The importance of disclosure

A person applying for insurance has a legal obligation to disclose to the insurer certain information, details of which are set out in Section 21 of the Insurance Contracts Act 1984 under the heading Duty of Disclosure.

Sometimes people fail to comply with their duty of disclosure either innocently or deliberately with a view to defraud the insurer. For the sake of brevity, the term non-disclosure will be taken to mean both.

This article will consider in general terms certain situations and discuss possible actions that the adviser and the client may take.

Occurrence and discovery

A non-disclosure can occur or be discovered at different times:

>at the time of application completion;

>subsequent to application completion but prior to policy issue;

>within three years of policy issue; and

>more than three years after policy issue.

The implications, and therefore the actions that should be taken, in regards to each situation may vary.

If a policy has not yet been issued, the matter of relevance of the non-disclosed information and the nature of the action that should be taken by the client and the adviser would generally be less open to debate as the insurer could simply be informed and an appropriate underwriting decision would be made.

Also, as a policy has not yet been issued, the client would not suffer the ‘loss’ that may arise if it, subsequent to being issued, is altered or cancelled.

If a policy has been in force for less than three years, the information not disclosed would only need to be ‘material’ to the insurer’s underwriting decision for it to potentially affect the cover.

If a policy has been in force for longer than three years, the insurer would need to be able to prove ‘fraud’ if they wanted to amend the cover in any way.

In the case of replacement business, the original policy may not have been affected by the non-disclosure at the time of application for the new policy, in which case the client may now suffer a ‘loss’ if cover under the new policy is affected.

The adviser should bear matters such as these in mind when speaking to the client about what to do and the implications of doing it.

For whom is the adviser acting?

The adviser also needs to understand legally in whose interests they were or are acting both at the time the non-disclosure occurred and when it was discovered.

Realistically, the four most likely possibilities are:

>adviser acting on behalf of the insurer both at time of occurrence and discovery;

>adviser acting on behalf of insurer at time of occurrence and on behalf of client at time of discovery;

>adviser acting on behalf of client both at time of occurrence and discovery; and

>adviser not acting for either the insurer or the client at time of occurrence and discovery.

If at any time the adviser was or is acting on behalf of the insurer, for example, as an agent, they have an obligation to tell the insurer if they become aware of a non-disclosure by the client.

If the adviser is not acting on behalf of either the insurer or the client, for example they simply become aware of a situation of non-disclosure, the adviser has no legal obligation as such to either party.

However, they do have a legal obligation ‘in the public interest’ and in an extreme situation, for example, if a fraudulent act has occurred, the adviser should inform the insurer or even the police.

Today, however, advisers are often acting on behalf of a client and thus they have a legal obligation to look after the client’s interests.

It is in considering what is in the client’s interest that complications can arise.

Duty of disclosure

As mentioned, clients have a duty of disclosure to the insurer detailed in Section 21 of Insurance Contracts Act 1984: “Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract is entered into, every matter that is known to the insured, being a matter that:

(a) the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk, and, if so, on what terms; or

(b) a reasonable person in the circumstances could be expected to know to be a matter so relevant.”

The duty of disclosure goes beyond the actual knowledge of the client. Under Section 21(b) the duty extends to information that a reasonable person in the client’s circumstances could be expected to know was relevant, that is, the ‘reasonable person test’.

The reasonable person test is a subjective one and its nature has not yet been fully tested.

It is, for example, not clear whether the test is based on factors ‘internal’ to the client, for example, is it measured against someone:

>having a similar understanding of the language;

>of a similar culture;

> of similar experience, and so on?

Or is the test based on factors ‘external’ to the client? For example:

>the circumstances of the negotiations, for example, formal or informal; or

>how the personal statement was completed, and so on.

It would be prudent for an adviser to consider both internal and external factors as potentially relevant when assessing the position of the ‘reasonable person’.

Non-disclosure

Under Section 21(a), the client is required to disclose information they have personally, for example, the client is aware they have blood pressure and asthma, and they are similarly aware that this information would be material to the insurer’s underwriting decision.

Alternatively, the client may delegate the responsibility of disclosure to the adviser, for example, by asking the adviser the relevance or otherwise of information. In this situation, the knowledge of the adviser is attributed or imputed to the client. If the adviser reasonably believes the information to be relevant, the adviser should advise the client to disclose it to the insurer.

If the client fails to disclose the information in either circumstance, non-disclosure has occurred.

However, if at the time of completing an application there was information the client did not believe was material and therefore the client did not disclose it, non-disclosure will not have occurred if a reasonable person in the circumstances would similarly have believed the information was not material.

Also, where there is no delegation of the duty of disclosure to the adviser, for example, the client completed the application on their own, knowledge of the adviser concerning the relevance of the information would not be imputed to the client and again, a non-disclosure will not have occurred.

However, the adviser may subsequently become aware of the information the client did not disclose and the adviser may recognise that this information would have been material to the insurer’s decision to accept the policy.

This may give rise to a genuine and reasonable concern on the part of the adviser that a subsequent claim payment could be jeopardised if, at that time, the insurer became aware of the information.

In acting on behalf of the client, the adviser has a duty to secure appropriate insurance cover in line with the instructions of the client.

Therefore, if the adviser believes it would be prudent to reduce the chances of subsequent complications at the time of a claim, the adviser should inform the client of the potential relevance of the non-disclosed information, that is, in line with the reasonable person test.

The client will then have actual knowledge of the relevance and would need to consider the consequences of disclosing or not disclosing the information to the insurer.

In deciding what action to take, it may, in turn, be prudent for the client to obtain formal legal advice.

Fraud

Information obtained by an adviser is subject to a duty to maintain confidence by virtue of the fiduciary relationship that exists between principal and agent.

This duty of confidence is, however, subject to a defence of disclosure for just cause or excuse; the clearest example of which is disclosure of a crime or civil wrong. Disclosure in this situation is subject to the test of whether it is in the public interest to disclose.

It would be difficult to imagine a situation of fraud or attempted fraud when disclosure would not be in the public interest.

If the adviser knows or has reasonable grounds to suspect that fraudulent non-disclosure has occurred, the adviser has a duty to advise the client to disclose the information.

If the client fails to do so, the adviser should notify the client of the consequences of their actions and refuse to act further on behalf of the client.

In this way, the adviser may avoid being implicated in any fraudulent actions of the client.

Manner of disclosure

If a decision is made to advise the insurer of the non-disclosed information, the most effective way to do this should be considered.

The traditional way has been to simply contact the insurer and give them details of the information that was not disclosed and await their decision.

However, the adviser and the client should realise that the insurer will need to consider the information provided and then try to reach an objective decision about its relevance and the extent of its relevance.

It may be difficult for the insurer to maintain or to be perceived as maintaining strict objectivity in this situation.

Therefore, the adviser and the client may be better served to gather as much relevant information as possible, put their case down in a logical way and present this to the insurer for consideration.

Information that it may be beneficial to provide includes:

> details of the non-disclosed information and why it was not disclosed previously;

> details of how the insurance came to be in place — did the client approach the adviser or vice versa?;

> was there cover in place before and to what extent was this cover the same as, or different to, the existing cover; and

> if the client saw a medical practitioner in regards to the matter not disclosed, what did the medical practitioner say to the client and what did the client understand in regards to what was said.

In addition:

> underwriting decisions from other insurers in regards to the non-disclosed information might be obtained and these could be included; and

> a Health Insurance Commission Report might be obtained and analysed by the client with the assistance of the adviser.

Most importantly, the merit or otherwise of obtaining formal legal advice should be seriously considered by the adviser and the client.

If, in fact, the adviser may potentially be implicated in the non-disclosure, the legal advice subsequently obtained should be independent of the adviser.

The adviser and the client should bear in mind that it is easier to influence a decision than to change a decision and thus they should look to put forward the best case possible to the insurer.

In so doing they will maximise the chance that the insurer will not consider the non-disclosed information material and thus will not be inclined to alter the insurance in any way.

Whatever action is taken, it is important the adviser maintains sound file notes of what has occurred.

Finally, the adviser should ensure their licensee and, if necessary, their professional indemnity insurer are informed.

Col Fullagar is head of risk at Genesys Wealth Advisers . The contents of this article should not be taken as providing legal advice as the circumstances of individual clients may differ. If either the adviser or the client is in any doubt as to what action to take, formal legal advice should be obtained.