Don’t give insurers a reason to deny your claim: the importance of complying with the duty of disclosure

In our article “current trends in claims management reflecting poorly on industry: strategic denials” (located here), we flag “non-disclosure” as a common reason used by of insurers to deny indemnity to policyholders. In this article we elaborate on the duty and why it is critical to comply with it to mitigate against the risk of your insurer declining indemnity to you for a claim.
The duty of disclosure

Proposers (people applying for insurance or “insureds” for the purpose of this article) will face trepidation of whether they tell their insurer ‘everything’. They fear that the insurer will not accept the risk, impose a significantly high premium or apply onerous terms. The reasons underlying the duty of good faith were stated by Lord Mansfield in Carter v Boehm (1766) 97 ER 1162, 1164:

Insurance is a contract of speculation... The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only: the under-writer trusts to his representation, and proceeds upon confidence that he does not keep back any circumstances in his knowledge, to mislead the under-writer into a belief that the circumstance does not exist... Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact, and his believing the contrary.
What do I have to tell my insurer?

In Australia, the duty of disclosure is codified in section 21 of the Insurance Contracts Act 1984 (Cth).[1] In broad terms that provision requires an insured to disclose to the insurer every matter that the insured knows (s 21(1)(a)), or that a reasonably person in the insured’s circumstances could reasonably expect to know (s 21(1)(b), is relevant to the insurer’s decision whether to accept the risk of insurance and if so, on what terms.[2] An insured has the same duty to disclose those matters to the insurer before it renews, extends, varies or reinstates a contract of general insurance.[3]

Section 21 requires the insured (or a reasonable person in the insured’s circumstances) to “know” certain things. “Knows” means considerably more than “believes” or “suspects” or even “strongly suspects”. In s 21 the matter must be a matter that is not only “relevant to the decision of the insurer whether to accept the risk, and if so, on what terms”, but also one that the insured knows it to be such a matter or that a reasonable person would know it to be so relevant.[4]

Completing answers in a proposal form

The insurer will ask questions of the proposer it considers relevant to underwriting and ultimately “accepting” the risk. When providing a quotation and then “binding cover”, responses to the questions in the proposal form will enable the insurer to calculate the premium, excess, policy terms and conditions.

The answers and responses are very relevant (but not determinative) of a Court’s later decision as to whether an insured has discharged its duty of disclosure.[5] If a question is asked, it likely that a Court will conclude that an insured knew that the answer was relevant to the insurers’ decision to accept the risk.

Accordingly, it perhaps goes without saying that an insured should answer all questions in a proposal truthfully and as accurately as they can prior to entering into or renewal of a policy of insurance. A deliberately or even innocently false answer to a question in a proposal will almost always result in indemnity being declined and the policy being avoided.[6]

What if I don’t answer questions?

A prudent insurer ought to insist that questions in a proposal are answered prior to issuing a policy.

However, if the insurer does not insist and accepts a proposal that contains an obviously incomplete answer to a question, or the insured fails to answer a question in the proposal, the insurer will be deemed to have waived its rights under the duty of disclosure in relation specifically to the matter raised in the question.[7] Not answering questions is rarely a prudent course for an insured. It will not alone or in all circumstances relieve the insured from its broader duty of disclosure and such a course is likely to invite litigation.

No specific question about a particular matter
Where there is no question in a proposal directed to a particular matter the position of disclosure is less clear.

If the insured actually knows that a matter is relevant to the insurers decision to accept the risk, then such a matter must be disclosed regardless of whether a specific question is asked in the proposal.

A simple example might be where a person knows that his or her car has faulty brakes but takes out a car insurance policy without telling the insurer that fact. It does not matter if the insurer did not ask whether the car had working brakes if the insured knew that this fact was relevant to the risk insured against (i.e. the risk of a car accident).

A more frequent and difficult issue is were an insured innocently fails to disclose that a set of circumstances exist that might be seen to have been, in hindsight, a matter that the insurer asserts a reasonable person in the circumstances ought to have known was material to the insurers’ decision to accept the risk. This is particularly so when there are no questions in a proposal directed to that matter.

In circumstances of an innocent non-disclosure s 28(3) enables the insurer to reduce its liability to the extent that would place the insurer in the position that it would have been if the failure had not occurred. Almost inevitably, the insurer will contend that it would not have entered into the policy at all and therefore its liability should be reduced to nil.

Significant costs of litigation can be incurred in such circumstances, with the insured contending that a reasonable person would not have known that the matter relevant to the risk and the insurer contending that such a person would have. The outcome of this argument is highly factually dependent and is often a matter of degree, which ultimately will be for the Court to determine. Insurers will often use this uncertainty and the expense of litigation to force insureds to settle a claim for less than the full amount of the otherwise available indemnity.

It is this particularly which we refer to in our article here: “current trends in claims management reflecting poorly on industry: strategic denials”.
How to avoid the risk of non-disclosure

Simply put, the best advice is that you disclose everything comprehensively.

Consider the type of risk that the insurance policy is intended to cover and disclose any matter that might increase the probability that the risk will eventuate, or that will increase the extent of the loss that will follow if the risk eventuates.

Insurers tend reward prudent insureds, and in circumstances insurers attempt to exclude certain risk or it is cost prohibitive to cover certain risk, then you can strategise with your broker to transfer the risk another way or mitigate against the significant cost other ways.

In short, it is better to disclose a matter than not to disclose the matter. Increased premium/excess or more onerous exclusions will always be less than protracted litigation for non-disclosure.

Otherwise, if in doubt, seek advice from your broker.

[1] Section 21 is a code insofar as it replaced the antecedent common law regulating, inter alia, non-disclosure Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606 at 615; [1989] HCA 22.

[2] Stealth Enterprises Pty Ltd t/as The Gentlemen’s Club v Calliden Insurance Limited [2017] NSWCA 71

[3] Section 11(9)(b) of the Insurance Contracts Act provides that the reference to “the entering into of a contract of insurance” includes the making of such a contract by the renewal of an existing contract.

[4]  Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (2003) 214 CLR 514; [2003] HCA 25 at [30] McHugh, Kirby and Callinan JJ

[5] Stealth Enterprises Pty Ltd t/as The Gentlemen’s Club v Calliden Insurance Limited [2017] NSWCA 71 per Meagher JA [53], Ward JA [73], Sackville AJA [83].

[6] Section 28 Insurance Contracts Act 1984 (Cth)

[7] Section 21(3) Insurance Contracts Act 1984 (Cth)