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23 January 2007

Duty of Disclosure – How Does It Affect You?

Every insurance proposal form you complete and every renewal notice you receive will contain written reference to your Duty of Disclosure under the Insurance Contracts Act. This duty requires you to disclose to the insurer, before entering into a contract:

  • Any matters you know to be relevant to the decision of the insurer whether to accept the risk or not, and if so, on what terms; and
  • Any matters that a reasonable person in the circumstances could be expected to know to be a matter so relevant.

In practice, Duty of Disclosure is tested many times in the marketplace, and can easily be misunderstood, simply overlooked, or its importance severely underestimated by the insured.

We have detailed below some examples of disclosure issues that have occurred. These examples emphasise how easily non disclosure can happen and how disastrous the effect can be.

Case Study 1

Professional Indemnity Claim:
Proposal form not checked by Director prior to signing

When completing the proposal form for their PI renewal, the recently employed financial controller ticked ‘no’ to the question asking if their practice had had any claims. This proposal form was then sent to their broker for a quotation. The broker picked up that the Practice had in fact had a sizable claim 3 years prior and had the financial controller amend the proposal form to reflect this claim and resubmit the document for a quotation.

The financial controller had also sent the proposal form to another broker to obtain a quotation. The Practice decided to move their insurance and 8 months into the new policy made a notification to the new insurer of a new claim.

During the investigation process it became apparent to the new insurer that this Practice had been involved in a claim previously. Upon checking the proposal form they noted the Practice had ticked ‘no’ to the question regarding previous claims.

The insurer then denied indemnity to the Practice citing non disclosure of the previous claim. The policy was cancelled from inception and the premium refunded. The insurer stated if they had known about the size of the previous claim they would not have offered to insure this practice.
How carefully do you complete your proposal form every year? Do you rigorously check every question if other employees are completing the form on your behalf? Do you consider the proposal form to be the basis of your insurance contract or do you just find it frustrating and time consuming to fill in every year?

Case Study 2

Professional Indemnity Claim:
Failure to disclose claims history adequately

The insured when completing its proposal form did not disclose two claims made against it by a client in respect to a project.  It also failed to disclose circumstances that could result in a claim contained in a letter from the client expressing dissatisfaction and raising the prospect of financial ramifications in respect of the same project.

During the policy period legal proceedings were commenced against the insured by the client for the two claims and other matters in respect of the same project.

The policy definition of claim made it clear that a variety of claims arising from the same circumstances would be regarded as one claim under the policy.

The insurer’s position was that if the claims and circumstances that could result in a claim had been disclosed prior to policy inception, the insurer would have been put on notice in respect to the project generally and the policy would have included an endorsement excluding all claims relating to all aspects of the project.   Therefore, the insurer maintained that it was entitled to reduce its liability in respect of the claim to place it in the position in which it would have been if the claims and circumstances that could result in a claim had been disclosed prior to policy inception.  The result was that the insurer declined indemnity.

OUR ADVICE

If you are unsure about what is material, talk to us first. Do not simply file away information sent to you on renewal. Read it carefully, advise us of any changes, correct any inaccuracies and above all be aware that it is your responsibility to advise your insurer of any material changes that have occurred in the prior period.