Insurers need information from consumers to decide whether to offer (and renew) insurance, and to decide the price and other terms of the insurance to be offered to the consumer. The law imposes a duty of disclosure on policyholders when they seek to take out new insurance cover or to renew existing insurance cover.
Insurers may be able to refuse to pay a claim or part of a claim under an insurance policy if the policyholder has not complied with their duty of disclosure. However, an insurer must first establish that:
•the insurer clearly informed the policyholder in writing about the duty of disclosure and the consequences of non-disclosure;
•the policyholder knew or should have known that the insurer required information about certain matters;
•the policyholder failed to provide information, or misrepresented the information; and
•the insurer would not have offered insurance, or would have offered insurance on different terms, had the policyholder properly disclosed the information.
Each of these elements is discussed in detail below.
Insurer’s responsibility to inform
Under section 22 of the IC Act, before a contract of insurance is entered into, the insurer must clearly inform a consumer, in writing, of the general nature and effect of the duty of disclosure, including the consequences of non-disclosure.
In addition, where section 21A of the IC Act applies to a contract, an insurer must clearly inform the consumer in writing of the general nature and effect of section 21A (see “Consumer’s duty to disclose”).
An insurer who has not complied with section 22 may not exercise any rights in respect to a non-disclosure unless the non-disclosure was fraudulent (s 22(3)).
The insurer is responsible for proving that it has complied with section 22.
Under section 21 of the IC Act a consumer is required to disclose every matter known to them that they know to be relevant to the insurer’s decision to accept the risk, or that a reasonable person in the circumstances could be expected to know is relevant to the insurer’s decision.
Under the June 2013 reforms to the IC Act, in assessing what a reasonable person could be expected to know as relevant to insurers, the factors to be considered are the nature and extent of insurance cover and the class of persons expected to apply for insurance of this kind.
The test of what a consumer knows to be relevant to the insurer is often determined by what the insurer indicates is relevant to it by the questions in the proposal/application for insurance. For instance, if the proposal questions a consumer about previous criminal convictions, then the consumer knows that this issue is relevant to the insurer’s decision to accept the risk.
Under the common law and the IC Act both insurers and policyholders have a duty to act towards each other with the utmost good faith. However, section 12 of the IC Act states that this duty of utmost good faith does not place a higher duty on a policyholder in respect to disclosures made to insurers.
Insurers have the responsibility of proving what information is relevant to their decision to accept the risk. An insurer may prove this by reference to its underwriting guidelines, which usually set out risks that will be accepted and the relevant premium and conditions attaching to that risk. The undisclosed matter must be relevant to that insurer as distinct from insurers generally.
Section 33 of the IC Act prevents an insurer from imposing a more onerous duty of disclosure on any insured than is required by the IC Act.
Section 21A of the IC Act contains special disclosure provisions for eligible contracts of insurance. Eligible contracts are specified in the IC Regulations. Regulation 2B specifies the following as eligible contracts of insurance:
•motor vehicle insurance;
•home and buildings insurance;
•home contents insurance;
•sickness and accident insurance;
•consumer credit insurance; and
Section 21A was introduced to assist consumers to comply with their duty of disclosure by requiring an insurer to ask specific questions (rather than vague or open-ended questions) about the proposed insurance contract.
Completing the insurance proposal
An insurer cannot rely on non-disclosure to reduce its liability under the insurance contract where the policyholder has failed to answer or given an obviously incomplete or irrelevant answer to a question on a proposal form and the insurer has not followed up the matter (s 21(3) IC Act). An ambiguous question asked in relation to a proposed insurance contract will be resolved in favour of the policyholder (s 23).
If a policyholder makes an incorrect statement in connection with a proposed insurance policy, it will not be a misrepresentation if the statement was based on a belief held by that policyholder and a reasonable person in the circumstances would have held that belief (s 26(1)). Any statement made by a policyholder in connection with a proposed insurance contract shall not be taken to be a misrepresentation unless the consumer knew, or could reasonably be expected to have known, that the statement would have been relevant to the insurer’s decision to accept the risk (s 26(2)).
An insurer’s remedies for non-disclosure are defined in the section 28 of the IC Act, which provides that where a policyholder fails to comply with their duty of disclosure or makes a misrepresentation to the insurer before the contract is entered into, an insurer is not entitled to avoid the contract but is entitled to reduce its liability for a claim to the extent that would place it in the position it would have adopted had there been no misrepresentation or non-disclosure. The courts have interpreted this section to allow insurers to reduce their liability to nil in circumstances where they would not have accepted the risk but for the non-disclosure or misrepresentation.
This means that an insurer may not avoid the policy or reduce its liability if it would have accepted the risk for the same premium and on the same terms and conditions despite the non-disclosure or misrepresentation. However, an insurer may avoid the contract if a non-disclosure or misrepresentation is fraudulent.
An insurer is not entitled to rely on anything the Claims Review Panels (see “Resolution of insurance disputes”) generally consider that an insurer is not entitled to rely on anything a policyholder wouldn’t reasonably understand to be relevant to insurers. If the insurer does not clearly and concisely ask for relevant information it cannot allege a non-disclosure of that information by the consumer.
An insurer proposing to rely on section 28 has to prove it is entitled to reduce its liability.