Common Law
3.1 The source of the problem is the effect of the common law rules relating to non disclosure and misrepresentation by a person making a proposal for insurance (the proponent). These rules are concerned to ensure that a person seeking insurance provides accurately to the insurer all relevant information that will enable the insurer to assess the risk to be covered and to set an appropriate premium. Breach of the rules can have drastic results for the proponent. The insurance contract can be avoided by the insurer retrospectively from the commencement of the insurance cover, not just from the moment of avoidance. Non-compliance with the rules can therefore lead to a claim being defeated even when the breach of common law duty is only discovered after a loss has occurred and a claim has been made. There will have been a total failure of consideration the insurer never having been “at risk”. Premiums paid will normally be repayable by the insurer, but after a loss has been suffered this is likely to provide small comfort to the insured.
The Duty of Disclosure, and Materiality
3.2 The common law duty of disclosure requires that a person making a proposal for insurance must disclose to the insurer before the insurance contract is concluded “every material circumstance” known to that person. There are decisions suggesting that this duty extends not only to circumstances and facts which the proponent actually knows but also to those which he ought reasonably to know in the ordinary course of business and to beliefs or fears held by the insured even though they are baseless.1 A “material”, circumstance or fact has been defined as one “which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk”.2
3.3 The obligation upon the proponent is to volunteer to the insurer information about all facts that are material. Failure of the insurer to ask a particular question or refer to a particular topic in the proposal does not excuse the proponent from the duty to volunteer information on that topic, if it is material.
3.4 The duty is extensive in time and requires disclosure to be made beyond the date of completion of the proposal, that is, up to the time of making the contract of insurance. Any change in circumstances that is “material” prior to completion of the contract must be disclosed. The duty of disclosure, including the duty to disclose changes of circumstances, also applies upon renewal of an insurance contract and, to a more limited extent upon variation (for example, if the sum insured is increased).3 It appears to be common practice on the part of insurers to renew and, if requested, vary insurance policies without drawing to the attention of the insured person the continuation of this duty, and often without completion of a fresh proposal.
3.5 The duty of disclosure extends to circumstances that affect the “physical hazard”, for example, physical characteristics of a building proposed for fire insurance which might make it more vulnerable or more likely to catch fire. It also extends to facts affecting the “moral hazard”; that is, any matter going to the honesty and personal characteristics of the insured person that might increase the risk of loss. The following examples of “moral hazard” have been given by text writers:
... in relation to motor insurance it is important to know that the proposer has had convictions for motoring offences recorded against him and it is irrelevant to show that in other cases policies have been issued by the same insurers even with knowledge of such convictions. The age of the person who is to drive may also be material. It is material to disclose that the insured under a burglary policy, a trades combined insurance policy, an all risks insurance policy or a fire policy has a criminal record.4
A wide variety of circumstances have been held to be “material”.5
3.6 It does not help an insured person that he or she did not know that circumstances not disclosed were material or even that he or she honestly and reasonably believed that those circumstances were not material.6 In this way, the duty of disclosure has outstripped the doctrine of good faith upon which it was based.
3.7 The test of materiality is not concerned with the question whether the particular insurer regarded the circumstances as material but whether a prudent insurer would have done so. This can occasionally provide injustice to an insurer,7 but the rule operates more frequently in favour of insurers and against the interests of insured persons.
Misrepresentation
3.8 The common law principle relating to non-disclosure is concerned with the duty of a proponent for insurance to volunteer material information. The common law principle dealing with misrepresentation concerns that person’s duty to respond accurately to questions put to him by the insurer. The requirement that the matter misrepresented be material to the risk applies equally to misrepresentation as to disclosure.8 However, with misrepresentation, it must be shown that the misrepresentation actually induced the insurer to enter the contract. An honest but mistaken representation on a matter of opinion will not permit the insurer to avoid the policy on the ground of misrepresentation.
Basis of Contract Clauses
3.9 The difficulties confronting insurers in obtaining relief on the ground of misrepresentation have often been met by basis of contract clauses, the operation of which has been described in paragraph 2.10 above. The fact that the use of these clauses has attracted considerable criticism9) has not prevented their widespread use. We suspect that few policyholders are aware of the effect of these clauses and, in particular, of the reliance insurers may place on them to avoid making payments under a policy.
FOOTNOTES
1. Godfrey v. Britannic Assurance Co. [1963] 2 Lloyds Rep. 515; Khoury v. Government Insurance Office [1982] 2 A.N.Z Insurance Cases 60-478.
2. Marine Insurance Act 1906 (U.K.), s.18(2), regarded as restating the common law. Section 24(2) of the Marine Insurance Act 1909 (Cth) is in identical terms; see also Marene Knitting Mills Pty. Ltd. v. Greater Pacific General Insurance Ltd. (1976) 11 A.L.R. 167, where the Privy Council laid to rest for Australian purposes any remaining controversy on the question, and Lambert v. Co-operative Insurance Society Ltd. [1975] 2 Lloyds Rep. 485.
3. Lambert v. Co-operative Insurance Society Ltd. [1975] 2 Lloyds Rep. 485.
4. Halsbury’s Laws of England (4th ed. 1978), vol.25, para. 369.
5. See, for example, the illustrations collected in K.C.T. Sutton, Insurance Law in Australia and New Zealand (1980), para. 3.77, and by MacGillivray and Parkington on Insurance Law (7th ed. 1981), paras 648-672.
6. Lambert v. Co-operative Insurance Society Ltd. [1975] 2 Lloyds Rep. 485.
7. Babatsikos v. Car Owners’ Mutual Insurance Co. Ltd. [1970] V.R. 297.
8. MacGillivray and Parkington, note 5 above, para.582.
9. See cases collected by K.C.T. Sutton note 5 above, paras 2.70, 2.71; Western Australia Law Reform Committee, Motor Vehicle Insurance (Working Paper, Project No.10, 1972), para.27; Joel v. Law Union and Crown Insurance Co. [1908] 2 K.B. 863, at p.885; MacKay v. London General Insurance Co. Ltd. (1935) 51 Ll.L Rep. 201.
