The duty of disclosure is a very important element of an insurance contract and can affect all parties involved.
The Marine Insurance Act 1906 states that a company’s insurance is only valid if it volunteers all relevant information when taking out the policy. Essentially any detail that may cause an underwriter to consider a risk differently should be made known to them at the beginning and subsequent renewals of an insurance policy. However, what happens if this information is not disclosed?
A breach of a duty of disclosure can occur in two ways:
- Non-disclosure
- Misrepresentation
Non-disclosure occurs when the proposer simply fails to tell the insurer some thing they know and this information would have caused the insurer to decline the risk or to enter the contract on different terms. An example of this would be to forget to inform underwriters that a car has been modified to a higher specification engine. If the underwriters knew about this at renewal they may have charged a higher premium.
Misrepresentation occurs when the statement that is given relating to the subject matter is substantially false and will have induced an insurer to enter into a contract. An example of this would be to obtain car insurance and intentionally not tell the insurers the claims that were made under a previous policy. An underwriter would base their terms on a claim free risk, however this would not be true. If the insurer had known about the previous claims they may have never incepted cover or may have required different terms.
Should insurers find out that there has been a breach of the duty of disclosure they may avoid the contract entirely by voiding it ab initio (from the beginning). It would be deemed that the policy never existed and no claims would be paid. Should the non-disclosure be fraudulent then an insurer has the right to keep the premium and may even sue for damages.
Next time you are applying for insurance or subject to a renewal make sure you think about the relevant details that need to be declared and if you are not sure please don’t hesitate to ask!
By Peter Ryder.