Chapter 8 - Material Circumstances Flashcards
Material Circumstances in Risk Assessment
Are any circumstance that would affect the judgment of a prudent insurer in considering:
• Whether or not to accept the risk
• If willing to accept the risk, at what conditions and premium
Proposer has a duty to:
• If a consumer, take reasonable care not to make a misrepresentation
• If a non-consumer, make a fair representation of information
Circumstances that do not need to be disclosed:
• Circumstances that lessen the risk
• Circumstances that the insurer knows or ought to know
• Circumstances where the insurer has waived its rights
• Circumstances that a survey would have revealed
Material Circumstances in Risk Assessment Spent Convictions
Spent convictions are included in facts that do not need to be disclosed under the Rehabilitation of Offenders Act 1974, as amended by the Legal Aid, Sentencing and Punishment of Offenders Act 2012. These state that after varying periods of time the convictions become spent.
Material Circumstances in Risk Assessment Disclosure by Private Individuals
Is covered by the Consumer Insurance (Disclosure and Representations) Act 2012. Under CIDRA, consumers are required to take reasonable care not to make a misrepresentation and the emphasis is on insurers to ask the right question in a clear way.
If the misrepresentation was honest and reasonable:
• The insurer must pay the claim
If the misrepresentation was careless:
• The insurer can act as it would have done if the question had been answered correctly
If the misrepresentation was deliberate or reckless:
• The insurer is entitled to treat the policy as void and decline all claims
Material Circumstances in Risk Assessment Business Insureds
The Insurance Act 2015 applies to all consumer and non-consumer insurance contracts. Certain provisions only apply to non-consumer like the duty to make a fair presentation. This involves disclosing every material circumstance which the insured knows or ought to know or providing sufficient information for a prudent insurer to recognise that it needs to make further enquires. The act describes what the insured is deemed to know or ought to know:
• Knowledge held by the insured’s senior management and by the persons who arrange the insurance
• What ought to be known in the ordinary course of the insured’s business
• Information there was a suspicion about but deliberately didn’t enquire further
• Information that should reasonably have been revealed by a reasonable search
• Information held within the insured’s own organisation
The act also details the insurer should be able to find within its own organisation rather than expecting the insured to disclose:
• Information held by the insurer and accessible to the underwriter
• Information an insurer writing this type of risk would reasonably be expected to know
• Information that is common knowledge
Breach of Duty of Fair Presentation
An insurer only has a remedy against an insured where it can show that but for a breach it would either; not have entered into the contract at all, or would have done so on different terms.
Before applying any remedy the insurer has to establish whether the breach was deliberate or reckless, or neither deliberate nor reckless.
Remedies
If the insurer can prove the breach was deliberate or reckless it can avoid the contract and refuse to pay claims and not return any of the premium paid.
If the breach was not deliberate nor reckless there are the following remedies:
• If the insurer would have not written the risk it can avoid the contract but must return the premium
• If the insurer would have charge a higher premium it can proportionally reduce any claims
• If the insurer would have included new terms or imposed terms then to contract is to be treated as if it had been entered into on those terms
Basis of Contract Clauses
In the past some insurance proposal forms contained clauses that included a statement turning everything on that form into a warranty, allowing the insurer to avoid a claim if any information on the form was inaccurate. The Insurance Act 2015 abolished such clauses which had already been abolished by CIDRA.
Physical and Moral Hazard
Peril is the event giving rise to the loss itself.
Hazard is the factor that might alter the frequency and severity of the peril.
Physical Hazard
It relates to the physical characteristic of the risk.
Good physical hazards reduce the likelihood and severity of the risk. Poor physical hazards increase the likelihood and severity of the risk.
Moral Hazard
Relates to the human aspects that may influence the outcome of the risk. Very often a poor physical hazard exists as a result of a poor moral hazard at an earlier stage.
• Most serious example of a poor moral hazard on the part of the insured is the submission of false or exaggerated claims.
• Common examples of poor moral hazard is the lack of care on the part of the insured
• An example of a good moral hazard is where the insured is honest and takes all steps to protect property and employees
Proposal Forms
Is the most common mechanism that underwriters use to receive information.
Proposal forms should be simple to understand and easy to complete. Insurers endeavour to ensure they contain clear questions on all matters that they know to be material to risk assessment.
Proposal Form Questions
General questions: • The proposer's name, address, occupation and age • Details of past insurances • Details of other insurance The form will also ask: • Details on previous claims • Period of insurance • Subject-matter of the insurance • Sum insured or limit of liability There also risk specific questions for each class of insurance.
Other Ways of Obtaining Material Information
Surveys - are used in property insurance for larger risks. The risk surveyor acts as the eyes and ears of the underwriter providing a report with detailed information.
Supplementary questionnaires - are popular with some insurers when dealing with particular aspects of the risk that require further investigation.
Market Reform Contract - carries full details of the risk in a recognised format and is often used in London Market placings.
Meeting with the client/broker - often used in commercial insurances.
Writing to the proposer - usually used in personal insurance.
The internet - material information can often be discovered by searching the internet which can be verified during a subsequent meeting.
