Tougher laws on insurance policies to bring them up to date and make them fairer to consumers were called for by two Government law reform watchdogs yesterday.

Insurance companies should not be able to refuse paying out on policies because people have failed to disclose information — unless that refusal is fair and reasonable, the Law Commission of England and Wales and the Law Commission of Scotland said.

The onus should also be put on insurers to ask questions about what they need to know, the watchdogs propose.

The present duty of disclosure can “operate as a trap” and the penalty could be “overly harsh” and lead to an insurer refusing all claims, even if the undisclosed information was not relevant to the claim.

The Commissions also called for the law of warranties to be reformed to make it fairer to consumers - the undertaking by a consumer to do or not do something in the future, for example to have a working burglar alarm on their house.

At present people can have claims refused for failing to keep to their warranty. This could include a household insurance claim being rejected because the policyholder had failed to maintain a working burglar alarm, even though the claim was for flood damage.

In its consultation paper published yesterday the two Law Commissions said that the current law dates from 1906 when “private insurance as we know it was the preserve of the wealthy few”.

But today, insurance industry is a huge business and an integral part of our personal lives, it said.

The Commission is calling for reform because current codes of practice and regulation by the Financial Services Authority is well-intentioned but confusing.

“The law says one thing, the FSA says another and the Financial Services Ombudsman reaches decisions based on a third.

“This also leaves gaps in protection, and has little impact on business insurance.”

David Hertzell, the Commmissioner leading the project for reform of the law in England and Wales, said: “Our overriding objective has been to achieve fairness between both parties to an insurtance contract, whilst recognising different levels of information about the insured risk and different bargaining strengths.”

It has put forward a series of proposals distinguishing between business and consumer policy holders.

It also seeks to distinguish those who act deliberately or recklessly, those who act carelessly and those who act reasonably.

“In short,” the Commission said, “the proposals are tough on fraudsters, take a proportionate approach to those who acted carelessly and provide proper protection for those who acted reasonably.”

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