Case study: Insurer beware – how to minimise the risk of waiving away the right to avoid
A recent English High Court decision has reinforced the need for precision when asking questions in proposal forms. This decision aligns with current New Zealand law and is therefore relevant to local insurers. The principles will remain relevant even under the recently released exposure draft of the Insurance Contracts Bill.
It is well known that insureds have a common law duty to disclose all material facts that would influence a prudent insurer in determining whether to write cover and, if so, on what terms. A common format for this disclosure is a proposal form, where the prospective insured responds to questions put by the insurer. The insured’s general duty of disclosure supplements questions asked in proposal forms, so an insured must still disclose material facts that were not the subject of a question in a proposal form. However, the insurer can be deemed to have waived its right to disclosure
of material facts which are outside, but proximate to, the scope of a proposal form question. One example from a leading English case is that asking a prospective insured whether they have been convicted of an offence for which they were imprisoned waives disclosure of convictions which did not result in imprisonment.
In Ristorante Limited v Zurich Insurance plc  EWHC 2538 (Ch), the claimant, which operated a bar and restaurant, took out an insurance policy covering, among other things, business interruption caused by physical damage to its leased premises. On inception and at each renewal, the claimant was required to (and did) confirm the veracity of statements including:
“No owner, director, business partner or family member involved with the business:
… has ever been the subject of a winding-up order or company/individual voluntary arrangement with creditors, or been placed into administration, administrative receivership or liquidation.”
The claimant made a claim under the policy for losses flowing from a fire at its premises. The insurer purported to avoid the policy on the basis that the claimant’s directors had been directors of other companies that had been put into liquidation.
The primary issue was whether the claimant, in affirming the above statement in the proposal form, had made a misrepresentation. This largely turned on the construction of that statement accordingly to ordinary principles of contractual interpretation. The Court found that the claimant had made no misrepresentation because the statement, in context, captured only insolvency events relating to the directors/shareholders themselves and not other entities also controlled by them.
However, the claimant still owed the insurer a general duty to disclose material facts. It was common ground that the liquidations of the other companies controlled by the claimant’s directors were material and their lack of disclosure induced the insurer to issue the policy. The claimant could succeed only if the insurer was found to have waived its entitlement to that information.
The Court found that the insurer had indeed waived. The test was whether a reasonable person reading the questions put to the claimant would be justified in thinking that the insurer had restricted its right to receive all material information and consented to the omission of the past insolvency of other companies controlled by the claimant’s directors. The Court answered this in the affirmative because:
- the insurer had identified past insolvency events as a subject for disclosure but had limited its inquiry on that topic to certain individuals and thereby waived disclosure of other insolvency events;
- there was no special reason for a court to be slow to waive disclosure relating to insolvency; and
- there was no evidence to support the submission, made in light of the fact that a broker arranged the claimant’s policy, that a reasonable broker would have identified that the other insolvency events were material and needed to be disclosed.
This case demonstrates the heavily contextual nature of the inquiry into whether an insurer has waived rights to disclosure. Poorly drafter proposal forms can unintentionally result in waiver. Insurers must therefore be careful to ensure that proposal forms are suitably and precisely worded so as to extract necessary information from prospective insureds without abridging the general duty of disclosure – the insurer’s great ally – by waiver.
"This case demonstrates the heavily contextual nature of the inquiry into whether an insurer has waived rights to disclosure.“
Waiver is one aspect of the law of disclosure in insurance contracts which has long been the subject of calls for reform on the basis that the current rules generate incoherent and unjust outcomes. In response to some of these concerns, MBIE undertook an inquiry in 2018/19. That inquiry concluded by recommending (among other things) a reform of the insurance disclosure rules to impose a requirement of reasonable care on consumers, and a duty of fair presentation on non-consumer insureds, when making disclosures to insurers (in proposal forms or otherwise) in lieu of the general duty of disclosure.
The recently released exposure draft of the Insurance Contracts Bill reinforces the risk of waiver for insurers and the need for clarity in proposal forms:
- In relation to consumer insurance contracts, clause 15 addresses matters which may be taken into account in determining whether the policyholder has taken reasonable care not to make a misrepresentation (the duty proposed to replace the general disclosure duty for consumers). Two of those matters are: (a) how clear, and how specific, any questions asked by the insurer of the policyholder were; and (b) how clearly the insurer communicated to the policyholder the importance of answering those questions and the possible consequences of failing to do so.
- In relation to non-consumer insurance contracts, clause 33(2)(e) expressly relieves policyholders, in the absence of enquiry, of the obligation to disclose a material circumstance if “it is something as to which the insurer waives information”.
The draft bill therefore makes it clear that insurers will need to remain ever vigilant in drafting proposal forms.
This article was co-authored by Thomas Leggat, a Senior Solicitor in our Litigation and Dispute Resolution team.