Insurance Misrepresentation and Non-disclosure

Insurance Misrepresentation and Non-disclosure

Non-life Policies

Misrepresentation and/or non-disclosure by an insured is one of the main reasons non-life insurers reject policy claims. 

The Duty of Disclosure

Potential insureds who wish to obtain insurance from an insurer have a duty to act with the utmost good faith toward the insurer.  Potential insureds have a duty before entering into the policy not to misrepresent facts and to disclose facts which are known and are relevant to the insurer deciding whether to issue the policy, and the terms upon which the policy is issued.

For instance, a homeowner who telephoned an insurer and arranged home insurance for flooding while floodwaters were approaching his or her home without telling the insurer about the approaching floodwaters, would breach the duty.

This duty also applies to each renewal or variation of a non-life insurance policy.

Breach of the Duty

A breach of the duty by the insured may be fraudulent or innocent.

If a potential insured makes a false statement knowing that it is false or not caring whether it is true or false, the statement will be a fraudulent misrepresentation. 

A fraudulent failure to disclose facts occurs if an insured deliberately fails to disclose a matter which he or she knows to be relevant to the insurer deciding whether to issue the policy or on what terms it issues the policy.  The law is still not settled as to what constitutes a fraudulent failure to disclose facts. 

A misrepresentation or failure to disclose is innocent if it is not fraudulent.

Rights of the Insurer if Breach of the Duty

If the misrepresentation or failure to disclose is fraudulent, the insurer can avoid or set aside the policy from when it started.  The insured is entitled to repayment of the premium.  The insurer does not have to pay for the loss and is entitled to repayment of any money it has paid to the insured in respect of the loss.

Where a court believes:-

1. that an insurer has not been prejudiced by a fraudulent misrepresentation or non-disclosure, or such prejudice is minimal or insignificant;
2. it would be harsh and unfair not to do so;

a court may disregard an insurer’s avoidance of a policy for fraud and allow the insured to recover the whole or part of the amount payable by the insurer if the contract had not been avoided.

If the misrepresentation or failure to disclose is innocent, the insurer’s liability for a claim is reduced to the extent necessary to put the insurer in the situation it would have been if the misrepresentation or failure to disclose had not occurred.

This means that if the insurer would not have issued the policy had the misrepresentation not been made, or the failure to disclose not occurred, the insurer’s liability in relation to the claim is reduced to zero.  Where the insurer would have issued the same policy, but for a different premium, it is likely that the insurer can only to reduce its liability with respect to the claim by the difference between the two premiums.

Where the insurer would have issued the policy, but on different terms, the reduction, if any, will be for the difference in liability which results from the different terms.

An insurer therefore will generally only be able to escape liability if, had it known the true position affecting the insured, it would either not have issued the policy, or alternatively would have inserted a term in the policy which excluded liability for the insured’s loss.

Difficulties of Insurer Escaping Liability for Innocent Misrepresentation or Non-disclosure

In practice it is difficult for an insurer to escape liability for a claim by alleging that an insured is guilty of innocent misrepresentation or failure to disclose facts.  The insurer has the burden of proof to show that it either would not have issued the policy or would have inserted a term in the policy which excluded its liability for the claim.

The difficulty facing the insurer is that it has to prove what it would have done given a factual situation which is hypothetical and never occurred.  Courts are mindful, particularly when large sums of money are involved, that it is easy for an insurer to take a beneficial view of what it likely would have done.  The insurer’s task is almost impossible if the insurer had no effective applicable underwriting guidelines or lacked discipline in adhering to them.

A Court would likely expect an insurer attempting to escape liability for an innocent misrepresentation or non-disclosure to:-

1. Produce the underwriting guidelines of the insurance company. The underwriting guidelines are the written rules of the insurance company which set out in what circumstances the company will issue an insurance policy and on what terms.  Often the underwriting guidelines will be ambiguous or do not cover what the insurance company would have done if all information had been disclosed.
2. Have the people at the insurance company who decided to issue the policy give evidence whether the insurer would have issued the policy, or would have issued the policy on different terms.
3. Produce details of other occasions where the insurance company has refused to issue an insurance policy in similar circumstances, or produce details of other instances where the insurance company has issued a policy with amended terms which would exclude the loss.

Other Rules, and Additional Requirements for Insurers

• If the insurance was not issued through the insured’s broker, the insurer must prove that before the policy was issued, it clearly informed the potential insured in writing of the nature and effect of the duty of disclosure.  If the insurer breached this duty, the insurer will be unable to rely on any innocent misrepresentation or non-disclosure.
• If the insurance was entered into over the telephone, information about the nature and effect of the duty of disclosure should be given orally to the potential insured.  Written information about the duty of disclosure must then be given to the insured within 14 days of the policy being issued.
• Where the insurance involved is motor vehicle insurance, home building and/or contents insurance, sickness and accident insurance, consumer credit insurance, or travel insurance, the insurer can ask specific questions of the potential insured.  Once the insurer does so, the insured’s duty of disclosure is limited to the matters on which the insurer asks specific questions.  Legislation also controls the procedures which must be followed by an insurer when renewing these types of policies.
• Insurance is now often obtained from insurers online.  The online process may involve the broker or potential insured answering a number of questions set by the insurer’s computer program.  Frequently these computer programs do not allow a potential insured to provide information except in relation to the insurer’s specific questions.  In these circumstances, the insurer may have waived the obligation of the insured to make disclosure except in relation to the specific questions which the insurer has asked.
• If the insurance is arranged by the insured’s broker, the broker must take care to ensure that the insurer is not entitled to avoid the contract due to non-disclosure or misrepresentation.  Breach of this duty may make the broker liable to the insured for the loss.
• Where a question which an insurer asks is reasonably ambiguous and there has been a misrepresentation or failure to disclose, the ambiguity is to be determined in favour of the insured
• A statement made by a potential insured which is untrue, but which is made on a reasonable belief is not taken to be a misrepresentation.
• A statement made by a potential insured is not to be taken as a misrepresentation unless the potential insured knew or ought reasonably to have known that the statement would be relevant to the decision of the insurer whether to issue the policy, and if so on what terms.
• A potential insured does not make a misrepresentation only because he or she failed to answer a question, or gave an obviously incomplete or irrelevant answer to the question.
• A potential insured is not required to disclose any matter that diminishes the risk, is common knowledge, or that the insurer already knows or in the ordinary course of the insurer’s business ought to know.
• The non-disclosure or misrepresentation must be material in the sense that it must have been sufficient to induce the insurer to issue the policy or amend the terms of the policy to be issued, or induce the insurer not to make further enquiries.  Depending on the circumstances, prior claims or prior cancellations or refusals for a similar type of insurance will likely be material.
• If there is a relationship between a prior offence or offences and the type of insurance being sought, prior criminal convictions of a potential insured will be material.  Serious and credible threats to the property to be insured are material.

Summary

Legislation places very strict controls on how insurers may deal with misrepresentations and non-disclosure by insureds.  In practice, legislation makes it difficult for insurers to avoid making payment for losses in cases of innocent misrepresentation or non-disclosure.

Please call or contact me should you wish to discuss or have any queries in relation to the matters above.

John Radbone

June 2019