6 - Pre-contractual Information Duty

Question 1

What must misrepresentation be to affect the validity of an agreement?

Answer 1

A material fact made by a party to the contract that induces the other into the agreement and causes them some loss or disadvantage

Question 2

What is a material fact?

Answer 2

Something which would influence a prudent and reasonable underwriter in deciding whether to accept a risk, and on what terms

Question 3

When can an insurer seek a remedy when a consumer makes a misrepresentation?

Answer 3

When the misrepresentation is negligent or fraudulent

There is no remedy for innocent misrepresentation

Question 4

How does the sale of insurance differ from the sale of goods?

Answer 4

The sale of goods is governed by the doctrine of “caveat emptor” - let the buyer beware. Neither party can mislead the other, but they do not have to give information they are not asked for.

In insurance there is a positive duty of disclosure - this is because it involves the sale of an intangible product and relies on both parties being truthful

Question 5

Who is responsible for an agent breaching the duty of disclosure/fair presentation?

Answer 5

The principal

Question 6

What was the affect of Pan Atlantic Insurance Co v Pine Top Insurance Co (1994) on non-disclosure?

Answer 6

The “actual inducement test” - an Insurer can only seek a remedy due to non-disclosure if they can prove:

a) the non-disclosure was material
AND
b) the non-disclosure induced them into the contract

The non-disclosure may be presumed in certain cases

Question 7

What is meant by “the nexus question”?

Answer 7

Connection between the non-disclosure/misrepresentation and the circumstances of the loss?

Question 8

A proposer fails to disclose several previous burglaries when applying for household insurance. Following a fire, the policyholder makes a claim and during the investigation the Insurers discover the previous burglaries. Are they entitled to seek remedy?

Answer 8

Yes

The burglaries may not be connected to the fire, but if the Insurers had known about them they may have entered the contract on different terms, or not at all. The relevance of the non-disclosure to the circumstances of the claim is not the issue, it is the relevance to the risk as a whole

Question 9

What test is applied when the Insurer seeks remedy for misrepresentation in consumer insurance?

Answer 9

Whether the consumer took “reasonable care” not to make a misrepresentation

Question 10

What are the two categories of material facts?

Answer 10

Physical hazards - relate to the characteristics of the risk itself

Moral hazards - relate to the characteristics and behaviour of the Insured/proposer

Question 11

What information does not need to be disclosed?

Answer 11

Facts which lessen the risk (although they often will be)

Facts of law

Facts which the Insurer ought to, or does, know

Information waived by the Insurer

Spent convictions

Question 12

Under law, when does a duty of disclosure/fair presentation exist?

Answer 12

At the proposal stage, in relation to an MTA, and at renewal

Question 13

Does the duty of disclosure/fair presentation exist during the lifetime of a policy?

Answer 13

Under law no, but some policies contain a condition requiring ongoing disclosure of alteration to the risk

Question 14

What is the remedy for a fraudulent claim?

Answer 14

The whole claim is forfeited, even if a loss did occur but the Insured exaggerated the amount of the loss.

The Insurer may also avoid the entire policy if they wish

Question 15

What forms may a breach of pre-contractual information duty by the insured take in commercial insurance?

Answer 15

1. Misrepresentation (innocent or fraudulent)

2. Non-disclosure (innocent or fraudulent)

Question 16

In commercial insurance, what must an Insurer show in order to seek a remedy for an Insured’s innocent breach of the duty of fair presentation?

Answer 16

They would have entered into the contract on different terms, or not at all

Question 17

If an Insurer can show they would not have entered into a contract but for a qualifying breach of the duty of presentation, what remedy is available?

Answer 17

If the breach was deliberate or reckless they can avoid the policy and keep all premiums collected

If the beach was not deliberate or reckless they can avoid the policy but must return all premiums collected

Question 18

If the Insurer cannot show that they would not have entered into the contract, what remedy is available?

Answer 18

If they would have applied different terms, the contract will be treated as if those terms apply

If they would have charged a higher premium, they can proportionately reduce the claim

Question 19

For consumer insurance, what is a qualifying misrepresentation?

Answer 19

The consumer did not take reasonable care and the Insurer can show that without the breach it would not have entered into the contract, or would have done so on different terms

Question 20

In consumer insurance what are the categories of misrepresentation?

Answer 20

Deliberate or reckless (the consumer knew it was untrue or misleading, or did not care)

Careless (not deliberate or reckless)

Question 21

In consumer insurance, what is the remedy for a deliberate or reckless qualifying misrepresentation?

Answer 21

The Insurer may avoid the contract and keep all paid premiums

Question 22

In consumer insurance, what remedies are available for a careless qualifying misrepresentation?

Answer 22

If the Insurer would not have entered into the contract, they may avoid the contract and return all premium

If the Insurer would have entered on different terms, the contract may be treated as if those terms applied.

If the Insurer would have charged a higher premium, they may proportionately reduce claims

Question 23

What formula may be used to proportionately reduce claims following a qualifying breach which would have caused the Insurer to otherwise charge a higher premiumM

Answer 23

x = (Actual charged premium / Higher premium) * 100

This gives the percentage of the claim that the Insurer may pay

Question 24

What is chapter 8 of ICOBS?

Answer 24

Claims handling

Question 25

Is the Insurer breaches the duty of fair presentation, what will the remedy be based upon?

Answer 25

Common law / Marine Insurance Act 1906