Understanding Duty Of Disclosure In Insurance Law: The Importance Of Good Faith And Relevant Information

Explain the legal rules in relation to the duty of disclosure in insurance and to demonstrate understanding of these rules by applying the rules to the facts outlined in the question. We have given you instructions on what needs to be included in the report at points numbered 1-3 in the assignment question. Please read the assignment question carefully. You are required to reference relevant case law – the Court of Appeal decision in Sate Insurance v McHale is posted on Stream. We expect discussion of McHale in addition to other relevant case law. If you write about areas that are not connected to the duty of disclosure, you will not earn marks for this.

The Concept of Duty of Disclosure and Good Faith

Duty of disclosure is one of the essential concepts of Insurance Law. The main terms of the principle is based on the concept of good faith that each party is obliged to show for each other. Lord Mansfield has propounded this theory in the year 1766. Lord Mansfield has defined the term, as “Insurance is a contract upon speculation. The special facts, upon which the contingent change is to be computed, should be laid more commonly in the knowledge of insured only. The underwriter trusts to his representation and proceeds upon confidence that he does not keep back any circumstance in his knowledge, to mislead the underwriter into a belief that the circumstance does not exist and to induce him to estimate the risk as if it did not exist”. According to him, if it has been proved in subsequent event that the insured had concealed any fact to the underwriter regarding the insurance contract, it will be held as illegal and the nature of the policy will be void. A duty of disclosure arose in the cases where the insured has suggested any facts regarding the insurance policy. The nature of every insurance policy is quite important and therefore, it is the duty of the insured to honest while makes any statement regarding the policy to the underwriter. The insurance law of New Zealand has provided certain provisions to govern the facts of non-disclosure and misrepresentations made by an insured.

In New Zealand, various authorities govern the rules relating to the insurance policy. AIA New Zealand is one of them. A party is required to make an application before the authority and can only get the insurance policy after obtaining an affirmative reply from the authority. Before the assertion, the authority will examine whether all the relevant information have been disclosed by the insured or not.

The first element of duty to disclosure is good faith. It has been observed that an insurance policy will be void if an insurer has failed to disclose information and made fraud to the underwriter. In Pereira v Marine Trade Insurance 1975 (4) SA 745 (A) 755, it has been observed that the contract of insurance is based on utmost good faith.

The second element is the relevant information. According to section 18 of the Marine Insurance Act 1908, an insured should have to disclose all the relevant information and documents. He is restricted to make any misrepresentation regarding the facts of the case. Further, it can be stated that the insured should have to disclose the facts by which the risk regarding the insurance policies can be reduced.

The Importance of Relevant Information

The third element is to disclose the material facts for assessing the risks regarding the insurance policy and the same should bind the insurer. This principle has been established in Mutual and Federal Insurance Co Ltd v Oudtshoorn Municipality 1985 (1) SA 419 (A).  In Novick v Comair Holdings 1979 (2) SA 116 (W) 149, court states, “the test for materiality is an objective one and that facts are material if they would (objectively) influence the decision of the insurer to conclude a contract and on which terms”.

The fourth element it is a liability of an insurer to disclose all the material information, as those information create effect on the policy conditions. This concept has been established in the case of State Insurance General Manager v McHale [1992] 2 NZLR 399. It has been observed by the court in case of Carter v Boehm (1766) 3 Burr 1905 that an insurer may expect to disclose all the facts that come under the purview of actual knowledge of insured.  

It is a general fact that insurance policy is an important thing. It is the duty of the insured to disclose all the relevant information to the insurer so that related risks can be assessed and necessary policies can be implemented. It has been mentioned in Mutual and Federal Insurance Co Ltd v Oudtshoorn Municipality 1985 (1) SA 419 (A) that the insured should have to disclose all the necessary documents that can affect the insurance decisions or the terms offered by the insured. The kinds of the insurance policy will depend on the documents and information stated by the insured. According to section 18 (2) of the Marine Insurance Act 1908, before disclosing the information, one need to understand whether the same worth the material facts or not. The kinds of information depend on the types of insurance policy. The subject matter of the insurance will assist the insured to diminish his risks. It has been pointed out by Kennedy L J that an insured should have to disclose all the facts that are in his knowledge. Considering the importance of the insured in the matter, Fletcher Moulton states that "Insurers are thus in the highly favourable position that they are entitled not only to bona fides on the part of the applicant but also to full disclosure of all knowledge possessed by the applicant that is material to the risk". It has been held in Joel v. Law Union and Crown Insurance Co. [1908] 2 KB 863 that in case of medical insurance, the statement made by the insured is a statement of opinion. In Godfrey v. Britannic Assurance Co. Ltd. [1963] 2, it has been stated that where the insured know the relevancy of any facts, that will be treated as the material fact and in this case, the information should be regarded as matter of disclosure because such decision can affect the insurance policy of the insured. An insured must have to show all the facts and in case of any failure, regarding the non-disclosure of facts that are in actual knowledge of the insured could be stated as concealment. This principle has been established in Asfar and Co. v. Blundell [1896] 1 QB 123 CA. However, if any fact is unknown to the insured, he is not bound to disclose this. In case of life insurance, the insured should have to disclose his condition of health. According to Malcolm Clarke [1988], if the agent of the insured has known any fact or if the matter is covered under the inferential knowledge of the insured, he is not bound to disclose this.

Material Facts and Assessing Risks

Insurance is a promise that has been made by the insurer to the insured regarding his claim. There are certain insurance policies that help the related parties to mitigate their risks by verifying their statement of opinion. However, in certain circumstances, it can be observed that the insurance companies are denying the claim made by the insured. It happens when the insured failed to comply with all the norms of the insurance companies and failed to disclose all the relevant material facts. Non-disclosure of facts is the main reason behind the cancellation of claim that restricts the insured to make any claim for insurance. The insurance companies are repudiated a claim for the non-disclosure of the material facts by the insured to the insurer. It has been observed that all the relevant documents must be disclosed which are within the absolute knowledge of the insured and there is a scope that the documents can create effect on the insurance policy of the insured person. It is the duty of the insurer to rectify the claims that all the irrelevant claims are rejected. Further, they have to understand the fact that the insured has disclosed all the relevant facts for the insurance policy and he has understood all the terms and conditions of the insurance policies thoroughly. Any incidents that are useful or that can be important for the insurance policies should be disclosed and the material facts should have to be disclosed. It is mandatory in nature. If the insured has suppressed the material facts and provided false statement to the insurer, the policy will be cancelled and the insured could not make any claim in subsequent event. In State Insurance v McHale [1992] 2 NZLR 399, it has been held that the disclosure of the insurer should be relevant in nature. It has further observed in Lambert v Co-operative Insurance Society Ltd [1975] 2 that the statement made by the insured should be considered on the basis of the legislations and it is to be determined whether the facts are material or not. In Quinby Enterprises Ltd (in liq) v General Accident Ltd [1995] 1 NZLR 736 (HC), it has been held by the court that any false statement made by the insured regarding any specific question should be based on relevant facts that are implied with the provision of the law.    

Conclusion:

Therefore, it can be concluded that the term duty of disclosure is very important in case of insurance and the insured should have to meet all the requirements according to the law. It should be kept in mind that insurance is obtained to mitigate the scope and chance of risk and if proper information cannot be given to the insurer, risk analysis is not possible. Further, the insured is prevented from giving false statement. This report helps to understand the scope and width of duty of disclosure in a systematic manner.

Reference:

Asfar and Co. v. Blundell [1896] 1 QB 123 CA

Carter v Boehm (1766) 3 Burr 1905

Clarke, M. (2016). The Insurance Act 2015: A New Regime for Commercial and Marine Insurance Law. Informa Law from Routledge.

Godfrey v. Britannic Assurance Co. Ltd. [1963] 2

Joel v. Law Union and Crown Insurance Co. [1908] 2 KB 863

Lambert v Co-operative Insurance Society Ltd [1975] 2 

Mutual and Federal Insurance Co Ltd v Oudtshoorn Municipality 1985 (1) SA 419 (A)

Novick v Comair Holdings 1979 (2) SA 116 (W) 149

Pereira v Marine Trade Insurance 1975 (4) SA 745 (A) 755

Quinby Enterprises Ltd (in liq) v General Accident Ltd [1995] 1 NZLR 736 (HC)

State Insurance General Manager v McHale [1992] 2 NZLR 399