The duty of disclosure - will it be modernised at last?
A little over twenty years ago, the Law Commission published a paper with a title that hinted only vaguely at its contents: “Some Insurance Law Problems”.1 It examined five unrelated aspects of insurance law that were generally accepted as problematic, with the potential to produce unfair outcomes.2
The first issue discussed was the most problematic and contentious: an insured’s duty to disclose material circumstances to an insurer. Then, as now, under New Zealand law an insured owed an insurer a duty to disclose circumstances that a reasonable insurer would regard as material to its decision to accept the risk insured.3
The Law Commission identified four problems with this approach:
- what the insured is obliged to disclose is uncertain
- an insured’s honest ignorance of what it must disclose will not assist if it fails to make the necessary disclosure
- where an insurer asks specific questions of an insured, the insured still has a general duty of disclosure in addition to answering the insurer’s questions
- 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 had it known the relevant facts (albeit on different terms, such as a higher premium).4
The Law Commission observed that non-disclosure issues were one of the main reasons for complaints to the Insurance Ombudsman (now the Insurance and Financial Services Ombudsman). Reference was made to judgments in which the Courts had remarked upon the unfairness that resulted where insureds innocently failed to appreciate that circumstances outside the questions asked by the insurer, such as prior criminal convictions, were considered material by insurers.
The Law Commission discussed a number of possible reforms, including the following:
- 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 required to know in questions (in effect, abolishing the duty and replacing it with an obligation to answer specific questions truthfully)
- limiting the consequences for insureds of getting it wrong
The proposals made were, in short, the following:
- insurers would have 10 working days in which to pose specific questions to the insured and have them answered – within this time period the insurer could cancel the policy from the outset if it did not find the answers acceptable
- only an inaccurate answer or “blameworthy” conduct would entitle an insurer to cancel a policy from the outset. “Blameworthy” was intended to mean circumstances where the insured knew, or a reasonable person in their position would have known, that the undisclosed circumstances would be material to an insurer
How the issue has been dealt with in the UK and Australia
In the intervening years, both the UK and Australia have passed legislation to amend the duty of disclosure.
In Australia, the insured’s duty is limited to disclosing circumstances that the insured knew or a reasonable person in their position would have known were relevant to the insurer’s assessment of the risk. The insurer must inform the insured of this obligation.
Furthermore, the insurer may cancel the policy for innocent non-disclosure only if it can prove (for instance by using examples of its refusals in other cases) that it would have refused cover had the circumstances been disclosed. In other cases, it may reduce the payment instead, for instance, by deducting the amount of a higher premium that it would have charged if disclosure had been made. Where a claim is fraudulent, a court may order that the insurer pay what is “just and reasonable”, which may be ordered where, for instance, the fraud related to an insignificant part of the claim.
In the UK, the duty of disclosure has been abolished for consumers, who instead owe a duty to take reasonable care not to make a misrepresentation when answering an insurer’s questions. Insurers are obliged to ask questions upon all circumstances that they wish to consider when deciding whether to offer cover.5
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 the consumer to retain them) or a careless misrepresentation where the insurer would not have accepted the policy if it had known the relevant circumstances. Where, however, the insured made a careless misrepresentation but the insurer would 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”, in which 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.
MBIE issues paper
In May 2018, exactly 20 years after the Law Commission’s paper was published, the Ministry of Business, Innovation and Employment issued a paper inviting comment on (among other insurance issues) essentially the same issues with respect to insureds’ non-disclosure that the Law Commission had discussed. While observing that reform of insurance law generally was well overdue, no explanation for the lengthy delay was given.
The MBIE’s paper indicated that policy options to address the issues raised were expected to be circulated towards the end of 2018 in a second consultation document. While this has yet to appear, it seems very likely that it will propose changes to the duty of disclosure along the lines of those that have been enacted in the UK and Australia.
It is likely 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 view the Australian approach as problematic, as it only partially answers the main problem with the present duty, which is that many insureds do not know that they must disclose circumstances that an insurer would consider material and they do not know what those circumstances are. There is also considerable uncertainty as to what a reasonable person should know about insurers’ views. If the obligation is amended to a “reasonable person” test, this will leave insureds at risk.
The UK regime may be preferable, at least insofar as it relates to consumers, as a requirement that insurers ask questions that identify what circumstances they consider relevant should be easier for insureds to follow and should help them make full and honest disclosures. There is, however, a significant disadvantage from an insurer’s perspective, which 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 about matters that will be irrelevant for the great majority of insureds, which will produce inefficiencies. The Law Commission did not regard either of these factors as insurmountable, giving examples of general questions that insurers could ask such as “Do you know of any reason particular to you why you may not attain your normal life expectancy?”, while not going so far as becoming a general question about any risks, which would reintroduce the common law duty by the back door. However, it is too early to say how requiring insurers to ask questions about every matter about which they expect disclosure will play out.
It is less clear why there should be a different approach to consumer and business insurance, as in the UK. Many businesses are no more sophisticated than consumers when it comes to placing insurance and if a regime is considered fair and effective for consumers it is not easy to see why it should not be applied consistently to all insureds.
The UK approach to remedies in consumer insurance, where policies may be avoided only where the insured has been deliberate or reckless or where the insurer would not have accepted cover, but the policy in other cases is amended to reflect the arrangement that the insurer would have accepted, also seems fair and practical in principle. There may be difficulties, however, in drawing the line between conduct that is reckless and that which is merely careless.
1 NZLC R46, May 1998;
2 One issue seems to have been of academic interest only: the continued application in New Zealand of s.83 of the Fires Prevention (Metropolis) Act 1774 (Imp.), which the Law Commission viewed as anachronistic;
3 Marine Insurance Act 1908;
4 The consequences of mis-statement (as distinct from non-disclosure) are ameliorated to some extent for contracts of life insuranceby the Insurance Law Reform Act 1977. The consequences of mis-statement for marine insurance is provided for in the Marine Insurance Act 1908 and for other forms of insurance is provided for in the Contracts and Commercial Law Act 2017;
5 The Consumer Insurance (Disclosure and Representations) Act 2012 governs consumer policies and the Insurance Act 2015 provides for business insurance.
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