Chapter 5. Good faith

What is the FCA take on disclosure for consumers ?

1. Disclose all material facts to the policy 2. Ensuring the customer is asked questions about the material facts 3. Explaining to the customer to take reasonable care no to make any misrepresentations

Material circumstances

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

Duty of disclosure

A responsibility for revealing all information that affects the agency agreement.

Measure of the insurer's knowledge

An insurer ought to know something only if: an employee/agent of the insurer knows it or the relevant information is held by the insurer. An insurer is presumed to know: things which are common knowledge, things that an insurer, offering insurance of the class of business in question in the field of activity in question, would reasonably be expected to know in the ordinary course of business.

What is a material fact?

Any information that would influence the underwriters decision to take on the risk (changing the premium)

Name three policies that require continuous disclosure?

Commercial property insurance, motor insurances, public liability

CIDRA

Consumer Insurance Act (Disclosure and Representations)

General (short-term) insurance policies

Contracts that are renewable, usually after 12 months. When the contract ends it is customary to offer renewal terms. If accepted a new contract is formed. The duty of disclosure is revived during the period of negotiation and applies for new contracts.

Under common law when is the duty of disclosure for general policies?

Duty of disclosure starts when negotiations begin and ends when the contract is formed

Facts of law (don't need to be disclosed)

Everyone is deemed to know the law. It follows that those actions that the proposer needs to take in order to comply with the law do not need to be declared, even if material.

What facts do no need to be disclosed by the insured ?

Facts by law, facts of public knowledge, facts that a survey would of revealed, facts that the insured does not know

Misrepresentation

False statement of fact from one party to another.

Claiming failure of disclosure

If an insurer clarifies what they mean by a 'material fact', 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 material.

Insurers waving their rights

If only partial information is given in regards to a questions that's been asked and the insurer doesn't seek further details, the insurer is deemed to have waived their rights regarding this information.

Measure of the insured's knowledge

Individual insured only knows: what is known to them, what is known to one or more individuals who are responsible for their insurance Insured

Limitation of an insurer's right to information

Insurer's constructs proposal forms with the intention it will draw out all relevant information relating to the risk. However, the proposer must still disclose any information that is material unless they are a 'consumer'.

Insurer's duty of disclosure

Insurer's must disclose the following to the insured: notifying an insured of a possible entitlement to premium discount (from good insurance history). only taking on risks which the insurer is registered to accept. ensuring that statements made are true.

On alteration (general policies)

It may be necessary to change the terms of a the 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.

Breach of utmost good faith

Misleading an insured about policy cover, as shown in Kettlewell v. Refuge Assurance Company (1909)

Long-term insurance policies e.g. life insurance

Once the requirements for disclosure have been met in the negotiations leading up to the inception of a long-term contract, the duty of disclosure ceases. Once the policy is in force, even if a material fact, changes, it doesn't need to be declared. The only requirement for the policy to continue is that the insured pays the premiums when they fall due.

Non-consumer customers

Only under a duty to make fair presentation of the risk unless the insurer has contracted out of this provision. If this is the case, all material facts must be disclosed.

Facts that a survey should have revealed (don't need to be disclosed)

Provided that the proposer has not concealed anything from the surveyor, if the surveyor misses something of importance that is material fact, the insurer cannot subsequently claim non-disclosure

What does Estoppel mean?

Stops someone stating a fact due to what was previously said

Facts where the insurer has waived it's rights to the information (don't need to be disclosed)

Such facts would include those where the proposer has not answered a question on a proposal form, or has just inserted a dash.

Duty to make fair representation

The act states that the insured must make to the insurer a fair presentation of the risk and insurers have to take responsibility for asking questions and probing for information about a risk.

On renewal

The insured's duty of disclosure is revived for general insurance policies.

Modifications by policy wordings

The insurer requires a continuing duty to disclose material facts, in which case there must be a specific policy condition that makes this clear.

What is the responsibility of the principal in terms of their agents?

The principal has responsibility to the actions of the agent

At inception

Under common law, duty of disclosure starts when negotiations begin and ends when the contract is formed. From that point until renewal negotiations take place there is no requirement for the insured to declare material facts, unless they affect policy cover.

Modification by policy wordings

We have seen that the duty of disclosure exists from the beginning of negotiations until the time that the contract of insurance takes effect. Duty of disclosure revives automatically at renewal

Measure of what the insured ought to know

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

Avoiding policies

When there has been a breach of utmost good faith by the insured, the insurer will generally have the right to avoid the policy. The insurer must not act in a way that suggests they have waived their right to avoid the contract.

Utmost good faith

a positive duty voluntarily to disclose, accurately and fully, all facts material to the risk being proposed, whether requested or not

data dump

a shapeless outpouring of everything a presenter knows about a topic.

Material circumstances are not:

confidential information acquired through a business relationship unconnected to the contract of insurance.

Fair presentation 2

disclosure in a manner which would be reasonably clear and accessible to a prudent insurer.

Facts of public knowledge (don't need to be disclosed)

e.g. the fact that state of war exists, that an area is subject to natural catastrophes, subsidence, hurricane or flood. This also includes industrial processes, as these are standard for trade.

Facts that lessen the risk (don't need to be disclosed)

e.g. the fitting of an intruder alarm, there is no requirement to disclose them although in doing so it could produce a lower premium or better cover.

Consumer Insurance Act

elationship of insurer and proposer (who is a consumer) with regard to the duty of disclosure

proposer

insured

Fair presentation

the consistent and faithful application of accounting standards when preparing the financial statements

proposer does not need to disclose material circumstances

• matters known to individuals who participate on behalf of the insurer in deciding whether to take the risk and on what terms (for example, underwriting teams) • knowledge held by the insurer and readily available to the person deciding whether to take the risk • matters known by an employee or agent of the insurer, which should reasonably have been passed on to the person deciding whether to take the risk (for example, the claims department).

CIDRA's main provisions

• offer protection to proposers who are often unaware that a duty to fully disclose exists • prevent insurers from denying claims when the proposer has acted honestly and reasonably • prevent a claim being refused where the proposer has made an innocent mistake but could be prejudiced by the proposal form stating that the answers given 'form the basis of the contract'

The key changes in Insurance Act 2015

• the proposer cannot 'data dump' on the insurer - the presentation must be reasonably clear and accessible; and • the insurer has to consider whether the presentation invites further questions to be asked, and it has the burden to make sure those questions are asked if needed.

Material circumstances are:

• those that the insurer ought to know in the ordinary course of conducting their business for arranging insurance • information that should have been revealed by a reasonable search of information held within the proposer's own organisation • information held by others, such as the proposer's brokers.