CHAPTER 5 UTMOST GOOD FAITH 11% OF THE EXAM

Principle of utmost good faith Duty of disclosure Material facts Facts that do not need to be disclosed Consequences of non-disclosure Misrepresentation Breach of the duty of fair representation

Principle of utmost good faith Duty of disclosure Material facts Facts that do not need to be disclosed Consequences of non-disclosure Misrepresentation Breach of the duty of fair representation

UTMOST GOOD FAITH “The positive duty to voluntarily disclose, accurately and fully, all facts material to the risk being proposed, whether requested or not.”

Defined under the Marine Insurance Act 1906. Material Fact “Every circumstance is material which would influence the judgement of a prudent insurer in fixing the premium or determining whether he will take the risk.” Defined under the Marine Insurance Act 1906.

Duties Insured Make a full and complete disclosure of all material facts Insurer Must also disclose all material facts. Examples include: Inform insured about possible premium discounts Accept only those risks they are authorised to underwrite Untrue or misleading statements are a breach of utmost good faith

Principle of utmost good faith Duty of disclosure Material facts Facts that do not need to be disclosed Consequences of non-disclosure Misrepresentation Breach of the duty of fair representation

1 2 THE EFFECT OF FINANCIAL CONDUCT AUTHORITY RULES It is deemed ‘unreasonable’ to reject a claim if: 1 Ways of ensuring customers understand what must be disclosed: 2

Consumer Insurance (Disclosure and Representations) Act 2012 Replaces insured’s duty to volunteer all material information with a to take reasonable care to answer insurer’s questions correctly Consumer Insurance (Disclosure and Representations) Act 2012

Applies to non-consumer insurances Concept of utmost good faith continues Insured now has a duty of ‘Fair Representation’ Absolute remedy of avoidance replaced with proportionate remedies

FAIR PRESENTATION DEFINED AS: Disclosure of material circumstance which insured ought to know gives insurers sufficient information to put a prudent insurer on notice Disclosure in a manner that is clear and accessible to the insurer Every material fact is substantially correct and is made in good faith

DUTY TO MAKE A FAIR PRESENTATION Shifts the onus from Insured to Insurer to ask questions and probe for information? Applies pre-contract Can be extend throughout the lifecycle of the policy DUTY TO MAKE A FAIR PRESENTATION

Insured: MEASURE OF INSURED’S KNOWLEDGE Individual insured = Knows what is known to them or what is known by an individual or individuals responsible for their insurance Non-individual insured = What is known by 1 or more senior managers, or 1 or more people responsible for their insurance MEASURE OF INSURED’S KNOWLEDGE

MEASURE OF INSURERS KNOWLEDGE An employee/agent of the insurer knows it and ought to have passed the information onto the underwriter The relevant information is held by the insurer and is readily available to the underwriter making the decisions It is common knowledge (presumed knowledge) It is something that an insurer offering the class of insurance in question ought to know (presumed knowledge) Insurer ought to know something only if: MEASURE OF INSURERS KNOWLEDGE

What is know by the Insured includes…’What is known by someone responsible for their insurance’. The Insurance Act 2015 does not impose duties on brokers, however, what is known by the broker is imputed back to the insured. AGENT’s DUTY

WARRANTIES A warranty is a guarantee or promise made by the insured normally designed to control an specific element of the risk. The Insurance Act 2015 abolishes situations where pre-contractual warranties are created off the back of representations made by the insured – Basis of the Contract’ clauses

Can contract out of duty of fair representation Onus on insurer to explain consequences or contracting out will not be effective Insurer must take sufficient steps to highlight the disadvantageous term to the insured’s attention. The term is clear and unambiguous. In determining the above, the insured’s characteristics should be taken into account The insured cannot rely on the insurer to notify them of the disadvantages of the term if they already knew this CONTRACTING OUT

MODIFICATION BY POLICY WORDING Policy Condition Rules Common Law Rules There is a need for the customer to be honest during the negotiation stage, at any mid term adjustments and again at the renewal stage. Policy Condition Rules Insurers write a condition into the policy which means the customer must now advise the insurer of any material changes. This is referred to as the continuing requirement.

LIMITATION OF AN INSURERS RIGHT TO INFORMATION Estoppel: Legal term used for a bar or impediment that precludes a person from asserting a fact or a right. It usually arises where one party’s conduct has been relied upon by the other. Example: Customer returns a proposal without completing a question and the insurer sets up the policy without asking for the information – estoppel by waiver

Principle of utmost good faith Duty of disclosure Material facts Facts that do not need to be disclosed Consequences of non-disclosure Misrepresentation Breach of the duty of fair representation

MATERIAL FACTS When an insurer gathers material facts it enables the insurer to assess the physical and moral hazard the risk / proposer brings to them. Physical hazards relate to the physical characteristics of the risk Construction of the building, age of driver, nature of security precautions. Moral hazards relate to human element such as attitude and behaviour i.e. Previous refusals to insure (declinature) by other insurers; previous claims history, criminal convictions.

Principle of utmost good faith Duty of disclosure Material facts Facts that do not need to be disclosed Consequences of non-disclosure Misrepresentation Breach of the duty of fair representation

NO NEED TO DISCLOSE Facts of law Facts of public knowledge Facts that lessen the risk Facts where the insurer has waived its right to information Facts that a survey should have revealed Facts that the insured does not know Facts outside of the scope of specific questions Facts covered by policy terms See also Insurance Act 2015 See also spent convictions – Legal Aid Sentencing and Punishment of Offenders Act 2012 (LASPO)

Insurance Act 2015 – no need to disclose if: It diminishes the risk The insurer knows it The insurer ought to know it The insurer is presumed to know it It is something to which the insurer waived information

LASPO – Rehabilitation – Custodial Sentences Buffer period 0 – 6 months 2 years 6 – 30 months 4 years 30 months – 4 years 7 years Over 4 years Never Spent Halved for minors

LASPO – Rehabilitation – Non Custodial Sentences Buffer period Community order 1 year Youth rehabilitation order Fine Conditional discharge, referral order, etc. Period of the order Halved for minors

Principle of utmost good faith Duty of disclosure Material facts Facts that do not need to be disclosed Consequences of non-disclosure Misrepresentation Breach of the duty of fair representation

Historically, who was subject to the principle of utmost good faith in insurance contracts? Both the proposer and the insurer Interested third parties The insurer only The proposer only

Historically, who was subject to the principle of utmost good faith in insurance contracts? Both the proposer and the insurer Interested third parties The insurer only The proposer only

Which of these facts is a proposer for insurance required to disclose? Facts about claims history Facts about spent convictions Facts that lessen the risk Facts that a survey should have revealed

Mr Jenkins wishes to get a quotation for motor insurance Mr Jenkins wishes to get a quotation for motor insurance. He had an insurance claim for an accident he was involved in 3 years ago, when he was only 17. He was also sent to prison for 3 months because he assaulted the other driver. His vehicle has performance enhancing modifications and he sometimes uses it for business. Which of the following will Mr Jenkins NOT have to disclose to his insurer? His claim His conviction The type of business use The vehicle modifications

Which Act of Parliament replaces the duty of a proposer for a personal insurance to volunteer all material information with a duty to take reasonable care to answer insurer’s questions correctly? Consumer Insurance (Disclosure and Representations) Act 2012 Insurance Act 2015 Marine Insurance Act 1906 Misrepresentation Act 2012

As a result of the Insurance Act 2015, what is the new duty of disclosure imposed on commercial clients proposing for insurance? A duty of fair representation A duty to answer all questions correctly A duty to take reasonable care to answer questions correctly The duty of utmost good faith

What is a positive hazard? One that can be mitigated by positive action One that has been positively disclosed by the policyholder One that improves the risk One that increases the risk

What is an example of a physical hazard? A cyclist who ignores red traffic lights A fast driver A high performance vehicle A history of motoring convictions

What is seen to be evidence of a moral hazard? A busy road A high performance vehicle A history of motoring convictions Living in a high crime area

What is an example of a positive physical hazard? A bonfire and fireworks party A burglar alarm A history of claims Living in a high crime neighbourhood

Principle of utmost good faith Duty of disclosure Material facts Facts that do not need to be disclosed Consequences of non-disclosure Misrepresentation Breach of the duty of fair representation

Principle of utmost good faith Duty of disclosure Material facts Facts that do not need to be disclosed Consequences of non-disclosure Misrepresentation Breach of the duty of fair representation

CONSEQUENCES OF NON DISCLOSURE Insurer can: Void ab initio (from the beginning) If fraudulent they can keep the premium and sue for damages They could chose to ignore it. If they leave the policy running they must pay any valid claims. CONSEQUENCES OF NON DISCLOSURE Considerations: Is it within the knowledge of the insured? Is it known to the insurer? Did it induce the contract?

FOS – Three stage approach Was there a clear question and was it answered correctly? Was the insurer induced? What kind of non disclosure was it

Principle of utmost good faith Duty of disclosure Material facts Facts that do not need to be disclosed Consequences of non-disclosure Misrepresentation Breach of the duty of fair representation

CONSEQUENCES OF MISREPRESENTATION Deliberate – Insured knew their statement was misleading or false Reckless – Insured did not care if their statement was misleading or false Careless – Insured failed to check the facts given to ensure validity

Principle of utmost good faith Duty of disclosure Material facts Facts that do not need to be disclosed Consequences of non-disclosure Misrepresentation Breach of the duty of fair representation

CONSEQUENCES OF BREACH OF DUTY OF FAIR PRESENTATION DELIBERATE + RECKLESS ANY OTHER BREACH Void ab initio Repudiate any claims Void ab initio + repudiate any claim Additional premium Add any outstanding terms to the policy Two categories of qualifying breach: Deliberate or Reckless Neither Deliberate or Reckless

CONSEQUENCES OF BREACH OF WARRANTY Breach of warranty no longer means automatic voidance. Liability is suspended until the warranty is further complied with. Once the warranty is complied with, liability starts again for the insurer.

COMPULSORY INSURANCE Motor Employers liability Professional Indemnity Examples: Motor Employers liability Professional Indemnity Innocent 3rd parties are always paid out when involved, regardless of breach of non disclosure or misrepresentation. COMPULSORY INSURANCE

Principle of utmost good faith Duty of disclosure Material facts Facts that do not need to be disclosed Consequences of non-disclosure Misrepresentation Breach of the duty of fair representation

CHAPTER 5 UTMOST GOOD FAITH 11% OF THE EXAM