DISCLOSURE OF MATERIAL FACTS

What are Material Facts?

• Material facts are important pieces of information that an insurer (the company providing insurance) uses to determine how risky it is to insure someone or something.
• These facts help the insurer decide things like how much to charge for insurance (the premium) or whether to offer insurance at all.

Duty of the Insured to Disclose

• When you apply for insurance, you (the insured) must tell the insurer all the important facts about what you are insuring. These facts can be:
  1. Actual Knowledge: Things you definitely know.
  2. Presumed Knowledge: Things you should reasonably know. These include:
     • Facts you ought to know.
     • Facts that can be expected to be known by you.
     • Facts you could have found out by asking questions or making reasonable efforts.

Why Disclose Material Facts?

• The goal of disclosing these facts is to help the insurer understand the risk they are taking on. This way, they can decide correctly how much to charge for the insurance or if they should offer it.
• Tips: Risk, charge.

Test of Materiality

To determine if a fact is material (important), courts use a specific test. They consider whether not telling this fact would affect a sensible insurer’s decision to:

• Provide insurance or not.
• Set the price of the insurance.

It doesn’t matter if a particular insurer or the insured person thinks the fact is important or not. What matters is if a reasonable insurer would find it important.

Materiality is a Question of Fact

Whether a fact is material can vary from case to case. It depends on the details of each situation. So, a fact that is important in one insurance case might not be important in another.

Timing of the Duty to Disclose

• Your duty to disclose material facts lasts until the insurance contract is made.
• If there is any change in the policy or when renewing an expired policy, this duty starts again.

Consequences of Non-Disclosure on Insurance Policy

What is a Contract Uberrimae Fidei?

An insurance contract is known as an “uberrimae fidei” contract, which means it is a contract of utmost good faith. This means both parties, especially the insured (the person getting insurance), must be completely honest and disclose all important information (material facts).

Consequences of Non-Disclosure

If you fail to disclose a material fact, the insurance contract can become voidable. This means the insurer has the option to cancel the contract. Here are some scenarios and legal cases to illustrate this:

1. Intentional Concealment: If you purposely hide an important fact.
2. Negligent Concealment: If you fail to disclose an important fact because you were careless.
3. Fraudulent Concealment: If you hide an important fact with the intent to mislead the insurer.
4. Mistake or Error of Judgment: If you don’t disclose an important fact due to a misunderstanding or incorrect assumption.
5. Failure to Recognize Materiality: If you didn’t disclose an important fact because you didn’t realize it was important.

Case Examples

1. Bufe v. Turner: In this case, a warehouse was insured on the same evening after the shop next to it caught fire earlier that day. But the insured did not disclose this first fire incident. Then two days later, when the shop caught fire again and the fire spread to the warehouse, the insured claimed money from the insurance. The court decided that the insurer does not have to pay money because the insured hid an important fact.
2. Candogianis v. Guardian Assurance Co. Ltd.: In this case, in the proposal form for a fire insurance policy, there was a question about previous claims. The insured said he claimed money before from one company for burning of a car in 1917 but did not disclose that he claimed from another company in 1912 also for burning of another car. The court decided that because the insured partially hid an important fact, the insurer does not have to pay money.
3. Harrington v. Pearl Life Assurance Co. Ltd.: In this case, after the medical check up, the proposal for life insurance of the insured was accepted in May but no premium was paid so the proposal did not start. In October, he proposed again saying his health did not change, which was accepted but no premium was paid. On 6th November he fell ill and paid the premium on 8th November but died the same day. The court decided the insurer did not have to issue the policy because circumstances changed on 6th November which was not disclosed.

CONSEQUENCE OF NON-DISCLOSURE ON RETURN OF PREMIUM

When an insurer cancels or avoids a policy because important facts were not disclosed, whether they have to return the premium money depends on the policy terms.

Most policies say the full premium will be lost if important facts were hidden. So in this case, no premium money would be returned.

FACTS NORMALLY MATERIAL

a. Exposure to More than Ordinary Danger

If what you are insuring is at higher risk than usual, you must tell the insurer.

Example: For fire insurance, if someone has threatened to burn down your property, you need to disclose this to the insurer.

b. Special Motive of Insured

If you have a special reason for getting the insurance, which is not just normal caution, you must tell the insurer.

Example: For marine insurance, if you are insuring a ship carrying goods that are worth much more than their real value, you must disclose this.

c. Greater Liability of Insurer

If there are circumstances that make it more likely the insurer will have to pay out, you must disclose this.

Example: For marine insurance, if the ship you want to insure was seriously damaged before, you must tell the insurer.

d. Moral Hazard

If there are reasons to question your honesty or reliability, you must disclose this.

Example: If you have had losses before from the same risk you want to insure against, or if other insurers have refused to insure you, you must tell the new insurer.

e. Facts Regarded as Material by Insurer

If you know there are facts that the insurer considers important, you must disclose these.

FACTS NOT NORMALLY MATERIAL

a. Facts Within the Actual or Presumed Knowledge of the Insurer

• This includes facts that the insurer is expected to know due to their business expertise and information sources.
• Example: An insurer is presumed to know general industry trends, such as an increase in motorcycle burglaries.

b. Facts Which the Insurers Could Have Discovered by Making Inquiry

• If insurers have the opportunity to inquire but do not, they cannot later claim ignorance of those facts.
• Example: If an insurer had the chance to ask about specific security measures but chose not to, they cannot claim non-disclosure later.

c. Facts as to Which the Insurer Waives Information

• Any information that the insurer explicitly states they do not need does not need to be disclosed by the insured.
• Example: If an insurer waives the need for detailed medical history, the insured is not obliged to provide it.

d. Facts Which Diminish the Risk

• Information that would lower the insurer’s risk if disclosed is not necessary to report.
• Example: If an insured has taken additional security measures that reduce the risk of theft, they are not obligated to disclose this.

e. Superfluous Facts

• If certain facts are already assumed under a warranty or condition of the insurance, they need not be disclosed separately.
• Example: In marine insurance, it is presumed that the insured ship is seaworthy, so disclosing this fact is unnecessary.

f. Trifle Facts

• Minor facts that do not significantly impact the risk assessment are not required to be disclosed.
• Example: A mild form of epilepsy in a life insurance application might be considered trivial and not necessary to disclose.

Burden of Proof

There are two main types of allegations an insurer can make when denying a claim:

Non-Disclosure Allegation

When an insurer alleges non-disclosure, they must prove:

1. Materiality: The undisclosed fact was significant to the risk assessment.
2. Knowledge of the Insured: The insured person knew or ought to have known the fact.
3. Non-Communication: The fact was not disclosed to the insurer.

Breach of Condition Allegation

When an insurer alleges a breach of condition related to disclosure, they must prove:

1. Contractual Duty: There was a clear rule in the policy that required the policyholder to disclose certain information.
2. Breach of Duty: By not disclosing the information, the policyholder broke this rule.
3. Guilt of the Insured: The policyholder is responsible for the information not being disclosed.