Chapter 5 - Good Faith & Disclosure

Question 1

5 - Good Faith & Disclosure

1. Why are Insurance Contracts treated as contracts of “Utmost Good Faith”?

Answer 1

Because they don’t involve the purchase of tangible products.

Question 2

5 - Good Faith & Disclosure

2. What does Utmost Good Faith mean in simple terms?

Answer 2

The insurer and insured both have a duty to deal honestly and openly during their contractual relationship

Question 3

A - Principle of Good Faith

1. Explain Good Faith in more detail.

Answer 3

Good faith means disclosure must be made in a reasonably clear and accessible manner, and material representations of fact, expectation or belief must be “substantially correct”.

Question 4

A - Principle of Good Faith

2. Must parties to a contract volunteer material information in all negotiations before the contract comes into effect?

Answer 4

Yes.

Question 5

A - Principle of Good Faith

3. What duty does the proposer have to the insurer.

Answer 5

Duty to disclose all material circumstances about the risk.

Question 6

A - Principle of Good Faith

4. Can the insurer introduce new non-standard terms into the contract that were not discussed during negotiations?

Answer 6

No.

Question 7

A - Principle of Good Faith

5. Can the insurer withhold the fact that discounts are available for certain measures that improve a risk?

Answer 7

No.

Question 8

B - Duty to Disclose

1. What is material information?

Answer 8

Every circumstance which would influence the judgement of a prudent insurer in fixing the premium or determining whether they will take on the risk.

Question 9

B - Duty to Disclose

B1 Insurer’s Duty of Disclosure - Consumer Insurance

1. What does the Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA) give consumers a duty to do?

Answer 9

Take reasonable care not to make a misrepresentation.

Question 10

B - Duty to Disclose

B1 Insurer’s Duty of Disclosure - Consumer Insurance

2. Who does CIDRA apply to?

Answer 10

Consumers, not business/commercial insurance.

Question 11

B - Duty to Disclose

B1 Insurer’s Duty of Disclosure - Consumer Insurance

3. What safeguards are included in CIDRA?

Answer 11

It prevents insurers from including terms which put the insureds in a worse position in respect of pre-contract disclosure and representation.

Question 12

B - Duty to Disclose

B2 Insurer’s Duty of Disclosure - Non-Consumer Insurance

1. Which act extended CIDRA legislation to include non-consumer insurance companies?

Answer 12

The Insurance Act 2015.

Question 13

B - Duty to Disclose

B2A Good Faith

1. What does the Insurance Act 2015 state in regards to a breach of good faith?

Answer 13

The absolute remedy of avoidance no longer exists.

Question 14

B - Duty to Disclose

B2B Duty to make a Fair Presentation

1. Does the Insurance Act 2015 state that the “insured must make to the insurer a fair presentation of the risk”?

Answer 14

Yes.

Question 15

B - Duty to Disclose

B2B Duty to make a Fair Presentation

2. What must commercial insureds do to comply with the duty to make a fair representation contained in the IA 2015?

Answer 15

Disclose every material circumstance known

Make disclosures clear and accessible to a prudent insurer

Provide the insurer with sufficient information to put a prudent insurer on notice that it needs to make further enquiries into those material circumstances.

Question 16

B - Duty to Disclose

B2B Duty to make a Fair Presentation

3. Who does the IA 2015 shift the onus to make a fair representation on to?

Answer 16

Shifts the onus from the insured to the insurer.

Question 17

B - Duty to Disclose

B2C Measure of the Insured’s and Insurer’s Knowledge

1. What should be known to an Individual Insured?

Answer 17

What is known to them as an Individual.

What is known to the Individuals responsible for their Insurance.

Question 18

B - Duty to Disclose

B2C Measure of the Insured’s and Insurer’s Knowledge

2. What should a “Non-Individual” Insured know?

Answer 18

What is known to the Individuals who are part of the senior management.

What is known to the Individuals responsible for the Insureds Insurance.

Question 19

B - Duty to Disclose

B2C Measure of the Insured’s and Insurer’s Knowledge

3. Is an Insured deemed to know confidential information known to an Individual employed by their agent, where the information has been obtained by the individual from a source unconnected with the insurance in question?

Answer 19

No.

Question 20

B - Duty to Disclose

B2C Measure of the Insured’s and Insurer’s Knowledge

4. What is the measure of what the Insured ought to know?

Answer 20

What should have been revealed by a reasonable search of information available to the Insured.

Question 21

B - Duty to Disclose

B2C Measure of the Insured’s and Insurer’s Knowledge

5. Who can hold information on an Insured Individual?

Answer 21

The insured’s organization or by any other person such as an agent.

Question 22

B - Duty to Disclose

B2C Measure of the Insured’s and Insurer’s Knowledge

6. Does knowledge include those things than an Insured suspects and about which they would have had actual knowledge, but for deliberately refraining from confirming/enquiring about the information? What implication does this have for the Insured.

Answer 22

Yes.

They should not turn a blind eye to issues they have suspicions about.

Question 23

B - Duty to Disclose

B2C Measure of the Insured’s and Insurer’s Knowledge

7. What does the Insurer only know?

Answer 23

An insurer only knows something if it is known to one or more individuals who participate on behalf of the insurer in the decision whether to take the risk.

Question 24

B - Duty to Disclose

B2C Measure of the Insured’s and Insurer’s Knowledge

8. What can be said to be things the Insurer ought to know?

Answer 24

If an employee/agent of the insurer knows it and ought reasonably to have passed on the information to the risk decision makers.

If the relevant information is held by the insurer and is readily available to the risk decision makers.

Question 25

B - Duty to Disclose B2C Measure of the Insured’s and Insurer’s Knowledge 9. What is an Insurer presumed to know?

Answer 25

Things that are common sense. Things the insurer would reasonable be expected to ask.

Question 26

B - Duty to Disclose B2D Agent’s Duty 1. How is a careless or reckless misrepresentation by an agent treated?

Answer 26

As if it had been made by the principal, as the principal is responsible for the actions of their agent.

Question 27

B - Duty to Disclose B3 Insurer’s Duty of Disclosure - Non-Consumer Insurance 1. Who does the Insurer have a duty of disclosure to?

Answer 27

The insured.

Question 28

B - Duty to Disclose B3 Insurer’s Duty of Disclosure - Non-Consumer Insurance 2. How must the Insurer behave?

Answer 28

With good faith.

Question 29

B - Duty to Disclose B4 Effect of FCA Rules 1. Why do FCA rules require insurers and intermediaries to provide sufficient information about the contract before its conclusion?

Answer 29

So customers can make informed decisions about whether to buy.

Question 30

B - Duty to Disclose B4 Effect of FCA Rules 2. What is the Statement of Demands and Needs?

Answer 30

One element of the info that must be disclosed to a client.

Question 31

B - Duty to Disclose B4 Effect of FCA Rules 3. What does fulfilling the requirements of the Statement of Demands and Needs imply?

Answer 31

There is a comprehensive fact gathering exercise.

Question 32

B - Duty to Disclose B4 Effect of FCA Rules 4. What does the Statement of Demands and Needs place upon the adviser?

Answer 32

Onus for establishing the facts.

Question 33

B - Duty to Disclose B4 Effect of FCA Rules 5. Are there restrictions on rejecting claims where consumers have failed to disclose information or misrepresented facts? Who imposes them?

Answer 33

Yes, imposed by the FCA.

Question 34

B - Duty to Disclose B4 Effect of FCA Rules 6. List the steps the FCA requires of firms to ensure customers are aware of what they must disclose.

Answer 34

Explain to customers their responsibility to take reasonable care not to make a misrepresentation, and the consequences of failing. Explain to commercial customers their duty to disclose all material circumstances, what needs to be disclosed, and the consequences of failing. Ensure commercial customers are asked clear questions about material matter. Ask customers clear and specific questions about relevant information.

Question 35

B - Duty to Disclose B4 Effect of FCA Rules 8. Who are the FCA rules on a firms duty to ensure customers know what to disclose more onerous on?

Answer 35

Insurers of personal and private policies.

Question 36

B - Duty to Disclose B4 Effect of FCA Rules 9. Do Commercial insurers have an obligation to comply with FCA rules on Duty of Disclosure?

Answer 36

No, provided they can demonstrate they are treating their customers fairly.

Question 37

B - Duty to Disclose B5A At Inception 1. Under Common Law, when does the duty to disclose start and end?

Answer 37

When negotiations begin. When the contract is formed.

Question 38

B - Duty to Disclose B5A At Inception 2. Once the contract is formed is there a requirement to declare material circumstances?

Answer 38

No, not unless it affects the policy cover e.g. property value increase or car sold

Question 39

B - Duty to Disclose B5A At Inception 3. Does conviction of fraud need to be disclosed immediately?

Answer 39

No, not until renewal.

Question 40

B - Duty to Disclose B5B At Renewal 1. What happens to the insured’s duty to disclose at renewal?

Answer 40

It is revived.

Question 41

B - Duty to Disclose B5B At Renewal 2. What rule applies to the duty to disclose when it comes to long term policies like life insurance and pensions?

Answer 41

Once the policy is in force the duty to disclose ceases.

Question 42

B - Duty to Disclose B5C Continuing Requirement 1. How do Commercial Property Insurances deal with disclosure of mid-term changes?

Answer 42

A policy condition requires continuing disclosure of circumstances that increase the risk of damage.

Question 43

B - Duty to Disclose B5C Continuing Requirement 2. How do Motor Insurances deal with disclosure of mid-term changes?

Answer 43

Usually an onerous policy condition that requires continuing disclosure of all material changes during the policy period.

Question 44

B - Duty to Disclose B5C Continuing Requirement 1. How do Public Liability Insurances deal with disclosure of mid-term changes?

Answer 44

The continuing requirement for disclosure arises from the tight definition of “the business”. Any extension of activities must be notified.

Question 45

B - Duty to Disclose B5D On Alteration 1. What happens to the duty of disclosure where a change results in the need for an endorsement to the policy?

Answer 45

It is revived.

Question 46

B - Duty to Disclose B5E Limitation of an Insurer’s Right to Information 1. What applies if a specific question is not asked about relevant material information? When does it not apply?

Answer 46

The duty of disclosure means the proposer must still disclose the material information. Unless they are a “consumer” as defined under CIDRA.

Question 47

B - Duty to Disclose B5E Limitation of an Insurer’s Right to Information 2. What does the IA 2015 say about non-consumer Duty to Disclose?

Answer 47

Non-consumer customers need only make a fair representation of the risk.

Question 48

B - Duty to Disclose B5E Limitation of an Insurer’s Right to Information 3. What happens if a question is asked, but the proposed only provides partial information and the insurer does not seek further details?

Answer 48

The insurer is deemed to have waived its rights regarding this information.

Question 49

B - Duty to Disclose B5E Limitation of an Insurer’s Right to Information 4. What happens if the insurer defines what they mean by “material disclosure” but the proposer doesn’t provide all details and the insurers accepts the risk.

Answer 49

The insurer can’t then claim they required wider or further disclosure at a later date.

Question 50

B - Duty to Disclose B5E Limitation of an Insurer’s Right to Information 5. What will the insurer generally have a right to do if there has been a breach of duty of good faith by the insured?

Answer 50

Avoid the policy.

Question 51

B - Duty to Disclose B5E Limitation of an Insurer’s Right to Information 7. If the insurer has the right to avoid the policy but chooses to waive its right to invoke it, what is the status of the policy?

Answer 51

The policy is treated as remaining in force.

Question 52

C - Material Circumstances 1. According to the IA 2015, what is a material circumstance?

Answer 52

A circumstance is material if it would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms.

Question 53

C - Material Circumstances 2. Give examples of Material circumstances.

Answer 53

Special or Unusual information Concerns which have lead the insured to feel they need insurance to cover the risk

Question 54

C - Material Circumstances C1 Features of Material Circumstances 1. What perspective do courts use when considering whether a circumstance is material?

Answer 54

Consider the risk by looking at it from a prudent insurer’s point of view.

Question 55

C - Material Circumstances C1 Features of Material Circumstances 2. Do courts consider the insured’s point of view or that of the particular insurer involved?

Answer 55

No, they consider from a prudent insurers point of view.

Question 56

C - Material Circumstances C1 Material Circumstances in Non-Life Proposals 1. In general, what do material circumstances relate to?

Answer 56

Physical hazards Moral hazards

Question 57

C - Material Circumstances C1A Physical Hazards 1. Give examples of material circumstances that concern physical hazards in relation to Fire Insurance.

Answer 57

Construction of the building Nature of use Heating and electrical system

Question 58

C - Material Circumstances C1A Physical Hazards 1. Give examples of material circumstances that concern physical hazards in relation to Motor Insurance.

Answer 58

Age and type of car Age of driver Previous accidents

Question 59

C - Material Circumstances C1A Physical Hazards 1. Give examples of material circumstances that concern physical hazards in relation to Theft Insurance.

Answer 59

Nature of stock Value of stock Nature of security precautions

Question 60

C - Material Circumstances C1B Moral Hazards 1. Give examples of material circumstances that concern moral hazards.

Answer 60

Insurance history Personal history

Question 61

D - Circumstances that do not need to be Disclosed 1. In basic terms, when would the material circumstances of a non-consumer risk NOT need to be disclosed?

Answer 61

When the insurer ought to know them or could find them out.

Question 62

D - Circumstances that do not need to be Disclosed 2. Is it usual to advise the insurer of circumstances that lessen the risk.

Answer 62

No. While they would usually lower the premium or create better cover, there is no duty to disclose such facts.

Question 63

D - Circumstances that do not need to be Disclosed D1 Spent Convictions 1. Under the Legal Aid, Sentencing and Punishment of Offenders Act 2012, rehabilitation periods for community orders and custodial sentences comprise of what?

Answer 63

The period of the sentence plus an additional specified “buffer” period.

Question 64

D - Circumstances that do not need to be Disclosed 2. What is the Rehabilitation Period (sentence + buffer) of a Custodial sentence of length 0 - 6 months?

Answer 64

2 years.

Question 65

D - Circumstances that do not need to be Disclosed 2. What is the Rehabilitation Period (sentence + buffer) of a Custodial sentence of length 6 - 30 months?

Answer 65

4 years.

Question 66

D - Circumstances that do not need to be Disclosed 2. What is the Rehabilitation Period (sentence + buffer) of a Custodial sentence of length 30 months - 4 years?

Answer 66

7 years.

Question 67

D - Circumstances that do not need to be Disclosed 2. What is the Rehabilitation Period (sentence + buffer) of a Custodial sentence of length over 4 years?

Answer 67

Never “spent”.

Question 68

D - Circumstances that do not need to be Disclosed 2. What is the Rehabilitation Period (sentence + buffer) of a Non-Custodial sentence of community order or youth rehab order

Answer 68

1 year.

Question 69

D - Circumstances that do not need to be Disclosed 2. What is the Rehabilitation Period (sentence + buffer) of a Non-Custodial sentence of a fine?

Answer 69

1 year from date of conviction.

Question 70

D - Circumstances that do not need to be Disclosed 2. What is the Rehabilitation Period (sentence + buffer) of a Non-Custodial sentence of conditional discharge or referral order?

Answer 70

Period of order

Question 71

E - Consequences of Misrepresentation by Consumers 1. How is non-negligent misrepresentation of a material circumstance by a consumer treated in regards to claims payment?

Answer 71

Considered unreasonable grounds for refusing to pay a claim.

Question 72

E - Consequences of Misrepresentation by Consumers 2. What is the test for establishing whether misrepresentation by a consumer should affects claims?

Answer 72

Whether the consumer acted reasonably in providing information.

Question 73

E - Consequences of Misrepresentation by Consumers 3. What is the insurer entitled to do if the proposer misrepresents deliberately or recklessly and/or withholds information?

Answer 73

Avoid the policy ab initio.

Question 74

E - Consequences of Misrepresentation by Consumers 4. Can misrepresentations be made of opinions?

Answer 74

No, misrepresentations must concern a fact.

Question 75

E - Consequences of Misrepresentation by Consumers 5. Give examples of misrepresentation in insurance.

Answer 75

A proposer for theft insurance says the premises are protected by a burglar alarm when they are not. A proposer for motor insurance says their car has not been modified when it has. A proposer for appliance insurance says declared that the appliance is under five years old when it is not.

Question 76

E - Consequences of Misrepresentation by Consumers E1 Remedies available to Insurers under CIDRA 1. CIDRA replaces the duty on consumers to volunteer information with what duty?

Answer 76

A duty to take reasonable care to answer insurers questions fully and accurately.

Question 77

E - Consequences of Misrepresentation by Consumers E1 Remedies available to Insurers under CIDRA 2. What is the consequence of consumers having a duty to take reasonable care to answer insurers’ questions fully and accurately?

Answer 77

It is the duty of the consumer to take reasonable care to not make a misrepresentation.

Question 78

E - Consequences of Misrepresentation by Consumers E1 Remedies available to Insurers under CIDRA 3. If a misrepresentation is reasonable, may the insurer have to pay a claim?

Answer 78

Yes.

Question 79

E - Consequences of Misrepresentation by Consumers E1 Remedies available to Insurers under CIDRA 4. List examples of things that will need to be taken into account when determining whether the consumer took reasonable steps to avoid making a misrepresentation.

Answer 79

The type of insurance contract. Any relevant explanatory material produced or authorised by the insurer. How clear and specific the insurers questions were. How clearly the insurer communicated the importance of answering the questions.

Question 80

E - Consequences of Misrepresentation by Consumers E1 Remedies available to Insurers under CIDRA 5. What is a qualifying misrepresentation?

Answer 80

Deliberate, reckless or careless.

Question 81

E - Consequences of Misrepresentation by Consumers E1 Remedies available to Insurers under CIDRA 6. What may the insurer do if a qualifying misrepresentation is found to be deliberate or reckless?

Answer 81

Avoid the contract and refuse all claims. Keep any premiums paid, unless it would be unfair to the consumer to retain them.

Question 82

E - Consequences of Misrepresentation by Consumers E1 Remedies available to Insurers under CIDRA 7. When is a qualifying misrepresentation careless?

Answer 82

When it is not deliberate or reckless.

Question 83

E - Consequences of Misrepresentation by Consumers E1 Remedies available to Insurers under CIDRA 8. What can the insurer do if there was a careless misrepresentation?

Answer 83

Apply a compensatory remedy. This would be based on what the insurer would have done if it had known the correct information, such as applying a relevant exclusion, refuse to offer terms, etc.

Question 84

F - Consequences of a Breach of the Duty of Fair Representation 1. For non-consumer contracts, when can the insurer avoid a policy?

Answer 84

The insurer will only be able to avoid a policy if the insured has made a deliberate or reckless breach, unless they have contracted out the duty to make a fair representation of the risk.

Question 85

F - Consequences of a Breach of the Duty of Fair Representation F1 Remedies available to Insurers under IA 2015 1. For non-consumer contracts, when does the insurer have a remedy for breach of duty of fair representation?

Answer 85

If they can show that without the breach: It wouldn’t have entered into the contract at all, or It would have done so on different terms

Question 86

F - Consequences of a Breach of the Duty of Fair Representation F1 Remedies available to Insurers under IA 2015 2. For non-consumer contracts, what is a breach that triggers a remedy called?

Answer 86

A qualifying breach.

Question 87

F - Consequences of a Breach of the Duty of Fair Representation F1 Remedies available to Insurers under IA 2015 3. For non-consumer contracts, what are the two categories of breach?

Answer 87

Deliberate or reckless Neither deliberate nor reckless

Question 88

F - Consequences of a Breach of the Duty of Fair Representation F1 Remedies available to Insurers under IA 2015 4. What must the insurer show for a breach to considered deliberate or reckless?

Answer 88

The proposer knew it was in breach of the duty of fair representation. The proposer did not care that it was a breach of that duty.

Question 89

F - Consequences of a Breach of the Duty of Fair Representation F1A Original Placement 1. The breach was not deliberate or reckless but the insurer wouldn’t have entered into the policy if they had known, what is the remedy?

Answer 89

The insurer can avoid and refuse claims, but they must return the premium.

Question 90

F - Consequences of a Breach of the Duty of Fair Representation F1A Original Placement 2. If the breach was not deliberate or reckless but the insurer would have entered on different terms had they know, what is the remedy?

Answer 90

The contract is treated on those different terms.

Question 91

F - Consequences of a Breach of the Duty of Fair Representation F1A Original Placement 3. If the breach was not deliberate or reckless but the insurer would have charged a higher premium had they known, what is the remedy? How is it remedied?

Answer 91

Claims can be reduced proportionately X = (Premium actually charged / Higher Premium) x 100%

Question 92

F - Consequences of a Breach of the Duty of Fair Representation F1B Variations of Contracts 1. Do the same rules apply to mid-term variations?

Answer 92

Yes.

Question 93

F - Consequences of a Breach of the Duty of Fair Representation F2 Breach of Warranty 1. Under IA 2015, do breaches of warranty automatically terminate the contract?

Answer 93

No.

Question 94

F - Consequences of a Breach of the Duty of Fair Representation F2 Breach of Warranty 2. What happens if there is a breach of warranty?

Answer 94

The insurers liability is suspended from the time of breach.

Question 95

F - Consequences of a Breach of the Duty of Fair Representation F2 Breach of Warranty 3. What happens if the insured can show that non-compliance with a warranty did not increase the risk of the actual loss?

Answer 95

The insurer cannot rely on non-compliance to exclude, limit or remove liability.

Question 96

F - Consequences of a Breach of the Duty of Fair Representation F2 Breach of Warranty 4. Why do warranties put the insured in a better position than an insurance contract?

Answer 96

Because they add a materiality link (must prove non-compliance increased the risk)

Question 97

G - Compulsory Insurances and Disclosures 1. Can the insurer avoid compulsory insurance like motor insurance on the grounds of a breach of good faith?

Answer 97

No.

Question 98

G - Compulsory Insurances and Disclosures 2. With compulsory insurances, what is the law primarily concerned with?

Answer 98

Compensating innocent victims.

Question 99

G - Compulsory Insurances and Disclosures 3. With compulsory insurances, what right do insurers have if there is a breach?

Answer 99

They have a right of recovery against the insured.