‘An insured’s duty of disclosure under the Common Law and the Insurance Contracts Act 1984’
Under section twenty one of the 1984 Insurance Contacts Act, all customers (insured) are required to make a disclosure to the insurer of any matters that are in relation to the risk. This is supposed to be done before an insurance contract is signed by both parties (Levin, 2000). The insured is supposed to disclose all issues related to the risk’s acceptance including subjective and objective disclosures. In subjective disclosure, the insured is expected to disclose all matters he/she perceives as relevant. Objective disclosure functions with an assumption that any reasonable person under the same situation will act in the manner expected (Rourke, 2007).
According to the act, the disclosure’s duty does not need any disclosures on matters of risk diminishing, common knowledge and any issue that the insurer may be aware of or ought to know. “When the compliance by the duty of disclosure is waived by the insurer, a disclosure becomes irrelevant” (Levin, 2000, p.23). In a case where a person gives an incomplete or irrelevant answer to any question that is part of the proposal form, the insurer is deemed to have given up compliance with disclosure’s duty relevant to the matter.
The insured’s duty of disclosure (during an insurance contract negotiation) under the common law states that there exists a duty to voluntarily make a disclosure of any facts that are material or known to the involved risk. Incase the above orders are not obeyed; the contract is taken as null and void. This coincides with the principle of utmost good faith (Garner, 2003). For instance, Mayne Nickless v Pegler (1974) case was purely a discussion concerning prudent insurer test. This case was used to shed more light on the meaning of material fact requiring disclosure. It was concluded that a fact would have only been a material if it would have reasonably affected the mind of a prudent insurer in determining the premiums and conditions behind acceptance or rejection of the insurance. The test actually worked against the consumer and was seen as a heavy burden to the insured. Other examples of cases that involved application of material test include: Joel v Law Union and Crown Insurance (1908) as well as Khoury v GIO (NSW) (1984) (Trudy, 1997).
Considering the case of Dalgety & Co Ltd v Australian Mutual Provident Society (1908), it was concluded that any circumstances that exhibits lack of confidence by one party to the other will lead to the former party being forced to disclose all the material facts known to it. (Trudy, 1997, p.69)
This is a condition that must be imposed unless the latter is very much aware of these facts, is presumed to be aware of them, takes on own knowledge or waives information concerning them. Incase the disclosure fails take place (may be due to accident, invalid contract or mistake); a material fact will be considered as one which is mostly likely to have an effect on minds of other reasonable insurers. Under the common law, any failure to make a disclosure of material fact relating to the insurance may lead to avoidance of the contract by the insurer. The common law does not take any necessity of reliance by the insurer and thus can avoid the contract in a situation where the insured breaches the duty to disclose any relevant information relating to the risk involved (Levin, 2000).
The common law also has provisions for timing of the duty of disclosure. The law allows the disclosure of the duty to be a continuous process that can only be concluded after the contract is over. The law recognizes the conclusion of the contract at the time when all the premiums have been paid. Since some contracts are renewable, the law requires that such contracts be signed by both parties at the time of renewal. Considering the materiality test, the law clearly stated that consumers were obliged to advise insurers of matters deemed to be material even when the consumers had no idea that a duty to disclose existed. In basic consideration, there was actually no obligation on the part of insurers to send a warning to the consumers about the nature as well as the existence of the duty of disclosure at any particular time (Brady, 2005).
The common law also has provisions for remedies available in a situation where there is breach of duty to disclose. Under this provision, any party that breaches the contract or makes false statements concerning the contract gives a lot of chances to the other party to avoid the contract and its terms. However, there is totally no provision in the law to make a distinction of a non disclosure that is fraudulent or innocent. Examples of matters which can be considered as ‘material’ under the new test include: Applicant’s name, health, occupation, insurance history, criminal record, financial status and type of property being insured. The cases that demonstrate the type of matters that need to be disclosed are: Lindsay v CIC Insurance Ltd (1989) 16 NSWLR 673 – ‘constructive knowledge’ as well as Naomi Marble and Granite Pty Ltd v FAI (Trudy, 1997).
There are two main statutory obligations of the insurer to disclose: The duty to notify and the duty to make further enquiries. Under the duty to notify, the twenty second section of the Insurance Contracts Act places the requirements of disclosure on insurers. Under this legislation, all the insurers are expected to adequately contact the insured and give them full and adequate information concerning the nature as well as the consequences of the duty of disclosure in the law (Brady, 2005). All the insurers are required to do this before the contract is officially signed by both parties to allow the consumers to make informed decisions concerning the contract. This law also requires that the insurers perform and enact the above orders in written form. For instance, the case of Lumley General Insurance v Delphin explores the consequences that may befall an insurance company if it does not comply with the provisions of duty disclosure under section twenty two of the Insurance Contracts Act. For information concerning the type of notice that is sufficient, Suncorp v Cheihk sheds more light. Considering the duty to make further enquiries, the common law states that failure by the consumer to complete an answer or give relevant information on the contract proposal form is deemed as failure to follow the rules and regulations of the duty of disclosure. Under section twenty one (subsection three) of the Insurance Contracts Act, this position is altered by giving the insurance companies an onus to make enquiries on whether the proposal forms have any errors, alterations or incomplete responses from the consumers (Siegal & Connolly, 2002).
Section twenty one (A) explores certain circumstances that may lead to waiver of the duty of disclosure. Under this section, misinterpretation and eligible contracts of insurance apply. In misinterpretation, Dawsons v Bonnin (1922) case under the common law shed more light on the ICA. In section twenty six, misinterpretation of statutory test of material occurs under the following circumstances:
In a situation where a person makes a statement that connects with the proposed insurance contract with the fact that such a statement (though untrue) was made on his own personal belief and such a belief can be presumed by another person given the same circumstances. If so, then such a statement will not be taken (under any condition) as a misinterpretation.
A statement that was made by a person in connection with a proposed contract of insurance shall not be taken to be a misrepresentation unless the person who made the statement knew, or a reasonable person in the circumstances could be expected to have known, that the statement would have been relevant to the decision of the insurer whether to accept the risk and, if so, on what terms. (Siegal & Connolly, 2002, p.53)
The case of Plasteel Windows Australia and ors v CE Heath Underwriting Agencies (1990) shed more light on misinterpretation (Trudy, 1997).
IRAC Format
Issue
The main issue concerns the following question that was asked by the professional indemnity policy:
“Are any of the partners, after enquiry, aware of any circumstances that are/is likely to give rise to a claim against the Firm or their predecessor in business or any of the present and former partners?”
Let us consider this declaration:
“I/We hereby declare that the above statements and particulars are true and that I/We have not suppressed any material facts and I/We agree that this Proposal Form shall be the basis of the contract with the Underwriters.”
Given that one of the partners was aware of a possible claim against the firm but the signing partner innocently and in ignorance answered “No”, we are required to analyze whether an insurer can deny liability on basis of misinterpretation and non disclosure.
Rules/facts
A misinterpretation is actually a statement placed by one of the parties to the contract. Such a statement is normally untrue as far as the legislation is concerned. Once the statement is made by one party, the other party has all the rights to deny any liability by the other party on basis of misinterpretation. Such a statement may be made out of ignorance (unknowingly), carelessly or innocently but this does not guarantee any defense whatsoever. Under such circumstances, the insurer can comfortably avoid the contract since the legislation does not have provisions to differentiate whether the misinterpretation was innocent or fraudulent (Rourke, 2007).
The court considers a statement related to proposed insurance contract as a misinterpretation if it was made under the following circumstances:
If the statement made was out of one’s personal belief which can be presumed by another person given the same circumstances.
“If the person who made the statement knew that the statement would have been relevant to the decision of the insurer on whether to accept the risk and associated terms” (Rourke, 2007, p.147).
Misinterpretation and non disclosure are both closely related terms and very few legislatures have been able to differentiate them. In most cases, the two terms have been considered to be similar.
Analysis and application
In this case, the two consumers had already signed a statement of material facts accepting that all the particulars were okay and that they were in agreement with the conditions of the contract. Further more, one of the partners gave incorrect response to the question asked by the professional indemnity policy. Although the response was made innocently, the law does not provide for such kinds of mistakes. Considering the above facts, the two partners actually made a statement which qualifies as a misinterpretation under section twenty six of the act of insurance contracts. This means that the insurer (insurance company) is allowed by the law to deny any liability on basis of misinterpretation. However, the partners would have had the opportunity to make claims against the firm if such a statement was not made (Rourke, 2007).
Conclusion
Under the insurance contracts act, the parties are required to be keen and not to make any statements without prior knowledge of the implications of such statements. This is because ignorance has never been recognized as a defense in any court of law. Furthermore, the law does not give any provisions that distinguish an innocently made statement from as statement made purposely for fraudulent (Siegal & Connolly, 2002). Therefore, the insurer holds an upper hand to deny any claims against it by the two consumers by arguing such a case on basis of misinterpretation or non-disclosure.
References
Brady, S. (2005). LLP: Protection of the insured. Law review journal, 3(5), 397-403.
Garner, A. (2003). Good Faith and Insurance Contracts. Philadelphia: Temple University Press.
Levin, M. (2000). The Modern Law of Insurance. Cambridge: MIT Press.
Rourke, M. (2007). Insurance law: Doctrines and Principles. Research journal, 5(3), 145-147.
Siegal, M., & Connolly, G. (2002). The law of insurance contracts. New York: Oxford University.
Trudy, D. (1997). Insurance law: Cases and Materials. Law Analysis Journal, 88(4), 53- 73.