Mar 2022
Unlike most other types of contracts, an insurance policy is a contract based on the duty of utmost good faith. This duty of utmost good faith applies to all insurance policies.
The most important aspect of the duty of utmost good faith is the duty of disclosure which applies to a person looking to buy an insurance policy (i.e. a prospective policyholder).
The duty of disclosure means that a prospective policyholder before completing the purchase of an insurance policy, must disclose to the insurer all “material facts” about the risk which the person is looking to insure.
The historical reason underpinning this duty of disclosure, is that a prospective policyholder has all the relevant information in relation to the risk he is looking to insure, whereas the insurer has none. For example, a person looking to buy life or medical insurance knows what illnesses he has had in the past, whether he has any ongoing medical issues, what his lifestyle is like and what information was in his last health check-up. All of this is highly relevant to the risk he is looking to insure (i.e. the risk of him dying sooner than expected, or the risk of him needing medical treatment). The insurer, however, knows none of this information and needs the prospective policyholder to disclose it, so the risk can be assessed, the amount of premium can be estimated and a decision can be made as to whether or not to offer the insurance policy. As such, the law requires the prospective policyholder to be honest and make full disclosure to the insurer of all “material facts” relating to the risk.
Failing to disclose such “material facts” can have very serious consequences. It entitles the insurer to “avoid” the insurance policy. This means the insurer, on discovering the non-disclosure by the policyholder, can simply pay back the premium received and act as if the insurance policy never existed (thereby denying any claims made under the policy).
What is a “material fact”? The law provides that a fact is “material” if it “would influence the judgement of a prudent insurer in fixing the premium or determining whether he will take the risk”.
In recent years, there has been a growing chorus of voices suggesting that the “duty of disclosure” has become increasingly outdated and is too weighted in favour of the insurer. After all, can a prospective policyholder really be expected to know what type of fact might influence a “prudent insurer”? Further, the remedy of avoiding the entire insurance policy in the event of a non-disclosure of a material fact is extreme (and the remedies should be more balanced). For these, and other, reasons certain jurisdictions have already taken steps to change this aspect of the law. That said, even with such changes, there generally remains an onus on policyholders to disclose certain facts to the insurer when applying for insurance.
For practical purposes, therefore, we offer this clear advice to policyholders when you are buying insurance:
If in doubt, please disclose!
We cannot emphasize this enough. If there is any information about the risk for which you are seeking insurance, that you are unsure about whether or not to disclose (such as previous medical condition or treatment you have received), the best course of action is to disclose it. It is, after all, better to be safe than sorry!