Insurer pre-empts changes to the insured’s duty of disclosure
In July this year, Tower Insurance announced a fundamental change to the way it will require its customers to disclose circumstances affecting their risks. The change foreshadows likely changes in the law for all insurers in New Zealand.
Tower's Chief Executive, Richard Harding, has announced that Tower will remove the general duty of disclosure from its policies before the end of the year. He was reported as saying that, if customers answered truthfully all of the specific questions that Tower asked, they could assume that they had disclosed everything that was required. There was to be no further, general, duty of disclosure of all material facts and circumstances affecting the risk. Tower did not intend to ask a catch-all question along the line of “is there anything else that we should know?”
This approach recognises that there are a number of problems with the present obligation on customers to disclose circumstances that a reasonable insurer would regard as material to its decision to accept the risk insured 1. These problems include:
- what the insured is obliged to disclose is uncertain;
- an insured’s honest ignorance will not assist if it fails to make the necessary disclosure;
- where an insurer asks specific questions, the insured still has a general duty of disclosure in addition to answering
- the questions (which insureds may not appreciate); and
- a breach of the duty may have disproportionately harsh consequences for an insured, as the insurer is entitled to treat the policy as void from the outset even if it would have accepted the policy on different terms had it known the true position.
In issue 17 of Cover to Cover, we discussed the Ministry of Business, Innovation and Employment’s proposals to reform the law relating to the insured’s duty of disclosure. This followed 20 years of inaction following the Law Commissions' paper examining this issue and identifying the need for reform 2. The Law Commission discussed a number of possible reforms, including:
- limiting the duty of disclosure or changing what was considered material;
- warning insureds of their duty more clearly;
- requiring insurers to set out expressly what they are required to know in questions (in effect, abolishing the duty and replacing it with an obligation to answer specific questions truthfully). (This is essentially what Tower have indicated it intends to do); and
- limiting the consequences for insureds of getting it wrong.
The proposals were, in short:
- insurers would pose questions to the insured; and
- only an inaccurate answer or blameworthy conduct (where an insured or a reasonable person would have known that the circumstances were material to an insurer) would entitle an insurer to cancel a policy.
The approach in the UK and Australia
Both the UK and Australia have passed legislation to amend the duty of disclosure. Their approaches differ.
In Australia, the insured’s duty is limited to disclosing circumstances that the insured, or a reasonable person in their position, knew or should have known were relevant to the insurer’s assessment of the risk. This means that an insured need only know what a reasonable person who is not an insurer would know. The benefit of this approach is that insureds are no longer expected to know what an insurer would consider material. Many insureds do not know what insurers consider important. In addition, an insurer may cancel the policy for innocent non-disclosure only if it would have refused cover if the circumstances had been disclosed. Furthermore, where a claim is fraudulent, a court may order that the insurer pay what is ‘just and reasonable’.
In the UK, the approach taken is similar to Tower’s initiative. There, the duty of disclosure has been abolished for consumers, who now owe a duty to take reasonable care not to make a misrepresentation when answering an insurer’s questions. Insurers must ask questions about any circumstances that they wish to consider when deciding whether to offer cover3. Insurers may cancel consumer policies only for a deliberate or reckless misrepresentation by an insured (in which case they may keep the premiums unless it would be unfair to retain them) or a careless misrepresentation where the insurer would not have accepted the policy if it had known the true circumstances. Where, however, the insured made a careless misrepresentation, but the insurer would only have offered cover on different terms (such as limited cover or a higher premium) then the policy will be treated as if it was entered into on those terms. With business policies, the duty of disclosure is amended to a duty of “fair presentation”, where the insured must provide enough information to enable the insurer to make a fair assessment of the risk or identify a need to investigate further.
Tower’s approach goes part of the way towards the UK approach. The insurer takes responsibility for asking questions about all of the matters and circumstances that it considers relevant. The customer is not obliged to disclose anything outside those questions, even if the insurer or the customer knows or ought to know that it would be relevant to the risk. However, Tower’s initiative does not extend to offering the other benefits provided to customers under the Australian and UK approaches where the customer gets it wrong. Tower may still cancel the policy if an insured innocently gives an inaccurate answer, even where Tower would have offered insurance anyway on different terms.
In issue 17 of Cover to Cover, we predicted that the insured’s duty of disclosure in New Zealand will either be reduced so that it applies only to circumstances that a reasonable person in the insured’s position would have regarded as relevant to an insurer (the Australian approach), or removed altogether and replaced with a duty to answer an insurer’s questions accurately (the UK approach).
We said that the UK regime may be preferable, at least for consumers, as a requirement that insurers ask questions should be easier for insureds to follow and should help them make full and honest disclosures. It seems that Tower agrees.
However, a significant disadvantage from an insurer’s perspective, is the risk that an insured may be aware of a circumstance that is clearly relevant to the risk but is so unusual that it is not within any of the insurer’s specific questions. There is also a risk that insurers may feel obliged to ask a large number of questions that insureds will need to answer. It remains to be seen how many questions Tower will ask.
We remain of the view that the Australian approach is problematic, as there will continue to be uncertainty for many customers as to what a reasonable person should know about what an insurer wants to know. This would leave unsophisticated insureds at risk.
What should insurers be doing?
We recommend that insurers prepare for the likely effects of changes to the law by considering whether they will take a similar approach to Tower.
It would also be worthwhile for insurers to consider:
- what detailed and specific questions they might need to ask insureds;
- whether they may be willing to offer the other protections now enshrined in the UK and Australia where an insured innocently gets it wrong;
- whether they prefer the Australian approach; or
- whether they would support different approaches between consumer and business insurance.
- Marine Insurance Act 1908
- Some Insurance Law Problems NZLC R46, May 1998.
- The Consumer Insurance (Disclosure and Representations) Act 2012 governs consumer policies and the Insurance Act 2015 provides for business insurance.