Disclosure
Duty of Good Faith / Disclosure
An insurance company may avoid a contract of insurance on the basis of non-disclosure as if it constituted misrepresentation. An insurance policy contract is one of utmost good faith. The English courts and Irish courts have diverged slightly in that the Irish courts have taken an approach which is more favourable to the insured.
The general principle is that the duty of disclosure requires that all facts be disclosed, which a reasonable insured might reasonably be thought to be material to the risk he is seeking indemnity for.
The failure to ask specific questions on the matter claimed to be material, does not constitute usually constitute a waiver, although some cases have so held. The wording must be such that the proposer is lead to believe that the insurer is only interested in matters specified, for a waiver to apply.
At one time, the courts held that the failure to ask an obvious question was not a waiver of information that would have been disclosed. The modern approach is to look at the manner in which the questions are presented and consider whether particular matters might fairly be thought to be waived.
If information is disclosed which should cause the insurer to ask further questions, the onus is on the insurer to so ask, if a reasonably prudent and careful insurer would so do. The reasonably careful insurer is not a detective but is not lacking in common sense.
On renewal of a policy, a fresh duty of disclosure applies. The insured must disclose material facts that have arisen during the term of the expiring policy, which are not known to the insurer. The general duty of disclosure requires that anything which bears upon the risk in a material way should be disclosed.
The insurer may waive the non-disclosure by its conduct. If there is unequivocal representation by the insurers that they will continue with the contract, notwithstanding their knowledge of material risks, they may be held to have waived their right to avoid the contract.
Materiality
The Irish test of materiality is whether the matter or circumstance would influence the judgment of a prudent insurer in undertaking the risk and setting the level of premium. The court will determine materiality. It is an objective test. The parties may give expert evidence as to what matter is material.
Material facts will generally include those which suggest a higher risk or that the insured is subject to greater danger, those which suggest special motive on the part of the insured, prospectively greater liability and those carrying a moral hazard. In response to case law and codes, insurers have limited their interpretation of materiality.
Immaterial risks are now commonly to be those known to the insurer, those which it could have reasonably expected to know or discovered by inquiry, those which tend to lessen the risk or where the insurer has expressly or implied waived the policy condition.
Moral hazard refers to the fact that the insured himself, may by negligence or deliberate action, trigger the risk concerned. In one sense, this may depend on his moral character and honesty. Questions on such characteristics are not generally asked, as they tend to be prejudicial, embarrassing and unlikely to be honestly answered.
Previous Offences
Questions arise as to whether a person’s general criminality and past misconduct should be disclosed. Questions might arise as to whether false attributions of dishonesty need to be rebutted, in the sense that they might be regarded as material, notwithstanding they turn out to be untrue. An insurer might regard a known propensity for dishonesty as material.
Previous convictions are generally held to be material. The general principles of disclosure apply. It is likely that convictions that are in any way material to the risk, ought to be disclosed and are likely to be regarded as material.
There may be a duty to disclose offences which are in fact been committed, even if the person has not been convicted. This raises difficult questions regarding the privilege against non-self-incrimination, If it can later be shown that offence was in fact committed and it is material, the insurer is likely to be entitled to avoid the policy.
It appears that the facts of arrest and charge for an offence that is relevant to the risk, should be disclosed, even if the person is in fact innocent. The matter may still be material if the person has, in fact, committed an offence, even if he has been tried and acquitted.
There is now legislation on spent convictions which must be considered in this context.
Proposal
An insurer may require that an applicant for insurance sign a proposal confirming not only that the specific questions answered are true but also declaring that all matters which would influence its decision have been disclosed. In some cases, the policy may purport to exclude liability, even where the matter not declared is irrelevant to liability. The Irish courts have tended to favour the insured person in relation to the interpretation and application of such clauses.
Until relatively recently, insurance companies could present standard form documents which greatly favour them, to the detriment of the insured. Under English law, the test of nondisclosure is materiality. A non-disclosure can be material, even though full disclosure would not have a decisive effect on the prudent insurer’s decision whether to accept the risk at that premium.
The misrepresentation or nondisclosure must induce the making of the insurance contract. If the misrepresentation or non-disclosure did not, in fact, induce the contract, the insurer may not use it to avoid the contract.
Contract Terms I
At common law, if the non-disclosure provision was actually incorporated in the policy as a condition, then it would not matter whether it is material or not. The courts have strained against such an interpretation unless it is very expressly provided. A clause of this nature in a consumer contract might now be deemed an unfair contract term and accordingly void.
The terms of the duty may be amended by the contract. It may provide the insurer with rights short of a complete repudiation of the policy if the statement turns out to be false but would not be critical. An insurer may waive the duty of disclosure on the part of the insured. This may arise by asking limited questions or not requiring further questions to be answered.
Commonly the declaration is made to the best of the insured’s knowledge and belief. Questions may arise as to whether answers given to the best of one’s knowledge and belief, requires a reasonable basis of belief. The court seems to take the view that opinion might be honest, even if misguided and wrong.
The duty of disclosure will arise on the making of the initial policy and on renewal. Generally, it does not arise on an ongoing basis. A continuing duty of disclosure may be provided for by contract, If the obligation is clearly and expressly provided, the insured may be obliged to reveal circumstances which increase the risk during the course of the term.
Contract Terms II
The duty of disclosure exists separate to the contract/policy. It may be modified by the terms of the policy.
It may be provided that the duty of disclosure is the basis of the contract. This would have the effect of making a non-disclosure, no matter how innocent, a basis for the insurer to avoid liability.
The Irish courts have been reluctant to enforce clauses whereby persons warrant to disclose facts which they do not know. They have sought to interpret such provisions to avoid this result. The Irish courts have allowed that such warranties are possible in principle, but they would have to be incorporated in very clear terms, such that the insured understood their nature and effect.
The Irish courts have supported a reasonable proposer over a prudent insurer approach. The Irish courts have been reluctant to uphold clauses by which a policy might be repudiated, because answers are untrue, even if the fact that it is untrue is not known to the insured.
The Irish courts have been critical of “basis of contract” clauses in insurance policies. Fundamental principles of contract law require that effect must be given to clear contractual terms (whether or not read or understood). However, the courts have sort to mitigate the harshness of such clauses in the insurance contracts, by straining to interpret them against the interests of the insurer.
In the consumer context, the unfair contract terms legislation is likely to limit the effect of “basis of contract” clauses. Where in a consumer contract, a clause which has no bearing on risk purports to relieve the insurer of liability, it may be void under the legislation.
Waiver and Insurer’s Failure
The duty of disclosure may be waived by the failure to ask relevant questions. However, invariably, the proposal form will reaffirm the general duty of good faith and require comprehensive disclosure. Answering the form in terms that are literally true will not suffice if the applicant knows of matters which are material to the risk.
The failure to ask obvious questions will not generally constitute a waiver of the duty of disclosure. However, if the insured discloses basic, there may be a waiver, where the insurer fails to ask obvious supplementary questions.
The principle of utmost good faith applies to insurers as well as the insured. If there are facts of which they insured is ignorant to the insurer’s knowledge, they may have to be disclosed under this principle.
There have been cases where exceptionally, the insurer has been aware of the broker’s dishonesty and have been held to have failed to have disclosed this to the detriment of the insurer. Damages may be available if the insured has lost on account of the failure of the insurer in this regard.
Codes of Conduct
The matter is the subject of codes of conduct. The codes of conduct and statements of insurance practice by the insurance industry are made under the auspices of legislation following consultation. The Minister may prescribe codes, but the insurance code of conduct in this context is voluntary. The code applies to individuals and not to commercial insurance.
The Irish Insurance Federation Code of Practice for non-life insurance recommends that matters which are commonly viewed as material be material should be the subject of a clear question. Insurers should avoid asking questions requiring knowledge beyond that which the insured might reasonably be expected to have.
The code provides that neither the proposal nor the policy should contain general provisions converting statements as to past and present fact into warranties. Matters which insurers have commonly found to be material should be the subject of clear questions. The insurer should not repudiate liability to indemnify a policyholder on grounds of breach of warranty or condition, where the circumstance are unconnected with the loss unless fraud is involved.
The provisions of the code shall be taken into account in arbitration and in other resolution procedures. The status of the code is unclear in court. It is argued, although some courts have held to the contrary, that codes of this nature may represent a waiver of the insurer’s legal rights.
Codes of Conduct I
The Irish Insurance Federation code of practice on personal non-life insurance requires that proposal forms should set out questions in clear terms. Insurers should avoid questions which are beyond the insured’s reasonable means of knowledge.
It is appropriate to require that questions be answered to the best of the applicant’s knowledge and belief. In effect, a basis of contract clauses in the widest sense, is contrary to the Code.
The introduction of Consumer Codes has limited the ability of insurers has limited the ability of insurers to set unreasonable duties of disclosure. Voluntary industry codes apply in the insurance sector, which forestalls the exercise by the Central Bank of its powers to make mandatory codes of conduct. This includes the Irish Insurance Federation voluntary code of conduct.
The non-life code of conduct and statement of insurance practice requires that members of the Irish Insurance Federation apply the following principles.
- The proposal form or policy should not contain any general provision converting statements of past or present fact in the proposal form, into warranties;
- those matters which insurers have commonly found to be material, should in so far as possible, be the subject of clear questions in proposal forms;
- an insurer should not repudiate liability on a policy on grounds of breach of warranty or condition, where the circumstances are unconnected with the loss, unless fraud is involved.
Codes of Conduct II
The introduction of Consumer Codes has limited the ability of insurers has limited the ability of insurers to set unreasonable duties of disclosure. Voluntary industry codes apply in the insurance sector, which forestalls the exercise by the Central Bank of its powers to make mandatory codes of conduct. This includes the Irish Insurance Federation voluntary code of conduct.
In response to the codes, insurers have sought to make their forms as unambiguous as possible in consumer cases.
The Code does not have the force of law. It is to be taken into account in arbitration. It may apply to disputes between policyholder and insurers. It is not clear to what extent the benefit of the code is available to members of the public, as they are not parties to it. The courts may find mechanisms to hold the code applies, where the insurer seeks to rely on “basis of contract” clauses, in consumer cases.
The code is of relevance in the context of complaints to and enforcement by the Central Bank. Its criteria will be taken into account in determining disputes by the Financial Services Ombudsmen and by the Central Bank enforcement.