Chapter 5: Good Faith and Disclosure Flashcards
Define the principle of good faith, also called utmost good faith
The disclosure must be made clearly and accessibly, and material representations of fact, expectation, or belief must be “substantially correct”
Who does the duty of disclosure apply to?
Both proposers and insurers
How does good faith apply to insurers?
Cannot introduce non standard terms without negotiation
Cannot not declare that discounts are available under certain circumstances (eg for installing home security)
What is a material circumstance?
Everything which would influence the judgement of a prudent insurer in fixing the premium or determining whether to take the risk
(Marine Insurance Act 1906)
What is the legal duty of a proposer?
To take reasonable care not to make a misrepresentation. Information provided must be true to the best of their knowledge
What acts set out the duties of consumers and business/commercial?
Consumers - Consumer Insurance (Disclosure and Representation) Act 2012
Commercial - Insurance Act 2015
Are proposers legally bound by the principle of good faith?
No, this was abolished under CIDRA 2012 for consumers and Insurance Act 2015 for commercial. The principle continues but insurers can no longer avoid contracts ab initio in the event of a breach
What does the Consumer Insurance (Disclosure and Representation) Act 2012 set out for consumers?
Consumers have a duty to take reasonable care not to make a misrepresentation. They must answer insurer’s questions wholly and accurately but do not have to volunteer information not asked for
What does the Insurance Act 2015 set out for commercial insurance?
Extends the duty of consumers from CIDRA 2012 to business/commercial insurance, namely a duty to take reasonable care not to make a misrepresentation
They also have a duty to “make a fair presentation of the risk”
How does the duty of disclosure apply to the insurer?
Notify insureds of entitlements to discounts
Only taking on risks the insurer is registered for
Ensuring statements are true + not misleading about coverage
When does the duty of disclosure exist?
It starts when negotiations start and ends when the contract is formed (inception). It begins again when renewal negotiations take place. During the policy there is no duty of disclosure unless the circumstances effect the policy cover. EG for motor insurance if you change your car you must declare it, but you do not have to declare a conviction for fraud until renewal
What do insurers do about disclosure mid-policy?
They may introduce policy conditions requiring continual disclosure. These differ depending on line of business but for example in liability the business of the insured is strictly defined in the policy and will not cover any activities not declared
What happens with disclosure if a mid term adjustment/endorsement is required?
The duty of disclosure is revived in relation to the change
What happens if a proposer does not answer, or fully answer, a question asked by the insurer but the insurer does not seek further details?
The insurer is deemed to have waived their right to the information and misrepresentation has not occurred - the onus is on the insurer to ask follow up questions
What material circumstances need to be disclosed?
Physical and moral hazards
What information does not need to be disclosed?
Information that lessens the risk (eg security) - you normally would because it may lower premiums but is not required
Information which the insurer is presumed, ought to, or does know
Information the insurer has waived it’s right to
When are remedies available to insurers for consumer policies under CIDRA?
When a qualifying misrepresentation has occurred that was deliberate, reckless, or careless
What remedy is available under CIDRA if a misrepresentation was deliberate or reckless?
Avoid the contract ab initio and refuse all claims
Keep any premiums paid
What remedy is available under CIDRA if a misrepresentation was careless?
The insurer can apply a remedy based on what they would have done if it had known the correct information. For example:
Applying a relevant exclusion
Applying an increased premium (claim is reduced in proportion)
Refusing to offer terms at all
Under CIDRA, when is a misrepresentation deliberate or reckless?
When the consumer knew it was untrue or misleading, or did not care
Under CIDRA, when is a misrepresentation careless?
When it is not deliberate or reckless. The consumer did not take sufficient care to understand what the insurer wanted or to check the facts
When are remedies available to the insurer under IA 2015?
When the duty of fair presentation is breached and the insurer can show that if not for the breach they would have entered into the contract under different terms or not at all
Under the IA what are the two categories of breach of the duty of fair presentation?
- Deliberate or reckless
2. Neither deliberate nor reckless
Under IA when is a breach of fair presentation deliberate or reckless?
When the insured knew it was in breach or did not care if it was in breach
Under IA what is the remedy if a breach of fair presentation occurred during original placement/prior to inception?
(Differs if deliberate or reckless vs neither deliberate nor reckless - give both)
If deliberate or reckless: Insurer may avoid the contract, refuse all claims, and not return the premium
If neither deliberate nor reckless:
A) If they would not have entered into the contract they may avoid it but have to return the premium
B) If they would have entered on different terms, then the contract will be treated as if those terms apply
C) If they would have entered at a higher premium, the claim can be reduced in proportion
Under IA what is the remedy if a breach of fair presentation occurred when a variation (endorsement) was made?
(Differs if deliberate or reckless vs neither deliberate nor reckless - give both)
If deliberate or reckless: Contract can be terminated from when the variation was made and no return of premium
If neither deliberate nor reckless:
A) If the insurer would not have agreed to the variation the contract is treated as if it was never changed, but any premium charged for the variation must be returned
B) If they would have applied terms then those terms may be applied
C) If they would have charged a higher premium the claim can be reduced in proportion
When may insurers apply remedies?
Upon the discovery of a breach. They may apply these remedies retrospectively and can revisit previously agreed claims if a breach is later discovered
How does the Road Traffic Act 1988 affect the insurer’s rights to remedies following a breach of disclosure?
Since motor insurance is compulsory and it would not be fair to penalise a third party in the event of a road collision because of the insureds non-disclosure. Insurers are therefore unable to avoid liability. Instead they must pay any claims for third party injury and property and then have a right of recovery against the insured
You have a motor insurance policy. After inception during the lifetime of the policy you are diagnosed with epilepsy. Do you have a duty of disclosure to your insurer?
Yes, the circumstances effect the policy cover and changes the risk so she has a duty to disclose this to her insurer
When would an insurer still pay out a claim even though a breach of good faith has been discovered that meant they would not have taken up the policy from the outset?
Where the claim is for third party injury and property and the insurance is compulsory by statute
How did the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) change when a conviction is considered spent?
The rehabilitation period is now the length of the sentence plus a buffer period which starts from the end of the sentence. The length of the buffer period is dependent on the length of the sentence or type of non-custodial sentence. A conviction is considered spent when the buffer period ends
(Prior to this all rehabilitation periods started from the date of conviction)
How long are the buffer periods for custodial sentences?
Depends on the length of the sentence!
0-6 months: 2 years
6-30 months (2.5 years): 4 years
30 months - 4 years: 7 years
Over 4 years: Never spent
How long are the buffer periods for non-custodial sentences?
Depends on the type of sentence!
Community order/youth rehabilitation order: 1 year
Fine: 1 year (from date of conviction)
Conditional discharge/referral order: Period of order
According to FCA guidance, when must insurers explain the duty of disclosure to a proposer?
For commercial insurance
How does the duty of disclosure differ for consumers and commercial insurance?
Consumers must take reasonable care to answer the insurer’s question but do not have to voluntarily disclose information not asked of them.
Commercial must do the same but also must make a fair presentation of the risk and do have to disclose all material facts relevant to the risk
What legal term/principle may prevent an insurer from cancelling a contract with the insured under certain circumstances?
Estoppel
A bar or impediment preventing someone from asserting a fact or right, usually when one person relies upon the conduct of another. In insurance this is most relevant for disclosure - if the insurer does not inform the insured of their concerns they may rely on the insurer’s silence as confirmation that everything is okay which would make it unfair to cancel the policy
