The reforms affect non-consumer insurance contracts entered into post 12 August 2016.
The old law
- The insured was under the duty of utmost good faith to disclose all facts material to the risk insured.
- This meant every material circumstance that would influence the insurer in deciding to take the risk and when quantifying the premium.
- The smallest adjustment to the premium constituted materiality.
- A material non-disclosure (even if innocent) which increased the risk gave the insurer the remedy to avoid the policy.
The reforms: There is now a two part test:
1. Duty to disclose information
- The Act requires the insured to make a fair presentation of risk by disclosing all relevant circumstances relating to the proposed insurance which the insured knows or ought to know having conducted a reasonable search.
- In determining what the insured knows, the knowledge of senior management and/or decision-makers as well as the individuals putting the insurance in place (excluding brokers) will be considered.
- The insurer is deemed to know what “should reasonably have been revealed by a reasonable search”. The extent of what is deemed “reasonable” is objective and depends on the nature, size and complexity of the business.
- It is worth noting that, if as a consequence of a reasonable search made in the context of the ordinary course of business, a non-managerial decision-maker or third party is found to hold relevant information and they are responsible for putting the insurance in place, this too should be revealed (e.g. agents or other external advisers).
If the first limb is not satisfied, the insured’s duty to disclose may be fulfilled by satisfying the second limb:
2. Duty to put the insurer on notice to make further enquiries
- The insured may satisfy its duty if it discloses sufficient information to put a prudent underwriter on notice that it needs to make further enquiries for the purpose of revealing those material circumstances.
- The duty requires the disclosure to be reasonably clear and accessible.
The reforms: Remedy
- The insurer cannot now avoid cover for non-disclosure unless there has been a breach of the duty of fair presentation and the insurer can show the breach was deliberate or reckless, in which case it may avoid the insurance contract and need not return the premium.
- Otherwise, if there has been a breach of the duty of fair presentation that is not deliberate or reckless, the remedy will depend upon what the insurer would have done had the risk been fairly presented.
- Using a subjective standard, the insurer may prove that:
- it would not have insured at all, in which case it may then avoid the contract (however it must return the premium); or
- it would have insured on different terms, then the insurance is treated as being on those terms; and if a different premium would have been payable, the amount paid out is reduced proportionally.
Comment
- Despite there no longer being a remedy for the breach of the duty of utmost good faith, it is worth noting that insurance contracts will still be founded on utmost good faith.
- Owing to the insurer’s positive duty of inquiry, the insured’s burden of disclosure will increase, particularly in circumstances where a reasonable search leads to information being disclosed by individuals responsible for putting the insured’s insurance in place who sit outside of the insured’s senior management.
- Insurers are likely to store more data on the insured from the outset by way of evidence of the information disclosed at the time of putting the insurance in place (for e.g. in the event of a dispute).
- Companies may form their own disclosure protocols in response to their revised disclosure duties.