Chapter 6 - pre contractual information duty

Question 1

What does the Marine Insurance Act 1906 (MIA 1906) state about insurance contracts?

Answer 1

The Marine Insurance Act 1906 (MIA 1906) states that insurance contracts are contracts of utmost good faith (s.17). This means that both the insurer and the insured have a duty to deal honestly and openly during their contractual relationship.

Question 1

How does the doctrine of utmost good faith in insurance contracts differ from most commercial agreements?

Answer 1

Unlike insurance contracts, which adhere to the doctrine of utmost good faith, most commercial agreements are subject to caveat emptor, or ‘buyer beware’. This means that in commercial agreements, the buyer assumes the risk for the quality and condition of the goods purchased.

Question 1

What is a ‘consumer insurance contract’ under the 2012 Act?

Answer 1

A ‘consumer insurance contract’ is defined as a contract of insurance between an individual who enters the contract wholly or mainly for purposes unrelated to their trade, business, or profession, and an individual who carries on the business of insurance and becomes a party to the contract by way of that business.

Question 1

What did the Consumer Insurance (Disclosure and Representations) Act 2012 abolish and replace for consumers?

Answer 1

The 2012 Act abolished the pre-contractual duty of disclosure for consumers and replaced it with the duty to take reasonable care not to make a misrepresentation.

Question 1

What are the two duties imposed by the new duty of fair presentation of the risk under the IA 2015?

Answer 1

The new duty of fair presentation of the risk under the IA 2015 imposes two duties:

A duty not to misrepresent any matter relating to the insurance – i.e., a duty to tell the truth.
A duty to disclose all material facts relating to the contract – i.e., a duty not to conceal anything relevant.

Question 1

What is a misrepresentation in the context of a contract?

Answer 1

A misrepresentation is a false statement of fact that induces the other party to enter into the contract.

Question 2

What conditions must a false statement meet to affect the validity of a contract?

Answer 2

To affect the validity of the contract, a false statement must:

Be one of fact (rather than a statement of law, or of opinion or belief).
Be made by a party to the contract.
Be material (i.e., something which would influence a reasonable person in deciding whether to enter into the agreement).
Induce the contract (i.e., be something that the other party relied upon in deciding to enter into the agreement).
Cause some loss or disadvantage to the person who relied upon it.

Question 3

What is a material fact in insurance?

Answer 3

The test of ‘materiality’ in insurance is different in that it is based on what a ‘prudent insurer’ would deem material rather than the opinion of a reasonable person.

Question 4

What is a ‘prudent insurer’ in the context of insurance contracts?

Answer 4

A ‘prudent insurer’ is a theoretical insurer who needs to know all the material facts before entering into a contract of insurance.

Question 5

What is fraudulent misrepresentation in the context of insurance contracts?

Answer 5

Fraudulent misrepresentation occurs when a person makes a false statement with the deliberate intention of misleading another and putting them at a disadvantage. The insurer must prove fraud.

Question 6

In non-consumer (business) insurance, can an insurer seek remedy for misrepresentation regardless of the type?

Answer 6

Yes, in non-consumer (business) insurance, an insurer may seek remedy on the grounds of misrepresentation regardless of whether it is fraudulent, negligent, or innocent.

Question 7

What is negligent misrepresentation?

Answer 7

Negligent misrepresentation occurs when a false statement is made because the person making it did not take sufficient care to ensure it was correct.

Question 7

How is an innocent misrepresentation different from a fraudulent misrepresentation?

Answer 7

An innocent misrepresentation is a false statement made without the intention to mislead the other party. It can also be described as negligent misrepresentation if the person making it did not take sufficient care to check that it was correct.

Question 8

What can an insurer do if a misrepresentation is found to be fraudulent in consumer insurance?

Answer 8

If a misrepresentation is found to be fraudulent, the insurer may avoid the contract and may keep any premium that has been paid.

Question 9

What does the doctrine of caveat emptor entail for the buyer of goods?

Answer 9

The doctrine of caveat emptor places the basic responsibility on the buyer to make sure they make a good bargain. The buyer is expected to examine the goods, assess their quality, and judge whether the price is fair.

Question 10

Are parties in a sale of goods contract required to disclose information that is not asked for?

Answer 10

No, neither party in a sale of goods contract is required to disclose information that is not asked for.

This means, for example, that if you are selling a car, you are under no positive duty to
disclose anything about it to the buyer (although, of course, if you do give information it
must be correct).

Question 11

Why is there a positive duty of disclosure in business insurance?

Answer 11

There is a positive duty of disclosure in business insurance because the proposer has full knowledge about the subject matter of insurance, and the insurer relies on this information to assess the risk.

Question 12

What did Scrutton, LJ, state about the duty of disclosure in Rozanes v. Bowen (1928)?

Answer 12

Scrutton, LJ, stated that as the underwriter knows nothing and the proposer knows everything, it is the duty of the assured to make a full disclosure to the underwriter without being asked of all the material circumstances.

Question 13

What happens if the insured’s agent breaches the fair presentation duty in non-consumer (business) insurance?

Answer 13

If the insured’s agent breaches the fair presentation duty, the insurer can seek remedy for the breach.

Question 14

How does common law treat misrepresentation by an agent?

Answer 14

In common law, a person is responsible for the acts of their agent. Therefore, a careless or reckless misrepresentation by an agent is treated as if it had been made by the principal.

Question 15

When is an intermediary considered the insurer’s agent under the 2012 Act?

Answer 15

An intermediary is considered the insurer’s agent if the intermediary:

Is the appointed representative of the insurer.
Collects information from the consumer with express authority from the insurer to do so.
Has authority to bind the insurer to cover and does so.

Question 16

What is the essential duty in non-consumer (business) insurance regarding the disclosure of material facts?

Answer 16

The essential duty is to disclose all facts or circumstances that are material to the risk.

Question 17

What does ‘influence the judgment’ mean in the context of material facts?

Answer 17

‘Influence the judgment’ means that the fact must be one which a typical, reasonable underwriter would want to know about when forming their opinion of the risk. It does not require proving that a reasonable insurer would have declined the risk or asked for a higher premium if the full facts were known.

Question 18

Under the Consumer Insurance (Disclosure and Representations) Act 2012, when can an insurer seek remedy for a breach of duty?

Answer 18

An insurer can seek remedy for breach of the duty only if the misrepresentation was caused by the consumer’s failure to exercise reasonable care not to make a misrepresentation, and if the insurer proves inducement.

Question 19

Can an insurer seek remedy for non-disclosure if there is no claim?

Answer 19

Yes, if insurers discover an actionable breach of the pre-contractual information duty at any time, they can seek remedy for the breach. They do not have to wait for a claim to happen before doing so.

Question 20

What is the duty of the proposer when completing a proposal form for insurance?

Answer 20

The proposer must declare all material facts or circumstances, whether or not they are asked to do so. This duty includes disclosing every material circumstance the proposer knows or ought to know, and it is sufficient if the proposer gives the insurer sufficient ‘signposts’ to make further inquiries.

Question 21

What are the two broad categories of matters requiring disclosure at common law?

Answer 21

The two categories are:

Physical hazard: relating to the physical characteristics of the risk.
Moral hazard: relating to the character and behavior of the insured.

Question 22

What is meant by ‘moral hazard’ in insurance?

Answer 22

Moral hazard refers to aspects of the risk that depend on the character and behavior of the insured, such as identity, occupation, previous criminal activity, and adverse insurance history.

Question 23

What are examples of matters that need not be disclosed under insurance law, even if they are material?

Answer 23

Here are the categories of matters that do not require disclosure:

Matters of Law
Factors which Lessen the Risk
Facts Known by the Insurers
Facts which the Insurers Ought to Know
Information that is Waived by the Insurers
Facts that are Outside the Scope of Specific Questions
Facts which an Inspection of the Risk Should Have Revealed
Facts which the Proposer Does Not Know
Convictions that are ‘Spent’

Question 24

When does the duty of fair presentation of the risk begin and end under CIDRA 2012 and IA 2015?

Answer 24

The duty of fair presentation starts at the commencement of negotiations for an insurance contract and ends when the contract is formed. Formation occurs at the point of offer and unqualified acceptance.

Question 25

Is there a duty to disclose new material facts that arise during the currency of the insurance contract?

Answer 25

No, there is no general duty to disclose new material facts that emerge after the contract is formed. However, parties may agree by express contractual term that such facts must be disclosed.

Question 26

How does the duty of disclosure apply to long-term non-consumer insurance policies like life insurance?

Answer 26

For long-term non-consumer insurance policies such as life insurance, there is typically no fresh duty of disclosure at each annual premium renewal.

Question 26

What happens to the duty of disclosure at the renewal of an insurance contract?

Answer 26

If insurers invite renewal, the duty of disclosure is revived. The insured must declare any changes in the risk or new material circumstances that occurred during the current period of insurance. Failure to do so may imply affirmation that the risk remains unchanged.

Question 27

What are ‘increase of risk clauses’ in insurance contracts?

Answer 27

Increase of risk clauses require the assured to disclose any material circumstances that arise after the contract is made, particularly if the alteration increases the risk of damage to the insured property.

Question 28

Who can breach the pre-contractual information duty, according to the IA 2015?

Answer 28

Only the insured (or proposer) can breach the pre-contractual information duty during the negotiation or renewal of an insurance policy.

Question 29

Can parties to a non-consumer insurance contract contract out of the IA 2015?

Answer 29

Yes, parties to a non-consumer insurance contract may contract out of the IA 2015 to the detriment of the insured, but only if the transparency requirement is met. This means the disadvantageous term must be clear and unambiguous as to its effect, and the insurer must sufficiently highlight this term to the insured before entering into the contract or agreeing to any variation.

Question 29

Can an insurer waive its right to avoid the contract after discovering a breach?

Answer 29

Yes, an insurer can waive its right to avoid the contract by affirming the breach, thereby treating the contract as enforceable despite the breach. Long-term silence by the insurer after discovering a breach may also be interpreted as waiver.

Question 29

What forms can a breach of the duty of fair presentation of the risk take in non-consumer (business) insurance?

Answer 29

In non-consumer insurance, a breach of the duty of fair presentation of the risk can take the form of misrepresentation or non-disclosure, which may be innocent, negligent, or fraudulent.

Question 30

How does the IA 2015 handle cases where the insurer would have entered into the contract on different terms?

Answer 30

If the insurer would have entered into the contract on different terms (other than the premium) had there been full disclosure, the contract is treated as if those different terms were included. If the premium would have been higher, the amount paid on a claim is reduced proportionately.

Question 31

What remedies does the insurer have for deliberate or reckless misrepresentations under the 2012 Act?

Answer 31

If a misrepresentation by the consumer in consumer insurance is deliberate or reckless, the insurer may avoid the contract entirely. In such cases, the insurer is not required to return any premiums paid, except where it would be unfair to the consumer to retain them.

Question 31

How does the insurer handle careless misrepresentations under the 2012 Act?

Answer 31

The insurer may avoid the contract if it can prove that it would not have entered into the contract at all in the absence of the misrepresentation. In such cases, the insurer must return the premiums paid.
Alternatively, if the insurer would have entered into the contract on different terms (other than the premium), those terms may be substituted into the contract if the insurer chooses.
If the insurer would have accepted the contract but charged a higher premium, any claim payment may be reduced proportionately based on the actual premium paid versus the higher premium that would have been charged.