Chapter 5 - Good faith & disclosure

Question 1

What does the principle of good faith mean?

Answer 1

‘disclosure must be made in a reasonably clear and accessible manner and material representations of fact, expectation or belief must be substantially correct’

That both parties to a contract volunteer all material information in all negotiations before the contract comes into effect

Question 2

What is the definition of material fact/circumstance?

Answer 2

Material which would influence the judgement of an Insurer in fixing the premium or determining whether to take the risk

Question 3

Under common law, when is the duty of disclosure reviewed?

Answer 3

At each renewal date. Insurers often add specific terms to make disclosure requirement a continuing one. Is also particularly important at the proposal stage

Question 4

What was the impact of the Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA) on the Insured’s duty of disclosure - consumer insurance?

Answer 4

Removed common law duty on consumers to disclose any information a prudent insurer would consider and changed it to ‘take reasonable care not to make a misrepresentation’

So replaces duty to volunteer information and instead makes them take reasonable care when answering insurers questions

Prevented insurers including terms in contracts which put insured in worse position in respect of pre-contract disclosure. e.g. banning of ‘basis of contract’ clauses

Question 5

What is the FCA’s definition of consumer?

Answer 5

Any natural person acting for purposes outside his trade, business or profession

Question 6

What is the impact of IA (2015) on the Insured’s duty of disclosure - no consumer insurance?

Answer 6

• Good faith
• Duty to make a fair presentation
• Measure of the insured’s and insurer’s knowledge
• Agent’s duty

Question 7

Explain the effect on Good Faith from the IA (2015) relating to the Insured’s duty of disclosure for non-consumer insurance

Answer 7

Concept of good faith still exists, but the absolute avoidance of a contract in the case of a breach no longer exists.
‘Avoidance of a contract on the ground that utmost good faith was not observed by the other party is abolished’

Question 8

Explain the effect on the Duty to make a fair presentation from the IA (2015) relating to the Insured’s duty of disclosure for non-consumer insurance. What 3 things must the Insured do under the duty?

Answer 8

Changes the obligation on the parties during placement as a new duty of fair representation, so insureds must make to the insurer a fair presentation of the risk.
1. Disclose to insurers ‘every material circumstance’
2. makes the disclosure in a clear and accessible manner
3. Provide sufficient information to put a prudent insurer on notice that is needs to make further enquiries

So, onus has shifted from Insured to insurer, so has to ask more questions and take more responsibility.

Duty continues through the life of the contract.

Question 9

Explain the effect (key points) on the Measure of insured’s and insurer’s knowledge from the IA (2015) relating to the Insured’s duty of disclosure for non-consumer insurance.

Reframe this question p 4/5 chapter 5

Answer 9

Insured: An individual only knows
- What is known the them as an individual
- What is known to one or more individuals responsible for their insurance

A ‘non individual’ insured knows only what is known to one or more individuals who are senior management or responsible for Insureds insurances

Insured is not deemed to know confidential information that is known to an individual employed by their agent, where the source of information is unconnected to the insurance in question

Insured ought to know is defined as ‘what should have been revealed by reasonable search of information available to the insured’

Insured should not turn a blind eye to issues they have suspicions about

Insurer: only knows something if it is known to one or more individuals who participate on behalf of the insurer in the decision to take the risk

Insurer outght to know something if: the agent knows and if the relevant information is held by the Insurer.

Insurer is presumed to know things which are common knowledge and things through ordinary course of business

Question 10

What is the agents duty relating to the Insured’s duty of disclosure when referencing non-consumer insurance

Answer 10

Insurer can seek remedy for breach of fair presentation of a risk if the agent breaches the duty. Comes from IA 2015. so, person is responsible for the acts of their agent, therefore misrepresentation by agent treated as mis interpretation made by the principle.

Question 11

Under CIDRA, when is an intermediary considered an insurer’s agent?

Answer 11

• Is appointed representative of insurer
• Collections information from consumer with express authority from insurer
• has authority to being cover.

Question 12

What is the insurer’s duty of disclosure for non-consumer insurance?

Answer 12

Insurer also has duty of good faith to insured, therefore must:
- Notify insured of possible premium discounts
- only take on risks they are registered to accept
- ensure statements made are true

Question 13

What is the effect of the duty of disclose on FCA rules?

Answer 13

Requires Insurers and intermediaries to provide sufficient information about the contract before its conclusion so customer can make an informed decision. One element which must be included is a demands and needs statement. Responsibility lies with advisor to show demands and needs are met.

Question 14

How does the FCA require firms to ensure a consumer knows what they must disclose?

Answer 14

Insurer must:
- Explain to customer the responsibility to take reasonable care not to misrepresent and the possible consequences
- Explain the duty to disclose all material fact/circumstance
- Ensure the commercial customer is asked clear questions
- Ask the customer clear and specific questions about relevant information

Question 15

Under common law and recent law reforms, when does the duty of disclosure begin?

Answer 15

Duty of disclosure starts when negotations begin and end when the contract is formed (inception) and only begins again at renewal, unless the material circumstances affect the policy cover.

Question 16

What is the duty of disclosure at renewal?

Answer 16

Insured’s duty of disclosure is revived so then must disclose all material circumstances but there is a difference in short term policies and long-term (life insurance). Duty of disclosure ceases after inception of a long term contract.

Question 17

What 3 classes of insurance have a continuing requirement to disclose material information?

Answer 17

1. Commercial property - must disclose circumstances that change the risk
2. Motor insurance
3. Public liability - must notify if extension of activities as increases the risk

Question 18

Can the duty of disclose be revived on alteration of the policy?

Answer 18

Yes, if there is a mid term adjustment such as increased sums insured, duty of disclosure is revived in relation to that particular change

Question 19

What are the key elements of the limitation of an insurers right to information?

Answer 19

• Many cases, the completion of a proposal form brings about insurance so insurer construct the forms with all information they require.
• However, duty of disclosure means proposer must disclose other material information unless they are a ‘consumer’ (defined by CIDRA)
• ## If questions asked and proposer only provides partial information but this is accepted, the Insurer has deemed to waive the rights. Proposer has not failed to disclose material fact in this example. Up to Insurer to follow up with suitable questions so have waived right to avoid policy/

Question 20

What are the Insurers rights when a breach a breach of duty of good faith by Insured has occured?

Answer 20

Generally have the right to avoid to policy and can do some from the beginning. However, if give a cancellation date then are subject to claims from inception to the cancellation date as have said the policy is still in force and they have subsequently waived their right.

Question 21

What is material circumstance? As defined by IA 2015

Answer 21

‘a circumstance or representation is material when it would influence the judgement of the prudent insurer in determining whether to take the risk’

Examples include:
- special or unusual information which is relevant
- particular concerns which lead insured to request insurance
- anything those involved with the class of insurance understand as something that should be dealt with in fair presentation of risks

Duty of disclosure of material circumstances is required from BOTH parties.

Question 22

How do the courts test if a circumstance is material?

Answer 22

Look from a ‘prudent insurers’ perspective, not the Insured or the particular insurer involved.

Question 23

What type hazard are the majority of legal cases concerning material circumstances and why?

Answer 23

Moral hazard - less likely to be physical hazard as specific questions are asked on the proposal form.

Question 24

What are 3 examples of material circumstance that concern possible physical hazard? (non-life)

Answer 24

1. Fire insurance: construction, nature of use, heating system/electrics
2. Motor Insurance: type/age/driver/how long driving, previous accidents
3. Theft insurance: stock, security, value

Question 25

What are 2 examples of material circumstance relating to moral hazard? (non-life)

Answer 25

1. Insurance history: previous refusal to insure, claims history, special terms imposed
2. Personal history: criminal convictions, lack of good management of businesses, excessive carelessess.

Question 26

How can some circumstances considered ‘material’ not need to be disclosed (non-consumer insurance)

Answer 26

The Insurer ought to know it or could find it out

Question 27

What 5 material factors do not need to be disclosed in non-consumer insurance?

Answer 27

1. Information that lessens the risk - unusual to not, but dont have to
2. Information the insurer knows - go back to IA 2015 Insured expected knowledge
3. Information the insurer ought to know
4. information the insurer is presumed to know - common knowledge depending on the class of businesses
5. Information waived by the Insurer - if proposer has not answered the question and it has not been followed up

Question 28

Do spent convictions need to be disclosed?

Answer 28

Only if they follow the government guidelines set by LASPO (2012) - normally the time of sentence + a buffer

Question 29

Is non-negligent misrepresentation of material circumstance considered grounds for refusing to pay a claim?

Answer 29

No, it is unreasonable grounds if the proposer has acted ‘reasonably’ in providing the information.
Proposer must answer to best of knowledge or belief.

Question 30

What happens when a proposer misrepresents information deliberately or recklessly withholds information?

Answer 30

Insurer is entitled to avoid the policy from the beginning. Misrepresentation must concern a fact, not an opinion & otherwise meet the requirement of the conditions outlined relating to non-disclosure.

Question 31

What factors need to be taken into account to determine if a consumer has taken reasonable care not to misrepresent?

Answer 31

-The type of consumer insurance contract & target market
- The relevant explanatory material or publicity produced and authorised
- How clearly the insurer communicated the answering of questions
- Whether or not an agent was acting for the consumer

Question 32

In what instance of misrepresentation may an Insurer have to pay a claim?

Answer 32

If the proposer is a ‘consumer’ (defined by CIDRA) and has made a reasonable mistake based on the type of insurance & the clarity of the insurer’s questioning.

Question 33

Explain the factors that give rise to a ‘qualifying misrepresentation’

Answer 33

When the consumer:
- knows it was untrue or misleading or did not take care
- Knew the matter to which the misrepresentation related was relevant

If not careless, then it is deliberate and reckless.

Question 34

What can an Insurer do if a qualifying misrepresentation is found to be deliberate or reckless?

Answer 34

1. Avoid the contract and refuse all claims
2. keep premiums paid, unless it is unfair.

• a lot is based on what the insurer would have done if it had known the correct information, such as an exclusion or refusing to offer terms or an increased premium.

Question 35

When can an insurer avoid a policy?

Answer 35

If the insured has made a deliberate or reckless breach.

Question 36

How can an Insurer have a remedy for a breach of duty of fair presentation?

Answer 36

If they show that but for the breach of duty they would have:
- Not entered into the contact at all
- Or, done so on different terms.

Question 37

What is a qualifying breach? (In relation to remedies available to Insurers under IA 2015) and what are the two categories?

Answer 37

= A breach that triggers a remedy
1. Deliberate or reckless
2. Neither deliberate nor reckless

Question 38

What is a deliberate and reckless breach of duty of fair presentation?

Answer 38

When an insured knew it was a breach of fair presentation and did not care if it was a breach. D

Question 39

What can an Insurer do if a qualifying breach occurs?

Answer 39

Depends on the time of the breach in the contract but can:
For deliberate and reckless:
- Avoid contract
- Refuse all claims
- Do not have to return premium

For neither deliberate nor reckless:
- if Insurer would not have entered into the contract at all, then can avoid and refuse all claims
- if would have entered into contract but for higher premium and ‘reduce proportionately’ a claim which is premium charged divided by the higher premium x 100 and can apply this to any claim.

Question 40

What can an Insurer do if there is a breach of the duty of fair presentation in the variation of a contract? Explain for both deliberate or reckless or neither

Answer 40

If deliberate or reckless:
- put insured on notice that contract is terminated from the time the variation was made and no premiums returned

If not deliberate or reckless:
- Can treat contact as if variation never occurred but return the premium or
- Apply new terms and reduce claims proportionately

All of this can be done retrospectively

Question 41

What can an Insurer do if there is a breach of warranty?

Answer 41

If loss occurs and warranty has not been complied with the Insurer must prove that the breach increased the risk of actual loss. Then will have no liability for loss occurring, when there was a breach of the warranty.

Question 42

Define a material term (by IA 2015)

Answer 42

Terms of a contract, which if complied, would reduce the risk of one or more of:
- Type of loss
- Location
- Time

Question 43

What is an example of compulsory insurance and disclosure?

Answer 43

= Motor Insurance (road traffic act 1988)
Insurer cannot avoid liability on grounds of certain breaches of good faith as otherwise could leave victims without compensation