Legal
November/December
2003
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Insurance
Part I: A matter
of faith
By Tom Williams, Solicitor
hen the World Trade Centre came crashing down, the cost
of insurance around the globe went up. For individuals, businesses and governments,
this has meant significant price increases, so it is worthwhile considering carefully
just how an insurance policy works. In this article, the focus is on general insurance
- that is, most types of insurance except life insurance and includes Home and
Contents, Income Protection, Public Liability and Computer insurance.
Insurance
& The Law
Like most commercial transactions, an insurance policy
is a contract. Each party makes promises to the other and each acquires particular
benefits or rights if and when those promises are kept. Failure to keep those
promises can have serious consequences, especially if the insurer refuses to settle
a claim.
From a legal perspective, insurance contracts in Australia are
governed by a scheme of Commonwealth legislation which includes The Marine Insurance
Act 1909, The Life Insurance Act 1945, The Insurance Contracts Act 1984, The Insurance
(Agents and Brokers) Act 1984.
Perhaps the most significant of these, in
terms of general application, is the Insurance Contracts Act. Note, however, that
this Act does not apply to contracts for Re-insurance, Health Insurance, Insurance
governed by the Marine Insurance Act, Workers Compensation or Compulsory Third
Party Insurance.
The First Step
There are a number of steps in the formation of an insurance contract, regardless
of the type of insurance sought or whether the cover is arranged through a broker
or agent, or directly with the insurance company.
The first step is to complete
the proposal form. This usually comprises a series of questions, the answers to
which will be used by the insurance company to decide whether or not to accept
the risk, and if so, on what conditions and at what price.
Questions on
the proposal form may deal with previous policies, for example: "Has the
insured ever been refused a policy or had a policy cancelled?" Great care
needs to be exercised when completing the proposal form because it is at this
stage of the negotiations that many later problems begin.
Duty
of Utmost Good Faith
Because contracts of insurance are treated
as a special type of contract, they are founded on a very specific duty: the duty
of utmost good faith. This is a positive duty imposed on both the insurer and
the insured to disclose all matters known to them which are material to the risk
before the contract is entered into.
Put simply, this requires each party
to notify the other of anything that might affect the likelihood of a claim arising
and the decision as to whether or not to take on the risk and under what conditions.
For the insured, the failure to advise the insurer of any facts relevant to the
risk can result in the insurance contract being cancelled so that the insurer
is no longer obliged to settle a claim.
The concept of "utmost good
faith" has caused considerable confusion over the years and the Courts have
found it necessary to determine the precise nature of a "material fact"
and the circumstances in which there has been a failure to make a full disclosure
of such a fact or facts.
In 1974, a New South Wales Court decided that a
fact was "material" if knowing about it would have reasonably influenced
a reasonably prudent insurer in deciding whether to accept the risk, or in determining
the premium at which, and the conditions on which, to do so.
How
much is enough?
The concept of disclosure also requires some consideration.
The question is "how much do I have to tell?"
In the same case
as above, the Court considered that full disclosure requires something more than
the mere statement of a bare fact. Enough details of the circumstances surrounding
the fact may be necessary to enable insurer, should it choose to do so, to make
further enquiries and obtain additional information before making its decision.
In
practical terms, this means that if you are taking out a policy for the first
time, or varying, renewing or extending an existing policy, you must provide details
of anything that is likely to affect the risk being accepted by the insurer. This
can include matters such as previous claims that have been rejected and the reasons
(if known), or changes in circumstances that may affect the renewal of a policy
- for example, new premises or equipment for a business.
Although in most
cases it is the insured who pays the price for a failure to disclose, the insurer
who fails to properly inform the insured of specific restrictions or conditions
attached to the policy can also find itself in difficulty. If the insurance company
fails to draw these terms of the contract to the attention of the insured, the
company may not be able to rely on the contract to avoid liability in the event
of a claim. Simply providing a copy of the insurance policy may not be enough,
particularly if the wording or layout of the policy do not draw the policy-holder's
attention to the clauses.
Under s22 of the Insurance Contracts Act, the
insurance company is also required to advise you, in writing, of the implications
and requirements of the duty of disclosure before the contract is finalised.
When
do I disclose?
As a general guide, the questions on the proposal
form should be answered fully and frankly. This is not the time to withhold information.
However, you do not have to tell the insurer about anything that is a matter of
common knowledge; may reduce the risk; or the insurer knows or ought to know in
the course of being involved in the insurance business.
If a response to
a question is incomplete or makes no sense at all, then unless the insurer takes
steps to obtain a proper answer, the insurer will be deemed to have waived compliance
with the duty of disclosure in relation to that particular question. This prevents
the insurance company from later asserting that the contract is void or that some
limitations should apply to the policy in so far as the response to that question
is concerned.
Innocent or deliberate?
The failure to disclose may be completely innocent: It may have happened because
something was forgotten or the insured did not think it was relevant. On the other
hand, the failure may arise out of a deliberate withholding of relevant information
or a misrepresentation of the facts. The consequences can vary accordingly.
For
example, where there was no intention to mislead the insurer and the policy would
have been issued regardless, then the insurance company cannot reject a claim
on the basis that there has not been full disclosure.
If, however, the insurance
company would have altered some aspect of the policy - such as the premium, the
maximum amount payable under a claim or the exclusions of liability - then the
insurer can reduce the claim by an equivalent amount.
Where there has been
a deliberate failure to disclose or to mislead, a number of consequences may follow:
1.
The policy can be cancelled by the insurance company and the premium refunded.
This has the effect of leaving the insured without any protection. It will also
be necessary to disclose this cancellation on any future insurance proposals.
2. If the policy is not cancelled,
the insurance company's liability for any claim will be adjusted to the amount
it would have paid if there had not been a misrepresentation or the relevant fact
had been disclosed.
3. If the
insurance company would not have entered into the contract because of the information
provided in the disclosure or the absence of any misrepresentation, then the insurer
will not be liable for any claim made under the policy. Its obligations will be
limited to refunding the premium paid.
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