If the proposals put forward by the Law Commission are adopted, policyholders could find it easier to make claims against their insurers. The Commission wants to update the 100-year-old law which covers insurance claims to restore consumer confidence. If accepted, its proposals would reduce the level of claim refusals which occur when consumers make innocent errors in answering disclosure questions on application forms.

The Association of British Insurers (ABI) has already rejected the changes. Its spokesperson said, "More law will not provide a better deal for policyholders. The insurance industry is already doing a lot to improve confidence among its customers."

It is claimed that the existing law, which is based on the Marine Insurance Act 1906, is no longer fit for a world of mass market policies or compulsory cover such as third party car insurance. The Law Commission believes that new laws are required to restore consumer confidence in personal insurance, such as life and critical illness insurance, and to underpin London's central position within the international insurance market.

At present around 20 per cent of critical illness claims are refused and of those around half are because the policyholder had failed to disclose everything relevant on their application form. But is an inadvertant "ommission" the same as "non-disclosure". Consumers can lose out when innocent errors on application forms are considered "non-disclosure or misrepresentation". If the customer makes an incorrect statement of "a fact that is material" and that affects the insurers' risk assessment, that situation can result in a refusal to pay a claim.

The current law that applies dates from a time when private insurance as we know it now was only for the wealthy few. Today the insurance industry caters for the mass market with modern mass market products and insurance is an integral part of our people's lives.

Many policyholders simply do not understand that they have a duty to relevant disclose information even though they have not been asked for it. If it is reasonable to expect that the information could influence an underwriter's judgment of the risk, that information must be disclosed. It is also acknowledged that some policyholders may be refused a claims even when they have acted reasonably and honestly because the relevant question was unclear or outside their knowledge.

Insurance companies are within their legal rights to refuse a claim even if the errors or omissions would not have had any effect on the policy or the premium. Under the Law Commissions proposals, reckless or dishonest insurance clients would have their claims refused - and they would forfeit premiums they had paid. However, if the the mistake would not have changed the insurer's decision to issue a policy, the claim should be met.

Where the mistake has resulted in an artificially low premium or the avoidance of special terms, the Commission says claims should be met proportionally rather than being refused totally. For example, if undisclosed information would have doubled the premium, any subsequent claim would be halved.

The Commission also suggests a 5 year "cut-off period" as it can be impossible to adequately verify statements made years ago by a policy buyer who may now have suffered a serious illness or died.

The ABI claims that the insurance industry, the Financial Services Authority and the Financial Ombudsman Service have already made changes. So the real challenge for insurers is to make regulation based on principles rather than law, work well. The ABI will be carefully examining these proposals to make sure they add real value to the regulatory system.

The Law Commission accepts that the insurance industry and the Ombudsman have made great progress. But it is a fact that not all consumers go to the Ombudsman so they believe that a change in the law should be applied.