What are the consequences of a non-disclosure?
The rights which the insurer has, as a result of a non-disclosure of a relevant fact are set out in section 21 and section 60(b) Insurance Contracts Act.
Section 28(2) allows an insurer to avoid a contract if the non-disclosure was fraudulent. It is very difficult for an insurer to prove that a non-disclosure was fraudulent and this section rarely comes up.
Section 60(2) allows an insurer to cancel a policy on the grounds of non-disclosure. This is straight forward.
However, the most common situation which we would see arise is for the insurer to rely on section 28(3) which says:
If the insurer is not entitled to avoid the contract or, being entitled to avoid the contract (whether under subsection (2) of otherwise) has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if the failure had not occurred or the misrepresentation had not been made.
The argument which the insurer makes is that if the relevant information had been disclosed the insurer would not have accepted the risk. As a result, the insurer says that they are entitled to cancel the policy back to inception. This means that the insurer is entitled to deny any claims made under the policy. However, the insurer has to refund the premium. If the non-disclosure was made 3 years ago, the insurer is required to refund the premium for those 3 years.
Insurers do not communicate their underwriting criteria to brokers and criteria does vary between insurers and sometimes the same insurer will have different criteria for different products.
Some insurers will decline a building risk if the building contains asbestos; others will accept those buildings. The same issue arises with EPS.
Sometimes, insurers who own systems can produce different outcomes depending on the policy selected. In one recent claim, an insurer accepted a particular risk under one policy (a domestic landlords policy) but declined it under another policy (a commercial landlords policy) on the grounds that they would not accept a building with wooden construction under the commercial policy (they did under the domestic policy).
If an insurer relies on non-disclosure to deny a claim and the dispute ends up in FOS or court, the insurer will need to be able to prove its underwriting criteria from the documentation.
However, insurers are much more likely to have clear underwriting criteria today than they did say 20 years ago. There are two reasons for this:
The prevalence of online underwriting – computers are programmed to say yes or no based on strict criteria; computers are not programmed to exercise a discretion.
Statements from FOS have forced insurers to clearly set out the underwriting criteria in written documents.
SOURCE: Lessons from Triage, STEADFAST.
For more information, please feel free to contact GRACE INSURANCE.
The information contained in this article is meant as a hypothetical guide only. Grace Insurance does not accept any liability arising out of any reliance on the information in this article. We urge you to consult your insurance broker for personal advise, as we only provided general advise.