Non-disclosure and misrepresentation

Non-disclosure and misrepresentation are arguably the two areas of general insurance law where the impact of the FOS has been greatest.

The policyholder's obligations

In law, a person applying for or renewing a policy of insurance is obliged to disclose all material facts. A material fact is one which would have an effect – not necessarily decisive – on the mind of a prudent insurer in assessing the risk. If a person fails to disclose a material fact, and that failure induces the policy – that is, causes the insurer to offer cover, or to offer cover on terms which would not otherwise be available – the insurer may, when it becomes aware of the non-disclosure, set the policy aside from outset.

A person may also misrepresent material facts by providing incorrect or incomplete information. There is a technical argument that the Misrepresentation Act 1967 might give the courts discretion to award damages to an insurer in place of setting a policy aside. However, in practice a misrepresentation will also amount to a non-disclosure of the true facts, and insurers typically rely on both defences. It is therefore convenient to consider non-disclosure and misrepresentation together, and this practice is typically followed by the FOS.

Four major criticisms of this area of insurance contract law have frequently been made, though these have in part been addressed by regulation:

  • An insurer is not obliged under insurance contract law to ask any questions. However, section 4.3.2(1) of the FSA's Insurance: Conduct of Business Sourcebook (ICOB) requires an insurance intermediary – whether independent or an employee of the insurer – to seek such information as might reasonably be expected to be relevant in identifying the requirements of the retail customer.
  • An insurer is not obliged under insurance contract law to give any warnings about the duty of disclosure. However, ICOB 4.3.2(3) specifically requires an insurance intermediary to explain both the duty and the consequences of any breach. (In this context an intermediary could be an insurer, if dealing direct with the customer.)
  • An insurer is entitled under insurance contract law to set the policy aside regardless of whether the non-disclosure was fraudulent, negligent or merely innocent. However, ICOB 7.3.6(2)(a) appears to bar an insurer from setting a policy aside for innocent non-disclosure.
  • Setting a policy aside is an all-or-nothing remedy. Issues of non-disclosure are usually raised when a claim is made. If the insurer sets aside the policy, the policyholder loses the cover, has his or her claim rejected and may find it harder to get cover at standard rates in the future.

The FOS takes a significantly different approach to that of the law. As set out in ON46 it considers non-disclosure in three distinct stages:

  • The FOS asks whether the insurer asked a clear question about the matter in dispute. If there was no such question, the insurer cannot rely on the non-disclosure.
  • If there was a clear question, the FOS asks whether it influenced the insurer's decision to enter into the contract at all, or to do so on terms it would not otherwise have offered. If there was no inducement, the insurer cannot rely on the non-disclosure.
  • If there was a clear question, and inducement, the FOS looks at the state of mind of the policyholder at the time the question was answered. However, it adopts a more subtle categorisation than that traditionally followed by lawyers, recognising four possibilities:
    • deliberate or fraudulent non-disclosure;
    • reckless non-disclosure;
    • inadvertent non-disclosure;
    • innocent non-disclosure.

The insurer is permitted to set the policy aside if the non-disclosure was deliberate or reckless, and is not permitted to do so if it was innocent. If the non-disclosure was reckless, the insurer should return the premium. In a motor insurance case reported in ON72 the insurer failed to do so. Although the FOS agreed that the insurer was entitled to reject a claim which had arisen, it instructed the insurer to return the premium with interest.  

For inadvertent non-disclosure, the policy should effectively be rewritten on the basis of the terms the insurer would have applied had disclosure been made. The outcome will therefore vary with the facts. It may be that the policy will remain in force and any claim will be met. On the other hand it may be that a policy would not have been offered, or that it would have been offered on terms which would have excluded the claim.

Effectively therefore the FOS follows the law on fraudulent non-disclosure and ICOB 7.3.6(2)(a) on innocent non-disclosure. The innovative categories are reckless and inadvertent non-disclosure. In ON61 the FOS explained what it means by “reckless” and “inadvertent”.

To be “reckless” a person must give an answer not caring whether it is true or false, knowing that an answer is required, that it is important to the insurer and that there will be a consequence to it. The FOS considers it would be reckless to sign a blank application form and leave someone else to complete the answers. It would not, however, be reckless to sign an application form completed by an intermediary without reading it, if one genuinely believed that one’s answers had been accurately recorded.

Inadvertence is where a lack of sufficient care and attention has resulted in an incorrect answer being given. If, for example, a person declared a drink-driving conviction, but failed to disclose points imposed for speeding, the FOS would consider whether the omission was inadvertent. The disclosure of the more serious offence may suggest that the need to disclose the points was simply overlooked – there was no recklessness.

The FOS also differs from the law in the way it regards what might best be termed “spent” non-disclosures. For example, on a household proposal form, an insurer may ask for details of all claims within the last three years. What happens if the policyholder fails to disclose a claim that occurred two years and six months previously? The FOS takes the view that this non-disclosure becomes spent at the first renewal date – since at that point the prior claim would not have to be disclosed if a fresh application was made. In other words, if the insurer becomes aware of the non-disclosure in the first year, it may be able to avoid the policy. However, after the first renewal the non-disclosure is spent and cannot be relied upon by the insurer (ON1).

Renewals

Most general insurance policies fall due for renewal on an annual basis. In law, a new contract is formed at renewal. The duty of disclosure therefore arises again and non-disclosure at renewal may lead to the policy subsequently being avoided.

Insurers are faced with a dilemma. On the one hand they want policyholders to disclose any material changes in their circumstances. On the other hand, they want to make the renewal process as simple as possible for their policyholders. The FOS is concerned that in some cases the duty of disclosure is not sufficiently brought to the attention of the policyholder. It gives the example of a renewal letter which began “If you want to renew then do nothing, it's that easy.” Three points have been made by the FOS in ON23:

  • If an insurer wishes to reject a claim on the basis of non-disclosure at renewal, it must be able to show that it asked the policyholder clear questions when the policy was renewed.
  • Some insurers simply ask policyholders to confirm whether any circumstances have changed since the original proposal form was completed. The FOS believes that it is good practice in such cases either for the policyholder to be provided with a copy of the original responses or for all original questions to be asked again. It may not support an insurer which fails to take one of these steps and later attempts to rely on non-disclosure.
  • The absence of clear questions will not assist a policyholder who fails to disclose information knowing that it is a matter about which the insurer would wish to have been informed. For example, the FOS rejected a complaint from a policyholder who failed to disclose any drink-driving offences at renewal – even though the question asked by the insurer was unclear.

The insurer's obligations

As noted above, the duty of utmost good faith is reciprocal – that is, it applies to both parties. The FOS gives an example of a policyholder who received a year's free insurance when he purchased a car. When the policy was about to expire, he received and accepted an offer to “renew” the policy. In fact, the “renewed” policy was on different terms. This came to light when the car was written-off in an accident. The original policy would have paid for a new car, whereas the “renewed” policy simply paid the pre-accident market value. When the policyholder complained, the FOS suggested that “the insurer's duty to notify changes in cover had not been met”, and that it should therefore pay for a new car. The insurer agreed to do so.

Intermediaries

In ON68, the FOS reported a case where an insurer had avoided a buildings insurance policy for non-disclosure. The policyholders, a married couple, had made a claim for storm damage. On investigation the insurer discovered that the husband was serving a prison sentence. It avoided the policy and refused to pay the claim.

The policyholders had been sold the policy by their bank. In communications with the bank the husband had twice mentioned his conviction, once in a letter expressing some concerns regarding both his mortgage and his household insurance and once when returning a renewal questionnaire for the policy. It was clear that the bank was aware of the husband's conviction; indeed, it had written to him in prison. Unfortunately, the bank had failed to pass on this information to the insurer.

Unsurprisingly the FOS found the bank responsible for the consequences of the non-disclosure. It required the bank to pay the sum that would have been paid by the insurer had there been no non-disclosure, less an amount equal to the additional premium which the insurer would have charged had it been aware of the conviction.

Group policies

The FOS will be no less demanding when dealing with disclosure on renewal under group policies. This issue was considered in ON49. The FOS gave an example from travel insurance, where a woman failed to disclose a mild heart condition that arose after she had booked a holiday for the following policy year. Her employer had dealt with the renewal documentation, and there was nothing in the paperwork she saw to alert her to her duty of disclosure. After she had a heart attack subsequent to renewal, the insurer was instructed by the FOS to deal with her cancellation claim – it was not permitted to rely on the non-disclosure.