The reinsurance industry faces change under a proposed overhaul of contract law.

Reinsurers are facing major upheaval as the UK's Law Commission considers the abolition of the duty of disclosure in insurance contract law. Releasing a first “issues” paper on misrepresentation and non-disclosure, the Law Commission has proposed replacing the insured's duty to disclose information with a duty on insurers to ask specific questions.

In relation to misrepresentation, the Law Commission is suggesting that the test for materiality would be based on the “reasonable insured” rather than the “prudent insurer”. Also, new remedies would include proportionality.Julian Miller, reinsurance partner at Beachcroft, said reinsurance interests are questioning whether reinsurance should be included in the reforms because of the international nature of the business. But he said the message from the commission was that at this stage, it could see no reason why it should exclude reinsurers. “Common law jurisdictions expect the UK to take a lead and to provide a principled and cohesive approach. I don't think excluding reinsurance would be realistic because it would create a two-tier system of insurance and reinsurance law.”

Katy-Marie Wilson, a partner in the reinsurance & international risk team at Barlow Lyde & Gilbert, added, “On the one hand, reinsurance is ‘insurance between consenting adults', so the arguments in favour of reform in a consumer context have less weight in the context of reinsurance. On the other hand, the potential exists for insurers ‘to fall between two stools' if the commissions' proposed reforms apply only to insurance and not to reinsurance. Whether or not the Law Commissions' proposals should apply to reinsurance, it is clear that reinsurance is being considered as part of the commissions' review.”

“Although the proposals are likely have less impact on the reinsurer because reinsurers would be entitled to contract out of the default regime, the Law Commissions' proposals are nonetheless likely have at least some impact on the reinsurance industry.”

She has urged the reinsurance industry to make its views known to the commission over the next few months. A second issues paper on warranties is expected in November and the first of two consultation papers will follow next summer, at which point the Law Commission's proposals are likely to be finalised. A final report and draft bill is suggested for 2010.