The policy

The insured will have a two-week cooling off period after receipt of the policy documents, during which he may avoid the contract (2.303). This does not apply to contracts of less than one month's duration, where the policy has been prolonged, or for certain types of cover, such as liability insurance.

For UK insurers, ICOBS provides a 14-day cancellation period for most general insurance products, but for pure protection or payment protection contracts the period is 30 days.

If the terms of the policy differ from the application or any prior agreement, the PEICL provide that the insurer must highlight the differences and remind the policyholder of his right to object. If the insured does not do so within a month after receiving the policy, he is taken to have accepted them (2.502).

Insurance policies (except for personal insurance) are assumed to last for a year, although the parties can agree a different period "if indicated by the nature of the risk" (2.601).

This period of cover will automatically be renewed ("prolonged") at the end of the policy period, unless the insurer gives a month's written notice to the contrary before expiry and gives reasons for its decision, or the policyholder gives notice at expiry or within a month of receiving a premium invoice that he does not want the cover to continue (2.602).

Abusive clauses

Under article 2.304, terms which have not been individually negotiated will not be binding on the insured if, contrary to the requirements of good faith and fair dealing, they cause a significant imbalance in the insured's rights and obligations under the contract to his detriment.

The provision applies to standard terms: that is, all terms that have been drafted in advance. The fact that one clause may have been individually negotiated will not change the character of a pre-formulated contract.

If the contract can continue without the offending clause, it will do so. Otherwise, the clause will be substituted by one "which reasonable parties would have agreed upon had they known the unfairness of the term". 

The reference to terms which have not been individually negotiated creating a significant imbalance echoes the wording of the Unfair Terms in Consumer Contracts Directive (93/13/EEC), implemented in the UK by the Unfair Terms in Consumer Contracts Regulations 1999.

The UK regulations, however, only apply to consumer insurance, although the Law Commissions are considering extending them to cover micro-businesses (businesses with fewer than 10 employees and a turnover of less than €2 million). This would be part of a wider law reform that would also treat micro-businesses as consumers when they buy insurance cover. The Law Commissions abandoned as impractical an earlier proposal that sought to limit the effect of standard terms. 

Precautionary measures

The PEICL regime significantly restricts insurers' remedies for breach of "precautionary measures:" clauses that, before an insured event occurs, require the insured to perform or not perform certain acts.

This would include certain types of conditions precedent - terms that expressly state that, if the insured fails to comply with the condition, the insurer will not be liable. It would also cover some warranties, which are usually in the form of a promise to do or not do something and which, under current English insurance law, must be strictly complied with or the insured automatically loses its cover.

Under the PEICL, a precautionary measures clause that allows the insurer to end the contract for breach will only entitle the insurer to terminate the contract if the insured has breached his obligation with intent to cause the loss or recklessly and with knowledge that the loss would probably result (4.102).

A clause totally or partially exempting the insurer from liability to pay a claim will only be effective to the extent the loss was caused by the non-compliance with intent to cause the loss or recklessly and with knowledge that the loss would probably result (4.103).

An insured who negligently (rather than intentionally or recklessly) breaches the term may find his insurance claim proportionately reduced according to the degree of fault, but only if there is a clear clause providing for this in the policy. Otherwise he is entitled to the claim in full.

The requirement to show intent or recklessness goes further than the Law Commissions' current proposals on warranties in insurance contracts, which only require a causal connection between the breach and the loss. 

As for conditions precedent, English courts will generally uphold such terms if clearly expressed, whether or not the breach has caused prejudice to the insurer and whether or not there is a connection with the loss. The Law Commissions are not proposing to change this.

Terms in consumer insurance contracts, however, are subject to the Unfair Terms in Consumer Contracts Regulations. The claims handling rules in ICOBS also provide that, in the case of consumers and in the absence of fraud, it is unreasonable for an insurer to reject a claim on the grounds of breach of warranty or condition unless the circumstances of the claim are connected to the breach.