Our previous edition of Cover to Cover explored the "fair presentation" duty on policyholders of non-consumer insurance contracts, in advance of the Contracts of Insurance Act's commencement on 15 November 2027. 

In this instalment of our deep dive series, we consider the duty owed by policy holders of consumer contracts to "take reasonable care not to make a misrepresentation".

Overview of the duty: Section 13 of the Act 

1. A policyholder (or other person to whom the duty applies) must take reasonable care not to make a misrepresentation.

2. The duty applies to: 

   1. policyholders of consumer insurance contracts;

   2. beneficiaries of group policies where if the beneficiary had entered into the policy directly with the insurer, it would be a consumer insurance contract; and 

   3. persons whose life or health is insured but is not a party to the insurance contract, but only in respect of information that depends on the state of mind, knowledge, circumstances or characteristics of the individual.

3. Consumer insurance contracts are contracts of insurance ordinarily entered into by a policyholder, wholly or predominantly for personal, domestic or household purposes. In large part these are likely to correspond to an insurer's "retail" or consumer offerings. Certain types of insurance contracts can be deemed consumer insurance contracts under regulations, but there is no suggestion that deeming regulations will be in force at the Act's commencement. 

4. The duty applies before a consumer insurance contract is entered into or varied. It is not a continuing duty throughout the period of insurance. However, entry into an insurance contract includes policy renewals. 

5. The standard of care required is that of a reasonable policyholder who enters into a consumer contract. That standard may be adjusted if there are particular characteristics or circumstances of the actual policyholder that the insurer knew or ought to have known (e.g., limited understanding of English, where English is the language of the insurer's proposal form and the primary means through which the insurer communicates with the insured. 

6. Whether a policyholder has complied with the duty must be determined with regard to all relevant circumstances.

7. Section 14(1) of the Act contains a non exhaustive list of the matters of court may consider when determining whether reasonable care has been taken. They include the type of consumer insurance contract at issue and its target market, as well as how clear and specific any questions from the insurer were. The majority of these focus on actions taken or not taken by the insurer, rather than the policyholder.

8. A misrepresentation made dishonestly will always be taken as showing lack of reasonable care.

9. A failure by a policyholder to comply with the insurer's request to confirm or amend particulars previously given is capable of being a misrepresentation. 

United Kingdom (UK) consumer duty: Closely aligned

Usefully, this new duty closely reflects the duty imposed by sections 2 to 5 of the Consumer Insurance (Disclosure and Representation) Act 2012 (UK Act). The similarities in the statutory language between the incoming Act and UK Act mean decisions testing the provisions in the UK provide important guidance. Specifically, cases in the UK have grappled with: 

• what qualifies as a 'misrepresentation' under the Act; 

• what a policyholder must do to show they took "reasonable care" not to misrepresent to their insurance provider; and 

• any remedies that are available to an insurer where reasonable care has not been taken.

There are also significant similarities with the consumer duty in sections 20A to 20C of the Insurance Contracts Act 1984 (Cth). 

We look at three UK case studies below addressing these issues.

Case study 1:

Jones v Zurich Insurance plc[1]

Facts: Mr Jones made a claim under his household insurance policy with Zurich for a vintage Rolex Daytona watch with a sought-after "tropical-dial" which he lost while skiing in Aspen, Colorado. The watch had an agreed value under the policy of GBP190,000, Zurich declined the claim and treated the policy as void. It considered that Mr Jones had breached his duty to take reasonable care not to make a misrepresentation because he had failed to disclose to Zurich a previous GBP15,000 claim for a broken diamond ring in 2016. Zurich's position was that had Mr Jones disclosed this prior claim, it would not have been willing to provide him with insurance at all. 

The Court identified three issues for determination:

1. Whether Mr Jones made a misrepresentation to Zurich.

2. If so, whether the misrepresentation was made in breach of his duty to take reasonable care not to make a misrepresentation; and

3. Whether Zurich had shown that without the misrepresentation it would not have underwritten the policy, or would have done so on different terms.

Issue 1: Did Mr jones make a misrepresentation to Zurich? The Court found that Mr Jones mad misrepresented the true position to Zurich by failing to disclose his 2016 insurance claim. Zurich's proposal form asked whether Mr Jones had "any losses or claims in the last five years." The proposal form was completed on behalf of Mr Jones by Mr Trautmann, his uncle and his assistant, with full knowledge of the details of the prior claim. Regardless, the answer given to Zurich was "no". Further, when Zurich provided a quotation for the policy, it included a statement of facts which it made clear formed the basis of the quotation. Zurich requested confirmation of the accuracy of the statement of facts as a condition of providing cover. One of Mr Jones' brokers, Bluefin Network, also made false representations in telephone calls with Mr Green of Zurich, both as to whether Mr Jones had made any claims in the last five years, and whether he had a claims history while living with his parents. 

Issue 2: Had Mr Jones failed to take reasonable care? Mr Trautmann, acted as an intermediary between Mr Jones and his brokers. Under cross-examination, Mr Trautmann accepted that he passed on to the brokers information that Mr Jones knew to be incorrect. The Court found Zurich had "gone out of its way to make clear the information that was required" by Mr Jones. Specifically, Zurich:

• asked whether he had "Any losses or claims in the last five years";

• asked whether he had any "claims history" while previously living with his parents;

• followed up with a telephone call to Mr Jones' broker to reinforce these questions; and 

• encouraged him to check that the information provided by him on the statement of facts was correct prior to accepting Zurich's quotation. 

The questions posed by Zurich where specific, unambiguous and repeated across multiple stages of the underwriting process.

The Court applied an objective standard: what would a reasonable policyholder in Mr Jones' position have done? It found that Mr Jones have failed to do what a reasonable policyholder would have done. The Court placed significant weight on Mr Jones' cumulative failures to correct the record, together with Zurich's thorough process (as noted above).[2]

Issue 3: Whether Zurich had shown that without the misrepresentation it would not have written the cover at all, or would have done so on different terms? The Court identified two limbs to the third issue.[3]

"a misrepresentation will be a qualifying misrepresentation if either Zurich would not have entered into the policy at all or if it would have done so on different terms, whereas even if the misrepresentation is qualifying misrepresentation, Zurich is not entitled to avoid the policy unless it establishes that it would not have entered into the policy on any terms had Mr Jones complied with his duty."

This largely aligns with the statutory language of s 23 and schedule 2 of the New Zealand Act. 

The Court accepted Mr Green's evidence that, given Mr Jones' young age, high value jewellery risk, and lack of prior relationship with the broker, his insurance proposal was already borderline, Further, knowledge of the previous substantial jewellery claim for the diamond ring would have tipped the decision into a declinature.[4]

The Court addressed the nature of underwriting evidence. Drawing on previous UK decisions, the Court noted that an underwriter’s evidence about what they would have done had they known certain information is, by its nature, hypothetical, and therefore may tend toward exaggeration.[5] However, the Court held that this does not make such evidence immaterial. Even if an underwriter’s evidence is exaggerated, it can still be sufficient to establish that the undisclosed information was material.

The Court also identified that Mr Green’s evidence was credible because of the extensive contemporaneous underwriting notes he kept, as well as his transcript of his call with the broker. Evident in both was his concern about providing cover for Mr Jones.

Counsel for Mr Jones argued that Zurich’s failure to disclose a macro-enabled version of the underwriting spreadsheet and any internal underwriting guidelines was significant.[6] The Court disagreed. The key question was whether Zurich would have declined cover or offered it on materially different terms had the prior jewellery claim been disclosed. Given the nature of the risk, Mr Jones’ personal history, and the direct relevance of his prior claim to the jewellery being insured, the Court found it almost inevitable that Zurich would have either declined cover or imposed a substantially higher premium than the 25 per cent loading Mr Green had already applied.[7]

Further, the Court held that the spreadsheet tool was not a decision-making system, as it produced an indicative premium only and left Mr Green with full discretion over the final underwriting decision. Mr Green's quoted premium was already 25 per cent above the tool's output. The Court accepted Mr Green’s evidence that reflecting the prior claim in the tool would have increased the indicative premium by a further 20–30 per cent, and that the ultimate decision always rested with Mr Green personally.[8]

Both parties called underwriting experts. Mr Pipe, Mr Jones’ expert, considered it unusual though not impossible to decline cover on the basis of the earlier claim for the diamond engagement ring. That concession from Mr Jones’ own expert was significant.[9] Mr Coates, Zurich’s expert, considered no prudent underwriter would have offered terms, noting that Zurich was a high value net-worth household insurer rather than a specialist valuables underwriter and treated high jewellery exposure cautiously even where the insured was claim-free.[10]

The Court sided with Mr Coates, finding that Mr Green would have sought more information from the broker about the prior claim and that, on learning the full details, he would have declined to offer cover. Ultimately, the Court held that Zurich was entitled to avoid the policy.

Case study 2: 

Gillian Cowie v. Vitality Corporate Services Limited [11] 

Facts: Cowie v Vitality is a recent UK decision concerning a life insurance policy in which the insurer, Vitality, sought to avoid liability on the basis that the insured, Mr Cowie, had failed to disclose a pre-existing medical condition – Barrett’s Oesophagus – and abnormal liver results when completing his proposal form. Following his death from a brain haemorrhage, his widow, the executrix of his will, pursued a claim under the policy.

Mr Cowie’s death certificate recorded a liver condition as a contributing factor. Mr Cowie’s widow made a claim for GBP500,000 plus interest under the Vitality policy. When considering the claim, Vitality sought authority to access Mr Cowie’s medical records. Those records revealed a history of gastrointestinal and abnormal liver function. Mr Cowie had not disclosed these issues when seeking life insurance from Vitality. Ultimately, Vitality declined the claim on the basis that Mr Cowie had not taken reasonable care not to make a misrepresentation. It said that had it been aware of Mr Cowie’s previous gastrointestinal and liver issues it would have required a GP’s report and upon reading that, would have refused to provide Mr Cowie with life insurance.

The Court applied the tripartite inquiry from Jones v Zurich, which required it to determine the following[12]:

1. Had Mr Cowie made a misrepresentation to Vitality?

2. If so, was the misrepresentation made in breach of Mr Cowie's duty to take reasonable care not to make such a misrepresentation?

3. Had Vitality established that, absent the misrepresentation, it would have acted differently at the time of placement?

Issue 1: Did Mr Cowie make a misrepresentation to Vitality? The first stage required the Court to determine objectively what the questions in the proposal form meant — specifically, what a reasonable person in the position of the proposer would have understood them to be asking. That interpretation would then determine whether any answer given was objectively wrong and therefore constituted a misrepresentation. 

The proposal form contained two relevant questions:

Whether, apart from any condition he had already told Vitality about, Mr Cowie had, in the last five years, suffered from any disorder of the digestive system, liver, stomach, oesophagus, pancreas, colon or bowel (with various conditions listed by way of example); and

Whether, apart from anything he had already told Vitality about, Mr Cowie had within the last 2 years undergone any investigation such as blood tests, scans or biopsies and was the result normal?

The executrix argued that the questions were not sufficiently clear for two reasons. First, because the word “including” in the first question had a limiting effect, confining the scope of the question to the conditions expressly listed, which did not encompass Barrett’s Oesophagus. Secondly, because the phrase “apart from conditions you have disclosed to us” extended to disclosures made outside the proposal form itself - in particular, disclosures Mr Cowie had previously made to Vitality (or its predecessor) in connection with other policies. The Executrix argued that as Mr Cowie had disclosed acid reflux and oesophagitis some five years earlier, he had not made a misrepresentation by answering the proposal form in the manner in which he did.

The Court rejected both arguments, finding that the questions were clear on their face. Further, the prior disclosure of acid reflux and oesophagitis was not regarded as in any way equivalent to the distinct condition of Barrett’s Oesophagus.

Separately, the Court found on the evidence that in 2010 – just within the five-year period covered by the question – Mr Cowie had been treated for residual elements of Barrett’s Oesophagus which had survived an earlier treatment. His denial of this condition therefore constituted a misrepresentation. The Court further found a misrepresentation in relation to the question about abnormal test results. By the end of 2014 Mr Cowie’s follow-up tests had produced abnormal results, which should have been disclosed.

Issue 2: Had Mr Cowie failed to take reasonable care? The Court acknowledged at the outset that it did not find certain aspects of the 2012 Act “particularly easy to understand or apply” but made clear that the legislation does not permit unlimited judicial discretion. Specifically, the Court was concerned with the relevance and weight of the various considerations listed, which largely mirror those in the New Zealand Act.

In assessing the standard of care, the Court had regard to a number of considerations:

Nature of the contract: Life insurance is a long-term arrangement concluded on the basis of information provided at inception, without periodic reassessment. Given the likely importance of such a contract to a consumer, it would be clear to any reasonable person that the state of health of the life insured would be of considerable importance to an insurer’s willingness to accept the risk and the terms on which it would do so. This somewhat heightened the degree of care expected.

Target market: The Court considered the target market but found that it added nothing of substance, as it was described in broad terms.

Clarity of the questions: The proposal form questions were found to be amply clear and specific, leaving no material room for doubt in the mind of a reasonable reader as to what was being asked.

Role of the agent: The agent had no appreciable input into the completion of the proposal form and therefore did not alter the analysis.

Mr Cowie’s profession: Vitality was aware that Mr Cowie was a lawyer. The Court declined, however, to scrutinise his conduct more closely than that of an average consumer by reason of his professional background. Since the questions had already been found to be clear and specific, any additional benefit that might be attributed to a legally-trained mind was simply irrelevant. No additional weight was given to this factor.

Recollection of Barrett’s: The Court acknowledged genuine difficulty with the question of whether a reasonable consumer would have recalled in 2015 a diagnosis of Barrett’s Oesophagus made at the end of 2010 and which appeared to have largely been dormant or cleared up by 2015. On that basis, it stopped short of finding dishonesty. Nevertheless, it concluded that a reasonable person would have been careful about the five-year cut-off period in the proposal form and would have checked the relevant dates against their records or with their doctor. Mr Cowie’s failure to do so amounted to a lack of reasonable care.

Issue 3: Whether Vitality had established that, but for the misrepresentations, it would have acted differently at placement? The Court recognised that the question of what Vitality would have done was inherently hypothetical. As it observed, all that the witnesses could meaningfully do was point to the underwriting guidelines then in force within Vitality as an indication of what ought to have happened. The Court went on, however, to consider whether those guidelines would in fact have been followed – a matter of inference from the evidence as a whole.

The evidence for Vitality was compelling. That was largely because Vitality had underwriting requirements imposed on it by its reinsurer and a process that meant the reinsurer was required to review any proposed placement falling outside its requirements.

Interestingly, the Court disregarded the evidence of the underwriter directly involved, making an adverse credibility finding against him. It was apparent from his answers that he was protecting his own position and advocating for Vitality’s case, rather than giving independent evidence.

Ultimately, the Court found that the evidence clearly established it would have been highly unlikely for the underwriters to have departed from the guidelines on not one but two grounds - the Barrett's Oesophagus and the liver abnormalities. Vitality therefore succeeded in establishing that it would have refused the risk.

Case study 3:

Southern Rock Insurance Company Limited v. Hadar Hafeez [2017] CSOH 127

Facts: Southern Rock v Hadar Hafeez concerned the validity of a car insurance policy provided by Southern Rock Insurance Company Limited (Southern Rock), and whether its coverage could be voided due to an alleged misrepresentation by the policyholder, Mr Hussain Hafeez (Mr Hafeez). Mr Hafeez had applied for car insurance by stating that his residential address, and therefore the address where he parked his car, was in a suburb named Giffnock (Giffnock Address). Evidence during the proceedings revealed that Mr Hafeez had, at times during the insurance period, resided in a suburb named Govanhill (Govanhill Address). Mr Hafeez lodged an insurance claim after his relative had driven the insured car without his knowledge or permission, and crashed it into three high-value parked cars.

Southern Rock sought to avoid the insurance claim on the ground that the Mr Hafeez had misrepresented his residential address, to influence Southern Rock’s judgement in determining whether to agree to provide insurance, and what the appropriate level of risk, and hence premium, would be. Indeed, the premium for the Giffnock Address was substantially lower than the Govanhill Address, being GBP1,649.34 for the former as opposed to GBP2,899.08 for the latter[13]. In arguing that Mr Hafeez resided at the Govanhill Address, and not the Giffnock Address, Southern Rock relied on documents produced by Mr Hafeez that were all addressed to him at the Govanhill address, including copies of Mr Hafeez’s driver’s licence, bank statements and utility bills.[14]

In response, Mr Hafeez argued that he had leased the property at the Govanhill Address for his siblings, and while he occasionally stayed there, it did not mean that he no longer resided at the Giffnock Address.[15] Further, Mr Hafeez had obtained the car insurance for his vehicle through an online provider, after using two insurance quote comparison websites through the Google search engine.[16] One of the quote comparison websites directed him to a quote from an insurance broker named “GoSkippy”. GoSkippy had an online electronic form which asked Mr Hafeez two key questions regarding his residential address, as follows:

1. “Address”; and

2. “Address where car is kept”.

Mr Hafeez answered with the Giffnock Address for the first question, and stated that he had not seen the second question on the online form that he had submitted it. He further stated that if he had seen the second question, he would have answered with the Govanhill Address. [17]

Issue 1: Did Mr Hafeez make a misrepresentation? The Court held that the insurer had not established a misrepresentation. The onus is on the insurer to prove that the insured either deliberately or recklessly mispresented his address. In assessing whether a deliberate or reckless misrepresentation as to Mr Hafeez’s address had been made, all circumstances must be taken into account, including the type of communication used, and the terms of any question put and opportunity given to the consumer to qualify or particularise any response, or provide non-standard information.[18] In assessing all circumstances of this case, the Court found that neither Southern Rock nor Mr Hafeez could produce a precise copy of the questions answered by Mr Hafeez as at the time he was applying for car insurance through GoSkippy. Counsel for the insurer accepted that computer website interfaces and changed and updated on a regular basis, and there was no evidence vouching for the format or content of the website with which Mr Hafeez had interacted. Compounding this was a failure by the insurer to provide a copy of the questions and answers for Mr Hafeez’s review and confirmation prior to cover being placed. Further the Court found that Mr Hafeez genuinely believed that his address was the Dinard Street Address.

Given these findings, it was not necessary for the Court to consider the second the third issues in the three-stage analysis. 

The Court outlined the advantages and disadvantages of purchasing insurance coverage online. While on one hand, there is the advantage of concluding a contract for insurance immediately online, the key disadvantage is that there is no clear record of the precise wording of the questions that obtained key information for the risk assessment of a consumer’s application.[19] This can become of particular importance in circumstances such as this case.

This will be an important factor for insurers in New Zealand to consider when weighing the benefits and risks of making their products available on comparators websites. Insurers will want to make sure that the websites are keeping accurate records of any questions posed and answers given, including to initial questions used to limit results, which do not constitute insurance applications, the completed application and any other explanatory material on the website. Insurers should also be confident that comparator websites contain appropriate messaging notifying potential policyholders of their duty of disclosure.

Key takeaways 

For Insurers 

• Draft clear, specific questions and well-drafted policy documents. 

• Ask policyholders clear questions on the outset of an insurance contract or any variation; failure to do so may increase the difficulty of establishing a misrepresentation.

• Provide policyholders with a copy of the questions and answers in the application and ask them to review and confirm the accuracy of those answers; this will strengthen any argument that a misrepresentation has occurred.

• Where coverage or variation is offered through both hard-copy proposal forms, and online equivalents, ensure that the same targeted questions appear on both versions. 

• Ensure consistency between versions; inconsistency may result in a policyholder unknowingly purchasing or varying their coverage on the lesser-detailed version of the proposal form, which may mean no misrepresentation has occurred on their part.

• Preserve a copy of all versions of a proposal form in all formats, as these may form a vital part of evidence in Court proceedings.

• Note that where underwriting questions are specific, targeted, and comprehensible, Courts expect consumers to exercise a higher degree of diligence in answering them accurately.

• Maintain clear underwriting guidance and training focused on ensuring compliance with that guidance.

• Ensure underwriters keep good contemporary documents that record compliance with the underwriting guidelines.

For Insurance Brokers 

• Verify clients’ claims histories, as passing on incorrect information to insurers on behalf of your client may jeopardise your client’s cover.

• Where questions focus on specific time-limits, for example, claims in the last five years, make clear to clients that those time-limits apply on a strict basis, so that careful checks of dates and records are undertaken.

• If you notice that an insurer offers coverage or variation through both hard-copy and online proposal forms, ensure that the online proposal form on your platform directly reflects the key questions asked by the insurer on the hard-copy form.

• Any variation between the hard-copy form and the online equivalent may give rise to confusion for the client, which will not amount to a misrepresentation where the answers collected via the online form were incorrect.