Good Faith and Disclosure

Material circumstances

'a circumstance or representation is material if it would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms.'

IA 2015

'any rule of law permitting a party to a contract of insurance to avoid the contract on the ground that the utmost good faith has not been observed by the other party is abolished'

An insurer ought to know something only if:

- An employee/agent of the insurer knows it and ought reasonably to have passed on the relevant information to the individual making the decision whether or not to take the risk - The relevant information is held by the insurer and is readily available to an individual making the decision whether or not to take the risk

Consumer Insurance (Disclosure and Representations) Act 2012

- Came into force on 6th April 2013 - Removes the common law duty on consumers to disclose any information that a prudent underwriter would consider material and replaces this with a duty to take reasonable care not to make a misrepresentation - Applies to consumers and not to business/commercial insurance

Disclosure Post contract

DPC

Physical hazard

Fire insurance Motor insurance Theft insurance

Moral hazard

Insurance history Personal history

What does the IA set out?

What the insured or the insurer should know or is expected to know

Material circumstance

- If an insurer clarifies what they mean by a 'material circumstance' by defining exactly what is required in answer to a question on a proposal form, they are unable at a later date to claim that they required wider or further disclosure. - They cannot claim that there has been failure to disclose something.

If the breach was not deliberate or reckless, and the premium either stayed the same or increased as a result of the variation

- If the insurer would not have agreed to the variation at all, the insurer can treat the contract as if the variation never happened, but must return any applicable premium charged for the variation - If the insurer would have agreed to the variation, but on different terms including the premium, then the contract will be treated as if those terms now applied and if the insurer would have charged a higher premium then any claim.

For all other breaches that were not deliberate or reckless, the remedy depends on the impact

- If the insurer would not have entered into the contract at all they can avoid it and refuse all claims - but they must return the premium - If the insurer would have entered into the contract but on different terms (not related to the premium), then the contract will be treated as if those terms applied under the insurer chooses not to apply them.

IA 2915 states that the following circumstances do not need to be disclosed:

- Information that lessens the risk - Information the insurer knows Information the insurer ought to know - Information the insurer is presumed to know - Inform waived by the insurer

Under CIDRA, an intermediary is to be considered the insurer's agent if the intermediary:

- Is appointed representative of the insurer - Collects information from the consumer with express authority from the insurer to do so - Has authority to bind the insurer to cover and does so - In all other cases, it is presumed that the agent is the consumer's agent unless, the consumer proves otherwise

Examples of good faith

- Notifying an insured of a possible entitlement to a premium discount resulting from a good previous insurance history - Only taking on risks which the insurer is registered to accept (avoiding unenforceable contracts)

Examples of material circumstances

- Special or unusual information relevant to the risk - Any particular concerns which lead the insured to request insurance to cover the risk - Anything which those concerned with the class of insurance and field of activity in question would generally understand as being something that should be dealt with in a fair presentation of risks of the type in question

Features of material circumstance

- The courts test whether a circumstance is material by looking at it from prudent insurer's point of view. - They do not consider the insured's point of view or that of the particular insurer involved

Estoppel

- The term for an impediment that precludes a person from asserting a fact or a right. - Arises where one party's conduct has been relied upon by the other. - The insurer has to be very careful not to lead the insured into a false sense of security concerning the policy validity

An insurer is presumed to know:

- Things which are common knowledge - Things which an insurer offering insurance of the class in question in the field of the relevant activity would reasonably be expected to know in the ordinary course of business

FCA disclosure rules

1. Explaining to the customer the responsibility of consumers to take reasonable care not to make a misrepresentation and the possible consequences if a consumer is careless in answering the insurer's questions or if a consumer recklessly or deliberately makes a misrepresentation 2. Explaining to a commercial customer the duty to disclose all circumstances material to a policy, what needs to be disclosed and the consequences of any failure to make such a disclosure 3. Ensuring that the commercial customer is asked clear questions about any matter material to the insurance undertaking; and 4. Asking the customer clear and specific questions about the information relevant to the policy being arranged or varied.

Qualifying breach

A breach that triggers a remedy is called a qualifying breach

What is a dishonest representation?

A dishonest misrepresentation is always to be taken as showing lack of reasonable care

What must the misrepresentations concern?

A fact not an opinion, and must otherwise meet the conditions relating to non-disclosure.

Agent's duty

A person is responsible for the acts of their agent and so a careless or misrepresentation by an agent is treated as if it had been made by the principal

DPC Commercial property insurance

A policy condition requires continuing disclosure of removal to another location, or circumstances that increase the risk of damage

What happens under the IA 2015 when there has been a breach of warranty?

An insurer's liability will be suspended from the time of breach. The insurer will have no liability for losses occurring or attributable to something occurring during this period of suspension, but will be liable for losses occurring after a breach has been remedied

Under the IA 2015, what can an insurer do if the breach was deliberate or reckless?

An put the insured on notice that the contract will be treated as terminated from the time when the variation was made, and the premiums do not have be returned

What do insurers have to do?

Ask specific questions

If a breach was deliberate or reckless insurers may:

Avoid the contract, refuse all claims and do not have to return the premium.

Who does the principle apply to?

Both the proposer and the insurer throughout the contract negotiations. Applies differently to each party

What can the insurer not do?

Cannot introduce new non-standard terms into the contract that were not discussed during negotiations, neither can the insurer withhold the fact that discounts are available for certain measures that improve a risk

Two categories of breach are

Deliberate or reckless Neither deliberate of reckless

DPC On alteration

During the term of a general (non-life) policy, it may be necessary to change the terms of the policy The insured may wish to increase the sum insured, change the description of the property, or add another driver to a motor policy. Where a change results in the need for an endorsement to the policy, the duty of disclosure is revived in relation to that change

What do material circumstances relate to?

Either physical hazard or a moral hazard.

Kettlewell v Refuge Assurance Company

Ensuring that statements made are true: misleading an insured about policy cover is a breach of good faith

s.18(2) of the Marine Insurance Act 1906

Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium or determine whether he will take the risk

What happens if an insurer does not seek further details?

If a question is asked, but the proposer only provides partial information in response and the insurer does not seek further details, then the insurer is deemed to have waived its rights regarding this information.

When is a remedy available?

If the misrepresentation is a qualifying misrepresentation - has to be either deliberate, reckless or careless.

Insurers duty of disclosure

In order to fulfil this duty, the insurer must also behave with good faith

Who must insurers meet claims for?

Insurers therefore must meet all claims for personal injury and property damage.

What were the consequences of this legislation?

Intermediaries and insurers include having to change their documentation, websites and ways of working.

An insurer has a remedy for breach of duty of fair presentation only if the insurer shows that, but for the breach of duty

It would not have entered into the contract of insurance at all It would have done so only on different terms

A deliberate or reckless breach means that the insured

Knew that it was in breach of duty of fair presentation Did not care if it was in breach of that duty

A qualifying misrepresentation is deliberate or reckless if the consumer:

Knew that it was untrue or misleading, or did not take care whether or not it was untrue or misleading Knew that the matter to which the misrepresentation related was relevant to the insurer, or did not care whether or not it was relevant to the insurer

If a qualifying misrepresentation is found to be deliberate or reckless, the insurer:

May avoid the contract and refuse all claims Can keep any premiums paid, unless it would be unfair to the consumer to keep them

Good faith

Means that disclosure must be made in a reasonably clear and accessible manner, and material representations of fact, expectation or belief must be 'substantially correct'

DPC On renewal

On the renewal of a policy, the insured's duty of disclosure is revived for general insurance (i.e. non-life) policies

What is a fair representation defined as?

One: - Which makes disclosure of every material circumstance which the insured knows or ought to know, or disclosure which gives insurers sufficient information to put a prudent insurer on notice that it needs to make further enquires for the purpose of revealing those material circumstances - Which makes the disclosure in a manner which would be reasonably clear and accessible to a prudent insurer; and - In which every material representation as to a matter of fact is substantially correct and every material representation as to a matter of expectation or belief is made in good faith

Non individual only knows what is known to one or more to the individuals who are:

Part of senior management Responsible for the insured's insurance

What does CIDRA replace?

Replaces the duty on consumers to volunteer the information before taking out insurance, with a duty to take reasonable care to answer insurers' questions fully and accurately

What information is required to make an informed decision?

Require sufficient information about the contract before its conclusion so that a prospective customer can make an informed decision about whether to buy it or not

Compulsory Insurance

Some are required by statute and has impacts on an insurer's rights following a breach of the duty of disclosure e.g. motor insurance

Who is a consumer under the CIDRA?

Someone who takes out insurance 'wholly or mainly for purposes unrelated to the individuals trade, business or profession.'

The insurer must not act in a way that suggests they have waived their right to avoid the contract.

Such an action could be in writing to the insured invoking a seven-day cancellation clause In doing this, the insurer accepts that the policy is in force up to the date of cancellation The insurer has thus waived its rights and is 'estopped' from avoiding the policy on grounds of non-disclosure at a later date.

DPC Public liability insurance

The continuing requirement for disclosure for this class of business arises from the fact that insurers tightly define 'the business' of the insured in the policy This means that the insured must notify any extension of activities for cover to apply A condition requiring ongoing disclosure of material circumstances may be coupled with this

What would be the effect of this be?

The effect of this would be that, should a claim occur between inception and the cancellation, the insurer could not avoid payment of the claim on grounds of non-disclosure

What is the law primarily concerned with?

The law is primarily concerned that the innocent victims of road accidents should be adequately compensated, and this aim would be defeated if an insurer could avoid paying claims on the grounds of non-disclosure.

What facts are mainly known by the insurer?

The nature of the subject matter of all the insurance contracts and the circumstances surrounding it

What does disclosure mean?

The parties to a contract must volunteer material information in all negotiations before the contract comes into effect

Who does the responsibility to disclose sufficient information fall to?

The responsibility lies with the adviser to show how the demands and needs are met by the product offered. Implies that there is a comprehensive fact gathering exercise that must be undertaken, placing onus on establishing the facts upon the adviser

What did intermediaries have to amend?

Their terms of business agreements as well as consider how their agency relationship with the policyholder may impact them

Duty of disclosure

There is an implicit duty to disclose material circumstances

DPC Motor insurance

There is usually an onerous policy condition that requires continuing disclosure of all material changes by the insured, during the currency of the policy

Who do insurers have a right of recovery against?

They then have a right of recovery against the insured.

When is the proposer not considered to have failed to disclose information?

This applies to answers left blank on proposal forms or a vague description of a business It is up to the insurer to follow up with further appropriate questions

What duty to disclose does the proposer have?

To disclose all material circumstances about the risk to the insure

DPC At inception

Under both common law and recent law reforms, the duty of disclosure starts when negotiations begin and ends when the contract is formed (at inception) From that point until the renewal negotiations take place there is no requirement for the insured to declare material circumstances, unless these affect the policy cover

An individual insured knows only:

What is known to them as an individual; or What is known to one or more of the individuals responsible for their insurance

The measure of what the insured ought to know is defined as:

What should have been revealed by a reasonable search of information available to the insured

Consequences of misrepresentation by consumers

Where a proposer, deliberately or recklessly answers wrongly, the insurer will be entitled to avoid the policy ab initio.

What happens when there has been a breach of good faith by the insured?

the insurer will generally have the right to avoid the policy.