Both parties to an insurance contract are primarily concerned with prudently apportioning their risk. Therefore there is a higher expectation than in other contracts, that both parties will disclose all relevant facts prior to entering into the contract, to allow an accurate assessment of the risk. While both parties are expected to disclose all facts material to the proposed insurance of which they are aware, the insured also has a statutory duty of disclosure.
What is the insured’s duty of disclosure?
The statutory duty of disclosure requires that the insured disclose to the insurer every matter they know or which a reasonable party in the insured’s circumstances could be expected to know, would be relevant to the insurer when they are deciding whether and on what terms to grant insurance. This must be complied with before entering into the insurance contract or on any renewal or variation.
The Insurer must inform the insured that they have this duty of disclosure.
If you have a co-insured, you each must comply with the duty individually, but unfortunately suffer the effects of the breach collectively. That means that even if you have complied with the duty, your claims can be rejected if your co-insured failed to disclose something relevant.
How do I know what to disclose?
The best place to start is the insurance proposal form. It will usually ask the most significant questions which you should answer as accurately and in as much detail as possible. However, the fact a question isn’t asked doesn’t absolve you of your duty. If you suspect there is any other information which may be of interest to your insurer, it is always better to err on the side of caution and disclose.
The types of things you could be expected to disclose will vary from policy to policy and depend on the insured. Some examples could be any previous or existing illnesses or disabilities, prior accidents, previous insurance claims and if any were rejected or even criminal convictions. Although this level of disclosure may feel invasive or embarrassing, you have to bite the bullet or risk having claims rejected down the track.
Also be aware of any continuing disclosure obligations outlined in the contract. For example, some types of professional indemnity insurance contracts require you to notify the insurer as soon as you become aware of any circumstances which may give rise to a claim against you, even if it hasn’t yet eventuated.
What doesn’t need to be disclosed?
You don’t have to disclose any matter:
- that diminishes the risk of you making a claim;
- is common knowledge;
- that the insurer knows or in the ordinary course of the insurer’s business an insurer ought to know; or
- for which the insurer has waived the duty of disclosure.
For example, if an insurer accepts or doesn’t follow up any instances on the proposal form where an insured failed to answer or gave obviously incomplete or irrelevant answers, the insurer will be deemed to have waived the duty of disclosure in relation to that matter.
Fraudulent vs Innocent Non-Disclosure
A breach of the duty of disclosure will be considered fraudulent if it can be shown that information was given or withheld which was known to be false or with reckless disregard to its truth. This could include deliberately withholding information you know will affect your premium or simply not being bothered to investigate the outcomes of your previous claims.
Otherwise, a breach of the duty of non-disclosure will be considered innocent.
What is the effect of breaching the duty of disclosure?
If it is determined that you have fraudulently breached the duty of non-disclosure, the insurer may refuse to pay your claim and avoid the contract entirely.
If the insurer is not entitled to avoid a contract (eg. because it was an innocent non-disclosure) or are so entitled but have chosen not to do so, the liability of the insurer for the claim is reduced to an amount which would place the insurer in a position had the breach not occurred. This can, in certain circumstances, amount to the claim being reduced to nil.
In limited circumstances, the court can decide not to allow an insurer to avoid a contract, even if there has been a fraudulent non-disclosure, on the basis that:
- No prejudice has been suffered by the insurer; or
- Avoiding the contract would be harsh, unjust, or unfair to the insurer.
It’s true that full and honest disclosure may cause your premiums to increase. But this will always be preferable to claims being refused completely. Although most disclosure obligations will either be intuitive or flagged by the insurer, if you are concerned you may have missed something its worth sitting down with your insurance broker who will be experienced with the types of things insurers need to know. The more proactive you are about disclosure, the more likely you’ll comply with your duty.
If you require any assistance in relation to insurance contracts, please don’t hesitate to contract us.