DON’T COVER UP, IT’LL BLOW YOUR COVER!

 DON’T COVER UP, IT’LL BLOW YOUR COVER!

Peh Fern and Wen Shan discuss the changes to pre-contractual duty of disclosure for insurance contracts in United Kingdom and Malaysia

Ordinary contracts require no duty of disclosure in pre-contractual relations, only that a party must not misrepresent. However, contracts of insurance are traditionally an exception to this requirement in that they require the insured to disclose every material circumstance known to him and every circumstance which in the ordinary course of business ought to be known to him. A breach of this duty allows the insurer to repudiate liability on the contract of insurance.

The pre-contractual duty of disclosure mentioned above was first introduced under section 18 of the English Marine Insurance Act 1906 (“MIA”) and has since become an accepted practice throughout the insurance industry.

 

THE SEISMIC SHIFT

The Consumer Insurance (Disclosure and Representations) Act 2012 (“CIA”) and the Insurance Act 2015 (“IA”) came into force in the United Kingdom on 8 March 2013 and 12 August 2016 respectively. This article will examine how the CIA and the IA have changed the traditional rules that govern the pre-contractual duty of disclosure in insurance contracts.

The CIA

As evident from its title, the CIA only applies to a “consumer insurance contract”, that is, an insurance contract between an insurer and an individual who enters into the contract mainly or wholly for the purposes which are unrelated to the individual’s trade, business or profession.

Duty to take reasonable care

In relation to pre-contractual disclosure, the CIA replaces the duty of utmost good faith on the part of an insured (“consumer”) under a consumer insurance contract with a duty to take “reasonable care” not to make a misrepresentation to the insurer.

The CIA does not define “reasonable care” but provides guidance to determine whether a consumer has discharged his duty to take such care. First, all relevant circumstances, such as the type of contract, its target market, any explanatory material produced by the insurer and how clear, and how specific, the insurer’s questions were, are to be taken into account in determining whether a consumer has taken reasonable care. Second, the standard of care to be applied is that of a reasonable consumer. A misrepresentation made dishonestly by a consumer evinces a lack of reasonable care.

Qualifying misrepresentation

If a consumer has made a misrepresentation before entering into a consumer insurance contract, the insurer will have a remedy only if he proves that (a) the consumer has breached his duty to take reasonable care; and (b) without such misrepresentation, the insurer would not have entered into the contract or would have done so on different terms (“qualifying misrepresentation”).

A qualifying misrepresentation may fall into two categories under the CIA, namely, one which is (a) deliberate or reckless; or (b) careless. A qualifying misrepresentation is deliberate or reckless if the consumer knows or did not care that (a) the misrepresentation was untrue or misleading; and (b) the matter was relevant to the insurer.

A qualifying misrepresentation is deemed careless if it is not proved to be deliberate or reckless. The CIA places the burden on the insurer to prove that a qualifying misrepresentation is deliberate or reckless.  

Remedies

If a qualifying misrepresentation is deliberate or reckless, the insurer may avoid the contract and refuse all claims. It need not return the premiums paid, except to the extent that it would be unfair to the consumer to retain them.

Where a qualifying misrepresentation is careless, the insurer’s remedies would depend on what it would have done if the consumer had complied with its duty to take reasonable care. If the insurer would not have entered into the contract on any terms, it may avoid the contract and refuse all claims, but must return the premiums paid.

However, if the insurer would have entered into the contract, but on different terms (other than terms relating to premium), the contract is to be treated as if it had been entered into on those different terms, if the insurer so requires. Further, if the insurer would have charged a higher premium, it may reduce proportionately the amount payable on a claim based on the formula set out in the CIA.

If the insurer elects to vary the terms of the contract, the consumer may, upon being notified of the changes, terminate the contract by giving notice to the insurer.

The duties and remedies discussed above also apply to disclosures made by a consumer in the course of the variation of a consumer insurance contract.

The IA

Following on the introduction of the CIA, the IA came into force in the United Kingdom on 12 August 2016, about 3½ years after the CIA.

The IA introduces a new pre-contractual duty of disclosure for non-consumer insurance contracts. It defines a “non-consumer insurance contract” as a contract of insurance that is a not a consumer insurance contract as defined in the CIA and uses the expression “insured” to describe a party who is the insured under the contract of insurance, or would be if the contract had been entered into.

Duty of fair presentation

The IA requires an insured to provide the insurer with a fair presentation of the risk. This duty is described in the IA as “the duty of fair presentation”.

A fair presentation of the risk is one that satisfies the following requirements: (a) it discloses every material circumstance which the insured knows or ought to know, or failing that, gives the insurer sufficient information to put the insurer on notice that it needs to make further enquiries; (b) the disclosure is made in a manner which is reasonably clear and accessible to the insurer; and (c) every material representation of fact is substantially correct, and every material representation as to a matter of expectation or belief is made in good faith.

The IA clarifies that a circumstance or representation is “material” if it would influence the judgment of a prudent insurer in determining whether to take the risk, and if so, on what terms.

Knowledge

An insured who is an individual is deemed to know only what is known to him, and what is known to other individuals who are responsible for his insurance. Where the insured is not an individual, its knowledge is that which is known to individuals who are part of the insured’s senior management or are responsible for its insurance.

The IA also provides that an insured ought to know what should have been revealed by a reasonable search of information available to him. Further, an individual’s knowledge includes not only actual knowledge but also matters which he suspects, and would have known but for the fact that he deliberately refrained from confirming or enquiring about them.

Remedies

To be entitled to a remedy for a breach of the duty of fair presentation by the insured, the insurer must show that, but for the breach, the insurer (a) would not have entered into the contract of insurance; or (b) would have done so on different terms (“qualifying breach”).

A qualifying breach may be either (a) deliberate or reckless, i.e. where the insured knew or did not care that it was in breach of the duty of fair presentation; or (b) neither deliberate nor reckless. The burden to prove that a qualifying breach is deliberate or reckless lies with the insurer.

The remedies available in respect of a qualifying breach under the IA are very similar to those available for a qualifying misrepresentation under the CIA. Where a qualifying breach is deliberate or reckless, the insurer may avoid the contract, refuse all claims and need not return any premiums paid.

If a qualifying breach is neither deliberate nor reckless, the insurer’s remedies would depend on what it would have done in the absence of the qualifying breach. If the insurer would not have entered into the contract on any terms, it may avoid the contract and refuse all claims, but must return the premiums paid.

On the other hand, if the insurer would have entered into the contract, but on different terms (other than terms relating to premium), the contract is to be treated as if it had been entered into on those different terms, if the insurer so requires. In addition, if the insurer would have charged a higher premium, it may reduce proportionately the amount payable on a claim based on the formula set out in the IA.

Contracting out

The IA allows the parties to a non-consumer insurance contract to contract out of certain provisions of the IA, including those that relate to the insured’s duty of fair presentation and the consequences thereof. The disadvantageous term must be clear and unambiguous as to its effect and the insurer is required to take sufficient steps to draw the insured’s attention to the disadvantageous term before the contact is entered into. 

As in the case of the CIA, the provisions relating to the duty of fair presentation and remedies also apply to disclosures made by an insured in the course of the variation of a non-consumer insurance contract.  

THE POSITION IN MALAYSIA

The insurance industry and its equivalent under Islamic law, i.e. the takaful industry, in Malaysia are regulated by Bank Negara Malaysia (“BNM”) under the Financial Services Act 2013 (“FSA”) and the Islamic Financial Services Act 2013 (“IFSA”) respectively.

The rights and obligations of the parties in relation to the pre-contractual duty of disclosure under a contract of insurance and a takaful contract are set out in Schedule 9 of the FSA and the IFSA respectively. The relevant provisions of both schedules came into operation on 1 January 2015.

The FSA

Schedule 9 of the FSA draws a distinction between pre-contractual duty of disclosure in relation to consumer insurance contracts and other contracts of insurance. For the purposes of Schedule 9 of the FSA, a “consumer insurance contract” refers to a contract of insurance entered into by an individual (“consumer”) wholly for purposes unrelated to his trade, business or profession. It is to be noted that the definition of a consumer insurance contract under the FSA is narrower than that under the CIA.

Non-consumer insurance contract

Paragraph 4(1) of Schedule 9 of the FSA requires a person who proposes to enter into a non-consumer insurance contract to disclose to the insurer any matter which (a) the proposer knows to be relevant to the decision of the insurer on whether to accept the risk or not and the rate and terms to be applied; or (b) a reasonable person in the circumstances could be expected to know to be relevant. 

Although the FSA does not set out the consequences of a breach of the pre-contractual duty of disclosure by a proposer for a non-consumer insurance contract, the similarity between Paragraphs 4(1) of Schedule 9 of the FSA and section 18 of the MIA suggests that the breach, however trifling, may allow the insurer to avoid liability on the contract.

Consumer insurance contract

Paragraph 5(1) of Schedule 9 of the FSA permits an insurer to request a consumer to answer specific questions which are relevant to the insurer’s decision as to whether to accept the risk and the rates and terms to be applied in respect of a proposed consumer insurance contract. A duty is imposed on the consumer under Paragraph 5(2) to take reasonable care not to make a misrepresentation when he answers the questions posed by the insurer.

The failure or omission by an insurer to ask questions operates as a waiver by the insurer of the consumer’s duty of disclosure. Further, an insurer is deemed to have waived the duty of disclosure if it does not follow up on incomplete or irrelevant answers provided by the proposer.

Subject to his duty under Paragraph 5(1) of Schedule 9 of the FSA, a consumer is also required to take reasonable care to disclose to the insurer any other matter that the consumer knows to be relevant to the decision of the insurer whether to accept the risk or not and the rates and terms to be applied.

As in the case of the CIA, the FSA does not define “reasonable care” but provides guidance which is substantially similar to the CIA to determine whether a consumer has discharged this duty. As in the case of the CIA, the standard of care is that of a reasonable consumer.

The remedies available to an insurer for a misrepresentation in respect of a pre-contractual disclosure for a consumer insurance contract are similar to those under the CIA and depends on whether the misrepresentation is (a) deliberate or reckless; or (b) careless; or (c) innocent.

A misrepresentation is deliberate or reckless if the consumer knew or did not care (a) whether the statement was untrue or misleading; and (b) that the matter to which the misrepresentation related was relevant to the insurer.

A dishonest misrepresentation is deemed to be deliberate or reckless whereas a careless or innocent misrepresentation is neither. The burden of proving that a misrepresentation is deliberate or reckless lies on the insurer and is based on a balance of probability.

The insurer’s remedies for misrepresentation are set out in Division 2 of Schedule 9 of the FSA and replicate those in the CIA, save that in lieu of a prescribed formula, BNM is to determine the reduced amount to be paid in respect of a claim.

The IFSA

The rights and obligations in respect of a pre-contractual duty of disclosure for a consumer takaful contract, that is, a contract of takaful entered into by an individual wholly for the purposes unrelated to his trade, business or profession, and a non-consumer takaful contract are set out in Schedule 9 of the IFSA. These duties and remedies are almost identical to those applicable to consumer insurance contracts and non-consumer insurance contracts under the FSA.

CONCLUSION

The rights and obligations arising from a pre-contractual duty of disclosure under the CIA and IA represent a radical shift from the position that existed before these statutes came into force, where even a minor breach could give the insurer the right to avoid the contract. The amendments represent a more equitable position and significantly improve the position of the insured.

The legal position relating to non-consumer insurance contracts and non-consumer takaful contracts appear to be stuck in the early-twentieth century and largely reflect the position under the MIA.

However, it is heartening to note that BNM had kept abreast of the developments in the law on the pre-contractual duty of disclosure for consumer insurance contracts and the legal position in Malaysia with regard to consumer insurance contracts and consumer takaful contracts is substantially similar to that under the CIA.

Notwithstanding these developments, a person who seeks protection against contingencies through insurance or takaful contracts should still be mindful not to cover up important facts or circumstances that may be relevant to the insurer. Otherwise, he could still run the risk of blowing his cover.

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SUBJECT MATTER: INSURANCE LAW

WRITERS' NAMES : LOO PEH FERN & KHOO WEN SHAN

WRITER'S PROFILE:

Peh Fern is a Partner in the Dispute Resolution Division of SKRINE. Her main practice areas are insurance and reinsurance law and commercial litigation.

Wen Shan is an Associate in the Dispute Resolution Division of SKRINE. He graduated from the University of Leicester in 2012.

PULL QUOTES:

an insured … under a consumer insurance contract (must) take “reasonable care” not to make a misrepresentation

an insured (must) provide the insurer with a fair presentation of the risk (for non-consumer insurance contracts)

the law on the pre-contractual duty of disclosure for consumer insurance contracts and consumer takaful contracts … will be substantially similar to that under the CIA

 
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