insurer would have acted differently), but it is not deliberate or reckless — the insured's risk manager simply failed to collate the claims history.
The remedy under Schedule 1 is a combination: the contract is treated as if it included a £1,000 theft excess (paragraph 5), and the theft claim is reduced proportionately to reflect the premium differential — the insurer pays 50% of the otherwise payable amount (£4,000 ÷ £8,000 × 100) (paragraph 6). The insurer cannot avoid the policy altogether, because it would have offered cover on a fair presentation.
The Consumer Regime — CIDRA 2012
Consumer insureds are governed not by the Insurance Act 2015 but by the Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA), which came into force on 6 April 2013. The 2015 Act deliberately left the consumer regime untouched, recognising that consumers need a lighter duty than commercial insureds.
The Consumer's Duty — Reasonable Care
Under section 2(2) of CIDRA, a consumer insured owes only one duty before the contract is made (or varied): to take reasonable care not to make a misrepresentation to the insurer. There is no general duty of disclosure for consumers. A consumer who answers the insurer's questions honestly and carefully has discharged the duty, even if they have not volunteered facts the insurer did not ask about.
The standard of reasonable care is assessed on the 'reasonable consumer' benchmark (section 3), taking into account the clarity and specificity of the insurer's questions, the explanatory material the insurer provided, and any characteristics of the actual consumer the insurer knew or ought to have known. A dishonest misrepresentation is always treated as falling below the reasonable-care standard.
Qualifying Misrepresentation and Remedies
Under section 4, an insurer has a remedy only if the consumer made a misrepresentation in breach of the section 2(2) duty and the insurer shows that without the misrepresentation it would not have entered into the contract at all, or would have done so only on different terms. This is the consumer equivalent of the 'qualifying breach' gateway in the 2015 Act.
The remedies are set out in Schedule 1 to CIDRA and, like the commercial regime, are proportionate:
| Type of misrepresentation | Remedy under CIDRA Sch 1 |
|---|---|
| Deliberate or reckless | Insurer may avoid the contract, refuse all claims, and retain premiums (subject to a fairness check on retaining premiums) |
| Careless — insurer would have declined | Insurer may avoid and refuse all claims, but must return the premiums |
| Careless — insurer would have entered on different (non-premium) terms | Contract is treated as if made on those different terms |
| Careless — insurer would have charged a higher premium | Claim is reduced proportionately (the insurer pays X% where X = (premium charged ÷ premium that would have been charged) × 100) |
The structure closely mirrors the commercial regime, but the starting duty is different: the consumer has no duty to volunteer information, only a duty to answer honestly and carefully.
Contrasting the Two Regimes
The distinction between the commercial and consumer regimes is a favourite exam topic. The table below draws the contrast directly.
| Feature | Non-consumer (Insurance Act 2015) | Consumer (CIDRA 2012) |
|---|---|---|
| Governing Act | Insurance Act 2015, ss.3, 7, 8, Sch 1 | CIDRA 2012, ss.2–4, Sch 1 |
| Duty | Fair presentation of the risk (disclose material circumstances; clear and accessible; before contract) | Take reasonable care not to make a misrepresentation |
| Duty to volunteer | Yes — must disclose every material circumstance known or ought to be known | No — only must answer the insurer's questions honestly and carefully |
| Reasonable search | Yes, under s.3(4) | Not applicable — consumer is not expected to search |
| Remedies | Proportionate under Sch 1; avoid + retain premiums for deliberate or reckless | Proportionate under Sch 1; avoid + retain premiums for deliberate or reckless |
| Inducement / qualifying | Insurer must show it would have acted differently (s.8) | Insurer must show it would have acted differently (s.4) |
Key Takeaways
- Under section 8 of the Insurance Act 2015 a commercial insurer has a remedy only for a 'qualifying breach' — one where, but for the breach, it would not have entered the contract or would have done so only on different terms.
- For a non-deliberate or reckless commercial breach, Schedule 1 provides proportionate remedies: avoidance with return of premiums if the risk would have been declined, or treating the contract as if made on the terms (including any higher premium) on which the insurer would have taken it.
- For a deliberate or reckless commercial breach, the insurer may avoid the contract, refuse all claims and retain the premiums.
- CIDRA 2012 governs consumer insureds and imposes only a duty to take reasonable care not to make a misrepresentation — there is no general duty of disclosure for consumers.
- CIDRA remedies are proportionate for careless misrepresentations (claim reduced or contract treated as if on different terms) and allow avoidance with retention of premiums for a deliberate or reckless misrepresentation.
A commercial insured carelessly fails to disclose a material prior loss. The insurer admits that, on a fair presentation, it would still have written the policy but would have charged a premium of £20,000 rather than the £10,000 it actually charged. Under Schedule 1 to the Insurance Act 2015, what remedy is available to the insurer if the claim is otherwise payable?
Which of the following most accurately describes the duty a consumer insured owes to an insurer under the Consumer Insurance (Disclosure and Representations) Act 2012 before the contract is entered into?