The duty to disclosure in insurance law

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A pre – contractual duty of disclosure is imposed by the Insurance law upon the assured, which requires the assured to disclose to the insurer all material facts and breach of this duty allows the insurer to avoid the policy. Section 18(2) of the Marine Insurance Act 1906 states that "Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.

" Similarly, all material representations made prior to the contract must be true.

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This fundamental duty has been the cause of a lot of concern in three major respects: the standard of the prudent underwriter, the degree of influence required and the remedies for breach. In Pan Atlantic Insurance Co. Ltd. v. Pine Top Insurance Co. Ltd. , this duty has been contested before the courts. In the marine insurance case of Container Transport International Inc. v.

Oceanus Mutual Underwriting Association (Bermuda) Ltd., the Court of Appeal opined that it was sufficient that non-disclosure would have influenced a hypothetical prudent insurer objectively material and immaterial that it would not have predisposed the particular underwriter in question subjectively material, thereby reversing on this point the decision in Berger & Light Diffusers Ltd.

v. Pollock . In other words the underwriter need not prove, if he is alleging non-disclosure that he would have been influenced. In Highlands Insurance Co. v.

Continental Insurance , this unlike the previously discussed case was a non-marine insurance case, the counsel made out a strong case for confining to marine insurance, the abolition of subjective materiality.

In Lambert v. Co-operative Insurance Society Ltd. , the court of appeal held that no distinction was to be drawn between marine and non-marine insurance in respect of the duty of disclosure. The juridical aspect of the non-disclosure obligation in insurance law was considered in La Banque Financiere de la Cite SA v. Westgate Insurance Co. Ltd. , and this was done in order to decide whether the remedy of damages was available for breach.

In this case it was held by the Court of Appeal that the duty originated as a contingent condition outside the contract and precedent to the right to insist upon performance of the contract by the underwriter. Whilst arriving at this conclusion, reference was made to the decision in Merchants' and Manufacturers' Insurance Co. Ltd. v. Hunt , wherein it was held that the origin of the right to avoid any contract, on the grounds of misrepresentation "arises by reason of the jurisdiction originally exercised by the Courts of Equity to prevent imposition.

" In the law of contract, a misrepresentation is not actionable unless the representee would have acted differently had the truth been told, this was decision in J. E. B. Fasteners Ltd. v. Marks, Bloom & Co . This is obviously correct, because the question arises as to how consent can be vitiated due to the reason that the contract would have been concluded even in the presence of full disclosure and accurate representations. It was held that if insurance law was to be based on different principles, there should be a good reason for doing so.

The suggestion is that this is not true. The reasoning that the disclosure obligation is but one aspect of the utmost good faith nature of insurance contracts and poor commercial judgment by the underwriter is no excuse for failing to act in good faith is circular. Only when the information is material is the duty deemed to be broken, otherwise, because the underwriter would not have been influenced by its disclosure, failure to disclose is not breach of the duty.

The third problem relating to the disclosure obligation concerns not its scope, but the remedies available for its breach, in particular to the disparity of remedies accessible to assured and insurer. The Court of Appeal decision in Westgate established that the general good faith obligation is mutual and that damages, which constitute the only remedy of any practical use to an assured is not available. In glaring contrast, the insurer can always rescind the contract and thereby avoid all liability.

The Barclay case In Barclay Holdings v. British National Insurance, the plaintiff company preferred a claim of indemnity in respect of its premises which had been destroyed by fire. The defendant denied liability on the ground that the plaintiff had breached his common law duty to disclose relevant material facts, specifically the facts set out below: (a) The plaintiff possessed another commercial office premises which were insured with MLC Fire and General Insurance Co. Pty. Ltd. These premises were damaged by fire and Mr.

Barclay lodged a claim with MLC. During the trial it was established that no mala fides were discovered during the MLC’s subsequent investigations in order to determine the cause of the fire. (b) Further, the MLC wrote a letter stating their inability to renew the plaintiff’s insurance policy. However, this refusal was later retracted. During cross-examination at the trial, the defendant insurer's expert witness accepted that the refusal to renew was due to "commercial administrative reasons" which did not reflect any moral hazard.

The judge of first instance opined that the earlier fire and refusal to renew constituted material matters which would influence a prudent insurer’s decision to undertake a risk or avoid the risk. At appeal however, this judgment was overturned and it was unanimously concluded that these instances of non-disclosure were not material. Although, the test of materiality may be one of law, its application is one of fact. This engenders difficulties, as can be observed in the trail of heavily criticised decisions biased in the insurer's favour .

In contrast, the Barclay case facilitates the application of the test of materiality. Roselodge v. Castle involved an all-risks diamond policy. McNair J. held that the undisclosed fact of the principal director of the insured company being an ex convict was irrelevant to the issue as it had "no direct relation to trading as a diamond merchant . " In Reynolds v. Phoenix , at the time of taking out a fire policy, the insured concealed the facts about a previous conviction. The judge opined that it was incorrect for the insurer to contend that this undisclosed fact was material.