Consumer Insurance Question

  1. The Consumer Insurance (disclosure and representation) act 2012. Explain the principles which apply to a business applying to entering into a contract of insurance in relation to disclosure of information.

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The contract of insurance is described as a contract uberrimae fidei, or involving the utmost good faith in relation to consumer insurance contracts.

Like the duty of good faith, the duty of disclosure is mutual, although few cases exist that explore the duty as it applies to the insurer. The duty of good faith is wider in ambit than the duty of disclosure. Good faith applies at all times during the insurance contract: during negotiations; the currency of the insurance contract; and the date when a claim is made.

By contrast, the duty of disclosure applies during negotiations, but only up until a binding insurance contract is formed. It revives when the insured renews the contact. Usually annually. There is, however, no obligation on the insured to disclose factors increasing the risk during the course of the insurance contract.

There are three elements of good faith

  • Duty of disclosure of all facts which are material to the risks insured in the insurance policy;
  • Duty not to misrepresent facts
  • Duty not to make a fraudulent claim on the policy.

There are two important issues to consider in the context of disclosure;

  • The state of knowledge or belief of the insurer about the relevance of certain facts to the risk insured; and
  • The test of what is “material” fact to the risks insured in terms of the insurance contract.

The first issue concerns the thorny problem of how the law treats the situation where the insured did not disclose a material fact but was unaware of the fact at the formation of the contract. In such cases it is important to distinguish between a consumer insurance and commercial insurance.

Consumer insurance the law asks: “Did the insured disclose what he knew or did he wilfully turn a blind eye or conceal the factual position?” If he did not disclose what he did not know, the insurer is unable to avoid liability.

In the case of Joel v law union insurance 1908 & Economides v commercial union assurance plc 1998 – held, that the insurer will be under a duty to indemnify the insurance in circumstances where the insured did not know of the material fact and did not turn a wilful blind eye to the matters.

However, in the case of marine insurance ( commercial nature) the law is as set out in s18 (1) of the Marine Insurance Act 1906. Here, the question becomes “ Did the insured disclose what he knew or ought to have known?” Moreover, in terms of s18 (1) the insured is deemed to know every circumstance which, in the ordinary course of business, ought to be known to him.

The test for Materiality – with regard to the test, there are two possible interpretations

  • Whether the undisclosed fact would have had a “decisive influence” on the prudent insurer or
  • Whether the fact is one which would have had an “effect” on the insurers mind

Life Association v Foster 1873

Held, that what is material is determined by reference to what a reasonable insured would consider material, not what the prudent insurer would consider material. Thus, the test of materiality in the case of life insurance in scot law is easier for an insured to satisfy.

S18 is silent on the extent of influence that the non-disclosure must have on the hypothetical prudent insurer.

In Pan Atlantic v Pine top industries ltd 1995

The HOL added a requirement that, the insurer must also prove inducement. I.e. that it was induced to enter into the contract or set the premium at the level it did as a result of the insureds non-disclosure.

Matters excluded from the duty to disclosure  

Certain classes of info are excluded from duty of D under common law and in terms of he Marine Insurance Act 1906.

  1. The insured need not disclose any circumstance that diminishes the risk
  2. The insured need not disclose any circumstance known or presumed known to the insurer. These include matters of common notoriety or knowledge, and matters that the insurer, in the ordinary course of business ought to know. E.g.

Cohen, Sons & co v Standard Marine insurance ltd 1925

In this case, the insurers were held unable to avoid a policy on the grounds that that the insured had failed to disclose an obsolete battleship under tow and no steam power to assist steering, because it was regarded as well-known that such vessels often went to sea in this condition.

  1. the insured need not disclose any circumstance that is waived by the insurer. This might occur where the answer given by the insured ought to have put the insurer on inquiry

ICOBS – disclosure

ICOBS 8.1.1 (3) – provides that an insurer must no “unreasonably reject a claim including by terminating or avoiding a policy”

Duty not to misrepresent material facts

The duty is a duty to disclose, and you cannot disclose what you don’t know. The case of                            M’phee v Royal insurance 1979 – it was suggested that in commercial insurance, the insured must demonstrate that it had reasonable ground for its belief. The belief must be in good faith when expressing an opinion or rep a fact

Failure to disclose info – when insurer is able to prove a failure on the part of the insured to disclose material factors, insurer entitled to reject liability. Contract treated as never existed. No right of damage all sums paid out to insured must be repaid and premiums refunded by insurer.

Fraudulent claims

An insurer is under no liability to meet a fraudulent claim. …