The assured is under a duty to disclose all material facts relating to the insurance which he proposes to effect. In addition, he must make no misrepresentation regarding such facts. Usually, however, these duties are modified by the terms of the contract. The burden of providing that there has been a breach of duty on the part of the assured rests on the insurers.
A. THE EXTENT OF THE ASSURED’S DUTY
The assured must disclose all material facts which are within his actual or presumed knowledge. The absence of a proposal form does not modify the assured’s duty of disclosure.
1 Actual Knowledge
It is the duty of the proposed assured to disclose to the insurers all material facts within his actual knowledge. The special facts distinguishing the proposed insurance are, as a general rule, unknown to the insurers who are not in a position to ascertain them. They lie, for the most part, solely within the knowledge of the proposed assured.
Thus, Kennedy LJ said in one case:
‘No class of case occurs to my mind in which our law regards mere non-disclosure as invalidating the contract, expect in the case of insurance. This is an exception which the law has wisely made in deference to the plan exigencies of this particular and most important class of transactions. The person seeking to insure may fairly be presumed to know all the circumstances which materially affect the risk, and, generally, is, as to some of them, the only person who has the knowledge; the underwriter, whom he asks to take the risk, cannot, as a rule, know and but rarely has either the time or the opportunity to learn by the inquiry, circumstances which are, or may be, most material to the formation of his judgment as to his acceptance or rejection of the risk, and as to the premium which he ought to require.’
Further, in another case, Fletcher Moulton LJ remarked:
‘Insurers are thus in the highly favorable position that they are entitled not only to bona fides on the part of the applicant, but also to full disclosure of all knowledge possessed by the applicant that is material to the risk.’
Good faith, therefore, requires that he should not, by his silence, mislead the insurers into believing that the risk as proposed, differs to their detriment from the risk which they will actually run. On the contrary, he should help them by every means in his power to estimate the risk at its proper value.
A failure on the part of the assured to disclose a material fact is sometimes called ‘concealment’. Strictly speaking, however, the word implies the keeping back or suppression of something which it is the duty of the assured to bring specifically to the notice of the insurers, and not merely an inadvertent omission to disclose it. Hence, where the failure to disclose is not due to design and the assured has no intention to deal otherwise than frankly and fairly with the insurers, the term ‘non-disclosure’ may perhaps be more appropriate.
Every contract of insurance proceeds on the basis that the duty of disclosure has been discharged by the proposed assured, and the failure to discharge it renders the contract voidable at the instance of the insurer.
2 Presumed knowledge
The duty of making disclosure is not confined to such facts as are within the actual knowledge of the assured. It extends to all material facts which he ought in the ordinary course of business to have known, and he cannot escape the consequences of not disclosing them on the ground that he did not know them.
There is, however, no duty to disclose facts which the assured did not know, and which he could not be reasonably expected to know at any material time.
Thus, Fletcher Moulton LJ stated the principle in a case concerning life insurance in these words:
‘But the question always is: Was the knowledge you possess such that you ought to have disclosed it? Let me take an example. I will suppose that a man, as is the case with most of us, occasionally had a headache. It may be that a particular one of these headaches would have told a brain specialist of hidden mischief. But to the man it was an ordinary headache indistinguishable from the rest. Now, no reasonable man would deem it material to tell an insurance company of all the casual headaches he had had in his life, and, if he knew no more as to this particular headache than that it was an ordinary casual headache, there would be no breach of his duty towards the insurance company in not disclosing it. He possessed no knowledge that it was incumbent on him to disclose, because he knew of nothing which a reasonable man would deem material, or of a character to influence the insurers in their action. It was what he did not know which would have been of that character, but he cannot be held liable for non-disclosure in respect of facts which he did not know.’
Where the fact could have been discovered by the assured if he had made reasonable enquiries, he is guilty of a breach of duty towards the insurers. This is clearly the case where, although the fact in question was never within his actual knowledge, his ignorance was due to his international failure to make such inquiries as he might reasonably have been expected to make in the circumstances; and the policy is, therefore, voidable at the instance of the insurers since his failure to make them is evidence of fraud and lack of uberrima fides.
Where the fact could have been discovered by the assured if he had made reasonable inquiries, he is guilty of a breach of duty towards the insurers. This is clearly the case where, although the fact in question was never within his actual knowledge, his ignorance was due to his intentional failure to make such inquiries as he might reasonably have been expected to make in the circumstances; and the policy is, therefore, voidable at the instance of the insurers since his failure to make them is evidence of fraud and lack of uberrima fides.
Where the fact could have been discovered by the assured if he had made reasonable inquiries, he is guilty of a breach of duty towards the insurers. This is clearly the case where, although the fact in question was never within his actual knowledge, his ignorance was due to his intentional failure to make such inquiries as he might reasonably have been expected to make in the circumstances; and the policy is, therefore, voidable at the instance of the insurers since his failure to make them evidence of fraud and lack of uberrima fides.
had made such inquiries as to its system of supervision as a reasonable prudent board of directors of such a company would have made in the ordinary course of business. McNair J said that he had been referred to no authority to suggest that the board of a company proposing to insure owed any duty to carry out a detailed investigation as to the manner in which the company’s operations were preformed and he knew of no principle in law which led to that result. He went on to say:
‘If a company is proposing to insure wages in transit, I cannot believe that they owe a duty to the insurers to find out exactly how the weekly wages are, in fact, carried from the bank to their premises, though clearly they must not deliberately close their eyes to defects in the system and must disclose any suspicions or misgivings they have. To impose such an obligation upon the proposer is tantamount to holding that insurers only insure persons who conduct their business prudently, whereas it is a common place that one of the purpose of insurance is to cover yourself against your own negligence or the negligence of your servant’
The ignorance of a material fact does not excuse the proposed assured from the consequences of failing to disclose it where his ignorance is due to the failure of his agent to communicate to him material facts within his knowledge. It must, however, be the duty of the agent in question to communicate such facts to his principle.
B. IS THE DUTY OF DISCLOSURE AN IMPLIED TERM?
In considering whether the duty of disclosure is an implied term of the contract of insurance, Scott LJ said that he realized that there were several reported cases in which learned Judges had, in the course of their judgments, expressed an opinion that the duty of disclosure might be regarded as resting on an implied term, but he did not know of any case where the point had come up for actual decision. On principle it seemed plain that the equitable jurisdiction to avoid a contract for misrepresentation could not rest on such a foundation. Even the common Law duty of disclosure he found difficult to explain fully on the theory of its resting only on an implied term of the contract. If it did, it would not arise until the contract had been made; and then its sole operation would be to unmake the contract. Although the question had not been decided judicially, it was worthy note that ss 17 and 18 of the Marine Insurance Act 1906, seemed to treat the twin duties of disclosing all the material facts, and of misrepresenting none, as existing outside the contracts, and not as mere implications inside the contract; for that Act was intended to be declaratory of the common Law; and he saw nothing in the language of those particular sections to justify interpreting them as being anything but declaratory.
In the same case Luxomore LJ said that counsel had maintained that the right of an insurer to avoid a policy of insurance for misrepresentation or non-disclosure with regard to a material fact was based in law on implied contract. But he himself thought that, whatever might be the position with regard to non-disclosure, as to which he said nothing, he was satisfied that in a case of positive misrepresentation the right to avoid a contract, whether of insurance or not, depended not on any implied term of the contract but arose by reason of the jurisdiction originally exercised by the Court of Equity to prevent imposition.
In March Cabaret Club and Casino Ltd v London Assurance, May J considered that the duty to disclose was not based upon an implied term of the contract at all, and arose outside the contract. It applied to all contracts uberrimae fidei and was not limited to insurance contracts.
C. THE TESTS OF MATERIALITY
Various tests have been adopted by the Courts in order to ascertain what facts are to be regarded as material.
The test which is usually adopted is whether the non-disclosure of the facts would influence a ‘prudent’ insurer (though in some cases the term ‘reasonable’ has been substituted for ‘prudent’). Another test is whether a ‘reasonable’ assured would consider them material.
In no case it is relevant to consider whether the non-disclosure would influence the particular insurer concerned or whether the assured himself thought that the facts were material.
1 The test of the ‘prudent insurer’
As far as marine insurance is concerned, the question as to what facts are material is settled by the Marine Insurance Act 1906, s 18(2), which provides that:
‘Every circumstance is material which would influence the judgment of a prudent insurers in fixing the premium or determining whether he will take the risk.’
This test was adopted in a motor insurance case by Supreme Court of Victoria, Court of Appeal, in Badatsikos v Car Owners’ Mutual Insurance Co Ltd, by the Court of Appeal in an ‘all risk’ insurance policy and by judicial Committee of the privy Council and by the High Court in fire policies, and by the High Court in a professional indemnity insurance policy.
The meaning of the term ‘prudent insurer’ was considered by Atkin J (as he then was) in Associated Oil Carriers Ltd v Union Insurance Society of Canton Ltd, where the question was whether it was material on July 31, 1914 to disclose that the characters of a vessel were of German nationality. His Lordship pointed out that this fact had been held material in British and Foreign Marine Co Ltd v Samuel Sanday & Co, which had been decided by the House of Lords in 1916, and then went on to say:
‘(Counsel) said that a prudent insurer within the meaning of the section must be taken to know the law as laid down in Sanday’s case. Knowing so much, he would clearly have been influenced. I think that this standard of prudence indicates an insurer much too bright and good for human nature’s daily food. There seems no reason to impute to the insurer a higher degree of knowledge and foresight than that reasonably possessed by the more experienced and intelligent insurers carrying on business in that market at that time. The evidence satisfies me that if the standard of prudence is the ideal one contended for by (Counsel) there were in July, 1914, no prudent insurers in London, or if there were, they were not to be found in the usual places where one would seek for them.’
In some cases, however, the test adopted has been that of a ‘reasonable’ insurer. But it is submitted that the words ‘reasonable’ and ‘prudent’ are interchangeable.
For instance, Lord Salvesen in delivering the judgment of the Judicial Committee of the privy Council in a case of life insurance said: ‘It is a question of fact in each case whether, if the matters concealed or misrepresented had been truly disclosed, they would, on a fair consideration of the evidence, have influenced a reasonable insurer to decline the risk or to have stipulated for a higher premium.’ This same test was applied by Lord Greene MR, in a case relating to a motor policy.
2 The ‘reasonable assured’ test
Another test which is sometimes applied is, ‘what would a reasonable assured consider material? Thus, in one case Fletcher Moulton LJ, said: If a reasonable man would have recognized that it was material to disclose the knowledge in question, it is no excuse that you did not recognize it to be so.’ In another case Lush J, stated: ‘If a reasonable person would know that underwriters would naturally be influenced, in deciding whether to accept the risk and what premiums to charge, by (the) circumstances (if disclosed) the fact that they were kept in ignorance of them and indeed were mislead, is fatal to the plaintiff’s claim. The plaintiff was making a contract of insurance, and if he failed to disclose what a reasonable man would disclose, he must suffer the same consequences as any other person who makes a similar contract.’
This test may not necessarily be the same as that of the ‘prudent insurer’, for although a reasonable assured might think it material to disclose that another company has refused to insure him, this is not regarded as material.
Hence, it is suggested that the ‘prudent insurer’ test is the one that should always be adopted. In the words of Scrutton LJ:
‘In my view it is very important to maintain the obligation on the assured of communicating to the underwriter every material fact, and I understand, and have always understood the definition of material fact to be that contained in the Marine Insurance Act:—“Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk.”
Again, in a later case relating to life insurance Roskill J, said that ‘It is well established that every circumstance is material which would influence the judgment of a prudent underwriter in fixing the premium or in determining whether he will take the risk’.
3 Whether the non-disclosure would influence the particular insurer is irrelevant
Whether the non-disclosure would influence the particular insurer concerned is irrelevant.
‘What is material is that which would influence the mind of a prudent insurer in deciding whether to accept the risk or fix the premium, and if this be proved it is not necessary further to prove that the mind of the actual insurer was so affected. In other words, the assured could not rebut the claim to avoid the policy because of a material representation by a plea that the particular insurer concerned was so stupid, ignorant, or reckless , that he could not exercise the judgment of a prudent insurer and was, in fact, unaffected by anything the assured has represented or concealed.’
Further, in a case concerning a treaty of marine insurance Scrutton J said that although the underwriter would have agreed to it even if he had known of the material fact alleged not to have been disclosed, he would on its disclosure in effect have said: ‘Yes I must think about this, and I am glad you told me.’ But the rest which had to be applied was not materially to the underwriter.
4 Assured’s opinion as to whether the fact is material is irrelevant
So, too the assured’s opinion as to whether the fact not disclosed is material is irrelevant.
‘It is also well established law, that it is immaterial whether the omission to communicate a material fact arises from…it not being present to the mind of the assured that the fact was one which it was material to make known.
‘The proper question is “whether any particular circumstance was in fact material?” and not whether the party believed it to be so. The contrary doctrine would lead to frequent suppression of information, and it would often be extremely difficult to show that the party neglecting to give the information thought it material.’
‘The question on such a policy is not whether a certain individual thought a particular fact material, but whether it was in truth material.’
‘The obligation to disclose, therefore necessarily depends upon the knowledge you possess…your opinion of the materiality of that knowledge is of no moment.’
‘I cannot help thinking that to enable a person proposing an insurance to speculate upon the maximum or minimum of information he is bound to communicate, would be introducing a most dangerous principle into the law of insurance.’
‘A policy is not binding if any material fact is not disclosed, and that…is so whether or not the person who does not disclose it knows that it is material, which is sometimes rather hard upon the assured….The question depends upon whether the fact is material or not, and not upon whether the person supposed it to be material.
‘It is also well established that the opinion of the assured whether or not a material fact is material fact is material is irrelevant. Even if the assured fails to disclose a fact because he does not think it is material when in fact it is, does not avail him.
Thus, in Godfrey v Britannic Assured Co Ltd:
The assured under a life policy had been told that he might have minor kidney trouble and should take care. Later he was told that the kidney condition was unchanged and that an X-ray showed lung infection which would probably clear up with treatment. He also suffered from attacks of pharyngitis. None of these facts was disclosed to the insurance company when the proposal was signed.
Held, that these were material facts, and the company could avoid liability under the policy, for the assured as a reasonable man specialist knowledge, should have appreciated that he possessed knowledge of his health which was of materiality to the company.
5 Fifth Report of Law Reform Committee
In January 1957 the Law Reform Committee stated in their Fifth Report that the practical effect of the law relating to non-disclosure was that insurers were entitled to repudiate liability whenever they could show that a fact within the knowledge of the insured was not disclosed which, according to current insurance practice, would have affected the judgment of the risk.
The Report then continued: ’Whether the insuring public at large is aware of this it is difficult to say; but it seems to us to follow from the accepted definition of materiality that a fact may be material to insurers, in the light of the great volume of experience of claims available to them, which would not appear to a proposer for insurance, however honest and careful, to be one which he ought to disclose.’
The Committee recommended ‘that for the purpose of any contract of insurance no fact should be deemed material unless it would be considered material by a reasonable insured’.
6 Law Commission’s proposals
In 1981 the Law Commission proposed that the assured’s duty was to disclose a material fact which was known to him or which he could be assumed to know and which a reasonable man in his position would disclose to the insurers. The same duty would apply in the case of renewal of a policy. The Commission’s proposals do not relate to marine, aviation and transport contracts nor to contracts of reinsurance.
D. MATERIALITY IS A QUESTION OF FACT
Whether a particular fact is material depends on the particular circumstances of the particular case. It does not necessarily follow that because a fact has been held to be immaterial in one case, a similar fact is not material in another. At the same time, similar circumstances may be assumed to be equally material or immaterial, whatever the nature of the insurance.
The question is one of fact to be decided, if necessary, by a jury, as representing reasonable men. Thus, a fact such as a rumour or suspicion which proves unfounded, may be material for the purpose of the duty of disclosure.
On the other hand, the non-disclosure of a fact which was not at that date material, and which was, therefore, not a fact to which the duty of disclosure then attached, does not affect the validity of the policy, even though the fact afterwards becomes material and actually brings about the loss.
F. THE CLASSIFICATION OF MATERIAL FACTS
A Facts normally material
In general, it can be said that the following facts will usually be held to be material:
2 All facts suggesting that the proposed assured is actuated by some special motive.
3 All facts showing that the liability of the insurers might be greater than would normally be expected.
4 All facts relating to the ‘moral hazard’
5 All facts which to the knowledge of the proposed assured are regarded by the insurers as material.
1 Exposure to more than ordinary danger
All facts are material which suggest that the subject-matter of insurance, by reason of its nature, condition, user, surroundings, or other circumstances, is exposed to more than ordinary danger from the peril insured against.
Thus, where a car is insured against fire, the structure and locality of the garage may be material as affecting the chances of fire or the chance of fire being extinguished. Further, in the case of merchandise insured against fire, it may be material that a portion of the building, in which it is stored, is used as a kitchen.
In particular, the following facts have been held to be material in the case of a fire insurance policy: that a fire had broken out in an adjacent building, although it had been extinguished a few hours before the assured sent the instructions to his agent to effect the insurance; that threats have been made to destroy the property; or that the assured had reason to suspect that an attempt to do so will be made.
2 Special motive of the assured
All facts are material which suggest that the proposed assured, in effecting the insurance, is actuated by some special motive, and not merely by ordinary prudence. Thus, in an insurance upon property, it is material that the subject-matter is so greatly overvalued as to make the risk speculative.
3 Greater liability of insurers
Facts which show that, in the circumstances, the liability of the insurers may be greater than would naturally be expected under an insurance of the property in question, are usually material.
Thus, it is material, in a retrospective insurance, that the subject-matter is already destroyed; or, under a special insurance, binding the insurers to reinstate the machinery insured, that the machinery is second-hand, seeing that the cost of reinstatement will be proportionately greater.
In the case of goods entrusted to a carrier, it may be a material fact that the assured has entered into a special contract, by which the carrier is relieved from his Common Law liability.
Again, it has been held in the case of an ‘all risk’ policy in respect of pictures and objects d’art stored at the assured’s office that it was a material fact that the premises would be left unoccupied expect during business hours.
4 ‘Moral hazard’
All facts are material which suggest that the proposed assured, by reason of his previous experience in matters relevant to the insurance, is not a person whose proposal can be accepted in the ordinary course of business and without special consideration.
This is sometimes known as the ‘moral hazard’, and has perhaps been best defined by Slesser LJ, in the following words:
‘It is elementary that one of the matters to be considered by an insurance company is entering into contractual relations with a proposed assured is the question of the moral integrity of the proposer—what has been called the moral hazard’
Thus, it is material that the proposed assured has suffered loss in the past from the peril to be insured against, or that other insurers have refused to grant or to renew an insurance similar to the insurance proposed.
In the case of motor insurance the previous convictions of the assured in respect of motoring offences are material. So also is it material that the insured under a burglary policy and a marine insurance policy has a criminal record.
The fact that the insured’s husband has previous convictions for receiving stolen goods and for theft has been held to be material in the case of an ‘all risks’ policy on jewellery.
In the case of insurance on profits the fact that the assured is trading at a loss should be disclosed.
In certain circumstances, the nationality of the assured may be material, or even his name.
Again, in the case of a trader’s combined insurance policy it has been held that the insurer could avoid liability where the fact that a director of the insured company had been convicted of handling stolen property prior to the renewal of the policy was not disclosed.
But the proposer need not disclose previous convictions which are ‘spent’ .It has been suggested that a proposer should disclose the fact of his arrest, charge and committal for trial even though in truth he was innocent but this would appear doubtful.
5 Facts regarded as material by the insurers
All facts are material which are, to the knowledge of the proposed assured, regarded by insurers as material.
The opinion of the insurers that a fact is material may be shown by a difference in the rate of premium charged according as the fact is present or absent. In practice, however, it is usually shown by the asking of a specific question.
B Facts not normally material
Facts which do not affect the risk are not material facts, and need not be disclosed.
Thus, it has been held not to be a material fact that at the time of the proposal a similar insurance is in force; or that the proposed insurance is a reinsurance, in which case it is equally immaterial that the original premium is lower.
Similarly, in the case of a personal accident policy, it has been held not to be a material fact that a person described as an ‘esquire’ was also an ironmonger, the rates of premium of both being the same.
In the case of an insurance on property, it is not a material fact that the proposed assured in not the owner of the property proposed to be insured, but is only a mortgagor or mortgagee; or even that his interest is merely that of a bailee. Nor is it material that he has entered into a contract with a third person by which, in the event of the property proposed to be insured being lost or injured by such person, his right of action is restricted. Further, in the case of motor insurance, it has been held not material that the assured had not had a driving licence for some years.
Any such fact may, however, become material if made the subject of a specific question.
It is further to be noted that facts are material, not in the abstract, but only as bearing upon the particular insurance proposed. The fact, therefore, which may be regarded as material in the ordinary course of insurance business, may be, in the special circumstances of the case, immaterial, e g where the fact lessens the risk, or falls within a condition or exception in the policy, or where the insurers waive its disclosure, or elect to make inquiries themselves.
G. FACTS WHICH NEED NOT BE DISCLOSED
Facts which would, in ordinary circumstances, be material, may become immaterial in the special circumstances of the case; and the assured is then under no obligation to disclose them. Facts which may thus become immaterial may be grouped under the following cases:
1 Facts which are known to the insurers or which they may reasonably be presumed to know.
2 Facts which they could have discovered by making inquiry.
3 Facts as to which they waive information.
4 Facts tending to lessen the risk.
5 Facts the disclosure of which is unnecessary by reason of a condition.
6 Facts concerning ‘spent’ convictions.
1 Facts within actual or presumed knowledge of insurer
(a) Actual Knowledge
‘There are many matters as to which the insured may be innocently silent—he need not mention what the underwriter knows—Scientia ulrinque par pares contrahentes facit. An underwriter cannot insist that the policy is void because the insured did not tell him what he actually knew; what way soever he come to the knowledge.’
So where the secretary of an insurance company, had guaranteed the solvency of a third party, knew that he was in financial difficulties, it was held that the company could not avoid liability on the ground that the insured had not disclosed this fact.
As far as marine insurance is concerned, the Marine Insurance Act 1906, s 18(3), provides:
‘In the absence of inquiry the following circumstances need not to be disclosed, namely:–…(b) any circumstance which is known…to the insurer…’
Thus, where the underwriters knew of the age, type, condition and agreed value of a Ketch, and the intended manner in which she was going to be laid up, it was not material for the assured to describe the neglected state of her topsides caulking.
It is sufficient if the matter is known by the insurance company’s agent.
Thus, in Pimm v Lewis
A water corn-mill was insured under a fire policy. Rice chaff which was more inflammable than pollard (i e the finer part of the husk of corn) was used in the mill, but this was not disclosed to the insurance company. The company’s agent resided in the neighbourhood and knew the mill well, and looked at the premises when the proposal was made.
Held, there was no duty to disclose that rice chaff was ground at the mill, for this fact was deemed to be known to be known to the company through its agent.
(b) Presumed Knowledge
‘(The insured) is not bound to communicate facts or circumstances which are within the ordinary professional knowledge of an underwriter. He is not bound to communicate facts relating to the general course of a particular trade; because all these things are supposed to be within the knowledge of the person carrying on the business of insurance, and which, therefore, it is not necessary for him to be specially informed of.
In hales v Reliance Fire and Accident Insurance Corpn Ltd:
A retail shopkeeper had taken out a policy against loss or damage to his shop due to fire or explosion. The business consisted of grocery, provisions, newspapers, tobacco and confectionery. For a period round Guy Fawkes Day substantial quantities of fireworks were kept on the premises in a tin box, and not in a place of safety, as required by the Explosives Act 1875. Held, there was no obligation in this class of insurance to disclose to the underwriters that fireworks would be, or might be on the premises during this short season, for this was a matter which the underwriters must be taken to have known.
‘(The underwriter) needs not to be told general topics of speculation: as for instance—the underwriter is bound to know every cause which may occasion natural perils; as, the difficulty of the voyage—the kind of seasons—the probability of lightning, hurricanes, earthquakes, etc. He is bound to know every cause which may occasion political perils; from the ruptures of States from war, and the various operations of it. He is bound to know the probability of safety, from the continuance or return of peace; from the imbecility of the enemy, through the weakness of their counsels or their want of strength, etc.’
‘It is also true that when a fact is one of public notoriety, as to war…the party proposing the insurance is not bound to communicate what he is fully warranted in assuming the underwriter already knows.’
Thus, in Lenn v Hall a castle in County Kerry in Ireland was insured against damage from riot, civil commotion, war, rebellion and fire. It was destroyed in May 1921 by members of the Irish Republican Army during the troubles of that year. In an action on the policy the insurer pleaded that the insured had not disclosed that the castle had been occupied for short periods during that year by Crown Forces, and that it had been used by them for the detention of Sinn Fein prisoners.The jury found that it was not material to communicate these facts, presumably because they considered that they were common knowledge. The insured is not bound to tell the underwriter what the law is.
As far as marine insurance is concerned, the Marine Insurance Act 1906, s 18(3), states:
‘In the absence of inquiry the following circumstances need not be disclosed, namely:–…(b) any circumstance which is… presumed to be known to the insurer. The insurer is presumed to know matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his business, as such, ought to know.
2 Facts within constructive knowledge of insurer
Actual knowledge is not essential if the insurer knew that he had the means of knowing the fact. If, for example, he knew that he could learn at Lloyd’s the exact cargo which had been shipped, and chose not to ascertain it, it would be considered to be within his knowledge.
If the insurer chooses to neglect the information which he receives, he cannot take advantage of his willful blindness or negligence. If he shuts his eyes to the light, it is his own fault provided sufficient information, as far as the insured is concerned, has been placed at his disposal, but the insured is still under a duty to communicate a material fact which is known to him, even though the underwriter might ‘by an effort of memory and of reasoning applied to the information actually communicated’ have arrived at the knowledge of the material fact concerned.
3 Facts as to which information is waived
This is a principle which applies to all branches of insurance, and as far as marine insurance is concerned the Marine Insurance Act 1906,s18(3), states:
‘In the absence of inquiry the following circumstances need not be disclosed, namely:–…(c) any circumstance as to which information is waived by the insurer.’
But omission to make inquiry is no waiver, if the insurers are not put on inquiry. Waiver is not to be easily presumed.
4 Facts tending to lessen the risk
In Carter v Boehm Lord Mansfield illustrated this point when he said:
‘The underwriter needs not to be told what lessens the risqué agreed and understood to be run by the express terms of the policy…If he insurers for three years, he need not be told any circumstance to shew it may be over in two; or if he insures a voyage, with liberty of deviation, he needs not be told what tends to shew there will be no deviation.’
As far as marine insurance is concerned, the Marine Insurance Act 1906, s18(3), states:
‘In the absence of inquiry, the following circumstances need not be disclosed, namely:–…
(a) any circumstance which diminishes the risk’
5 Facts the disclosure of which is unnecessary by reason of a condition
This principle applies whether the condition concerned is an express or implied one.
As far as marine insurance is concerned, the Marine Insurance Act 1906, s18(3), states:
‘In the absence of inquiry, the following circumstances need not be disclosed, namely:–…(d) any circumstance which it is superfluous to disclose by reason of any express or implied warranty.’
6 Facts relating to ‘spent’ convictions
After a certain length of time convictions are regarded as ‘spent’. But where a person is for convicted and a specified type of sentence is imposed e g a sentence of imprisonment for a term exceeding 30 months or a sentence of detention during Her Majesty’s pleasure, the conviction can never count as a ‘spent’ one.
Where a question seeking information with respect to a person’s previous convictions is put to him, the question must be treated as not relating to spent convictions or any circumstances ancillary to spent convictions and the answer thereto may be framed accordingly. The person questioned must not be subjected to any liability or otherwise prejudiced in law by reason of any failure to acknowledge or disclose a spent conviction or any circumstances ancillary to a spent conviction in his answer to the question.
Any obligation imposed on any person by any rule of law or by the provisions of any agreement or arrangement to disclose any matters to any person does not extend to requiring him to disclose a spent conviction or any circumstances ancillary to a spent conviction (whether the conviction is his own or another’s).
The Secretary of State is empowered to make orders excluding the operation of the above provisions.
H. SOME EXAMPLES OF MATERIAL AND IMMATERIAL FACTS
As has been shown above, a convenient method of classification of material facts is one setting out those facts which are normally material and those which are not.In the pages that follows a different method is adopted in order to show the materiality of matters relating to various types of insurance so that a broader picture may be achieved. The types of insurance which are here considered are fire, burglary, personal accident, guarantee, life, and motor.
1 Fire insurance
In Bufe v Turner the insured had a warehouse next to a boatbuilders’ shop in Heligoland. The shop caught fire, but the five was extinguished in half an hour. On the very same evening the insured instructed his agent to insure the warehouse. Two days later a fire again broke out in the shop, and spread to the warehouse. In an action on the policy the jury found that the insured should have disclosed the circumstances of the first fire. Consequently, in insurance company could avoid the policy on the ground of non-disclosure.
In Dawsons Ltd v Bonnin Viscount Finlay pointed out that if a car were insured against fire only, the question of where it was garaged might be very material, ‘for its structure and locality might affect the chances of fire or the chance of fire being extinguished’. But the case concerned a comprehensive motor policy (including fire risks), and it was proved that the risk of fire in the garage was, ‘so insignificant in comparison with the other risks insured, which are those of the road, including fire on the road, which might result from self ignition, that it is ignored in fixing the premium’.
It is material for an insurance company to know that a proposer has suffered previous losses under other fire insurance policies.
Disclosure should also be made of the refusal of another company to insure the proposer under a fire policy.
Where valuable furs had been insured under a fire policy under the description of ‘general merchandise’, Scrutton LJ said that he was extremely doubtful whether a proposer would not be guilty of non-disclosure is not stating what he knew of the nature of the goods. But the case was decided on other grounds.
In Ewer v National Employers Mutual General Insurance Association Ltd it was contended that when an insured made a proposal for fire insurance, he was bound to disclose, without any question being asked about it, the fact of his ever having made a claim on any other insurance policy of any sort for the whole of his life, e g claims upon a policy on goods in transit effected by the insured in his capacity of carrier. MacKinnon J, however, held that this argument was placing the duty of disclosure too high. ‘There is no trace, so far as I know, of any case in which any such duty has ever been suggested, and, as a matter of principle, I find it very difficult to believe that it can be correct.’
2 Burglary insurance
The fact that the property insured under a burglary policy has been overvalued has been held to be material in cases relating to the insurance of bearer shares, a cinematograph film, and objects d’art.
In a burglary policy the non-disclosure of the nationality of the proposer was held to be material in Horne v Poland, where he had come to this country from Romania at the age of 12, and had assumed an English name, though he had never become naturalized. This case, as was pointed out by Lush J turned on its own special facts, and he observed:
‘I cannot agree with the view which was pressed on me, and in support of which the evidence was given that the mere fact that a person is not a British subject is in all cases a material fact, so that the non-disclosure of it invalidates the policy.’
The insured should disclose that he has had previous losses. In this connection a previous ‘loss’ is sustained even if, in fact, the insurance company concerned has indemnified the insured of it.
In Schoolman v Hall it was held material that the insured under a burglary policy had not disclosed that he had a criminal record some years before the insurance had been effected.
In the case of a comprehensive policy which included a loss by burglary as one of the perils insured against, it has been held that there is no duty to disclose to the insurance company the insurance history of everyone of the persons living in the house. It may be that in certain circumstances…certain things may be most material and in other cases not material, and for it to be said that this is a universal rule is a view which I, for myself do not share.’
The insured should disclose that another insurance company has refused to renew a policy, for this is a material fact.
3 Personal accident insurance
Mis-statements as to the proposer’s height and weight have been held to be material.
The occupation of the proposer is not necessarily material. In Woodall v Pearl Assurance Co Ltd, where a proposer had described himself as a haulier and contractor, and the insurance company claimed that he was only a boatman, to Court of Appeal held that there had been no misdescription of his occupation. Bankes LJ said that he was glad to come to this conclusion because the effect, if he had decided otherwise, ‘would be to turn policies of this class—which ought to be, and I hope are intended to be, a simple means of persons securing protection for themselves or their families in the event of accident –into mere traps to catch the unwary’.
4 Guarantee insurance
In Anglo-Californian Bank Ltd v London and Provincial Marine and General Insurance Co Ltd, which concerned a policy guaranteeing the solvency of some underwriters, the jury held that it was a material fact that the insured had not disclosed to the insurance company that the underwriters were in serious financial difficulties.
In Seaton v Burnand the insured had effected a policy which guaranteed the solvency of a person who had himself. ‘guaranteed’ the repayment of a loan made by the insured to a third party. The money had been lent at a very high rate if interest, and the insurance company sought to avoid liability on the ground that this fact should have been disclosed by the insured. The House of Lords held that the fact was not material.
Lord Halsbury LC observed:
‘My Lords, I entirely differ from the view that any such thing as the circumstances of the original loan could or ought to have affected the minds of those who were entering into this contract. I do not believe that any one of them would have thought any such thing…and the reason I say that is not that I rely upon my own judgment alone, but I look as a fact those businessmen did in reference to it. Did they inquire by a single question what were the circumstances of the original loan? Did they ask anything about the original loan, or how it came to be made? Not a word. What they did was what as businessmen and a sensible men would be the natural thing for them to do—they went and inquired at the bank and found out what the commercial reputation of [the guarantor] was; they were satisfied with the result of their inquiries and they entered into this contract.’
5 Life insurance
‘Those whose business is to insure lives calculate on the average rate of mortality, and charge a premium which on that average will prevent their being loser. ‘ Hence, facts which tend to show that the average span of life will be shortened in the case of the particular insured will be regarded as material. Usually, of course, the insurance company puts specific questions in its proposal from which the insured is required to answer.
(a) Age
The age of the insured is clearly material. Thus, in Hemmings v Sceptre Life Association Ltd:
The proposer mistakenly stated that she would be 41 on her next birthday, though in fact she would have been 44.
Held, that this was a material fact. But the insurance company had continued accepting premiums in respect of the policy with knowledge of the true facts, and could, therefore, not repudiate liability on the ground of misrepresentation of the material fact
Kekewich J observed:
‘[The insurance company] might have said that the policy was granted on the basis of the assured being at the date of the proposal, 41 next birthday and that, as that fact was not admitted, and it was now proved that she was not 41. That they had to consider in 1897, when the mistake was discovered. It seems to me that they might then, if they had thought fit, with propriety have said, ‘We will return the premiums hitherto received…and we will receive no more unless you wish to make a new contract’. On the other hand, it was open to them to treat the policy as still subsisting and to accept the premiums on the old footing. It was a pure matter of business for the directors to say which of these two courses they would adopt. They elected to adopt the latter.’
(b) Residence
This is not normally considered material, but proposal forms in practice by making the insured’s answer the basis of the contract, make it so. Residence means the place where he is living or residing at the time of making the proposal, and not where he has been residing before or where he is going to reside afterwards.
6 Motor insurance
(a) Previous accidents
The fact that a proposer has been involved in a previous accident is usually material. Thus, in Dent v Blackmore a proposer in answer to a question in a proposal form stating ‘What accidents have occurred in connection with your car during the past two years, including cost? had replied, ‘Damaged wings’. In the previous year he had had seven accidents in each of which the wings of the car had been damaged, but in one of them substantial injury was caused to a third party,. The Court held that this fact was material, and should have been disclosed, and that the answer, ‘damaged wings’ was untrue. Consequently the underwriter could avoid liability.
Even where the insured was not actually driving at the time of the previous accident, he may be under a duty to disclose it. So, in Trustee of G H Mundy (a Bankrupt) v Blackmore a question in a proposal form asked the proposer to state what previous accidents he had had. He replied, ‘With eight cars insured at the same time a few minor accidents’. One of the insured cars which was being driven for him had been involved in a head-on crash resulting in its gearbox being thrown out of line and both axles being bent, the cost of repairs amounting to £130. This was held to be a material fact which ought to have been disclosed.
The accident record of a driver who to the proposer’s knowledge will drive the vehicle has also been held to be a material fact. Thus, in Dunn v Ocean, Accident and Guarantee Corpn Ltd the insurance company was entitled to repudiate liability because the proposer had not disclosed that her husband, who she knew was going to drive the car, had been involved in three accidents and had been required by one company to accept the first 20 per cent of the risk.
(b) Age of driver
Where a proposer had failed to disclose that he was only nineteen years old, an insurance company successfully claim, ‘ed to avoid liability on the ground that this was a material fact. Atkinson J suggested that instead of proposers being asked to state, ‘Age last birthday’ in the proposal form, they should be required to give the date of birth. There ought to be something to make it very clear how important was the question of age. If the proposer was asked the date of birth, it would make a boy rather shrink from giving a false answer. ‘It was in the interest of the public that these reckless boys should not get their protection too easily.’
(c) Previous convictions
If the insured fails to disclose his previous convictions in connection with the driving of vehicles, that will be considered a material fact, and the insurance company can avoid liability.
In Jester-Barnes v Licenses and General Insurance Co Ltd it was held that the proposer ought to have informed the company that he had been convicted of being drunk in charge of a car and driving in a manner dangerous to the public.
Even where the proposer had been convicted of drinking unconnected with any conviction for driving offences, this was still held in one case to be a material fact. Evidence was given that a prudent insurer would not have issued a policy at all if he had known of such convictions.
Again where the insured was asked the following question in a proposal form: ‘Have you been convicted?’ and he had not in fact been convicted of any motoring offence, and answered ‘No’, it was held that he should have disclosed that he had previously been convicted of garage breaking, forgery, breach of recognisances and stealing. for he had signed a declaration stating ‘I have withheld no information whatever which might tend in any way to increase the risk of the insurance company or influence the acceptance of this proposal’.
Not only are the proposer’s own convictions but also those of persons who are likely to drive the vehicle material, e g the son, husband, chauffeur, father, of the proposer.
(d) Cancellation of other policies
In Norman v Gresham Fire and Accident Insurance Society Ltd the view was expressed (but the case was decided on other grounds) that it was material for an insurance company to know whether or not the person, whose risk they were accepting, was a person of substance who could not only pay his premiums but also, particularly in motor insurance, was a person who did not get his policies cancelled for non-payment of premiums. That would show that they were persons who were impecunious, and therefore were not likely to spend money in order to give care and attention to their vehicles being insured.
(e) Refusals by other companies to insure or renew policies
It is a material fact that other insurance companies have refused to issue a policy to the proposer, or have declined to renew an existing policy.
(f) Previous losses
It has been held material for the insurance company to be informed of losses suffered by the insured on occasion prior to the issue of the policy.
1. PROOF OF THE MATERIALITY OF FACTS NOT DISCLOSED
There is sometimes no need to prove what facts are material, for it will be obvious to the Court that they are so. In the words of Scrutton LJ:
‘[Counsel contended] that before a Court can find that a fact is material, somebody must give evidence of the materiality. That is entirely contrary to the whole course of insurance litigation; it is so far contrary that it is frequently objected that a party is not entitled to call other people to say what they think is material; that is a matter for the Court on the nature of the facts. I entirely agree…that the nature of the fact may be such that you do not need anybody to come and say, this is material. If a shipowner desiring to insure his ship for the month of January knew that in that month she was heavily damaged in a storm, it would, with deference to counsel who has suggested the opposite, be ridiculous to call evidence of the materiality of that fact; the fact speaks for itself.’
If there is any need to prove the materiality of facts, than an expert witness can be called. Such a witness in the case of marine and most branches of non-marine will usually be one of those person ‘actually engaged in the occupation of insurers’.
In reviewing the history of the practice of calling evidence, McCardie J remarked:
‘The view of the Courts as to expert evidence in insurance cases seems to have developed. In the days of Lord Mansfield such evidence was apparently regarded as irrelevant: see, for example, Carter v Boehm. But the views of 150 years ago have been modified by the broader outlook of later judges and by a clearer realization of the utility of expert testimony as an aid to the administration of justice…In marine insurance cases the law to-day is not as it apparently was in 1766. Expert evidence with respect to materiality of a fact has been freely admitted in recent years by the experienced judges who have administered, and are now administering, justice in the Commercial Court…I can conceive that no sound distinction can be drawn between cases of marine insurance as distinguished from life, fire of other heads of insurance business…Expert evidence may frequently afford great assistance to the Court upon questions of novelty or doubt. If excluded, it would deprive the Court ascertaining those considerations and views which a tribunal may well require to know, and the insurance witness would by process of law be stricken with absolute silence upon matters of vital importance to him. Judges are always free to test and revise every form of expert testimony.’
Thus, as regards marine insurance, evidence of Lloyd’s underwriters was held admissible to show that it was material that they should know that the valuation of a yacht was in excess of her actual, value, for the reason that any great disparity might tempt the assured to cause her to be lost. Evidence has also been admitted to show whether it was necessary to disclose that the master of a vessel had not been to sea for 20 years and had then lost his ship, that a cargo was overvalued, and that the characters of a vessel insured just before the First World War broke out were of German nationality.
In Horne v Poland, which concerned a burglary policy, the evidence of the underwriters was admitted in order to show that they would not accept the risk of an alien as satisfactory. In this case one or two of the witnesses said that they did not and would not insure aliens. Lush J said that he was doubtful whether evidence of what individual witnesses would do was admissible, but it had not been objected to, and in any event he felt that in the circumstances of the case, apart from the evidence, there had been non-disclosure of a material fact.
In Regina Fur Co Ltd v Bossom, which also related to a burglary policy, evidence was given by two underwriters to prove that it was a material fact for the purposes of the policy that the assured had had an isolated conviction for receiving stolen goods 20 years before, for this affected the ‘moral hazard’.
In Becker v Marshall, another case on a burglary policy, it was proved by expert evidence that it was material in the particular circumstances to know the nationality of origin of the assured, and that the assured had changed his name.
In Woolcott v Sun Alliance and London Insurance Ltd an underwriting manager gave evidence as to whether a proposer for a fire insurance policy should have disclosed a previous conviction for robbery.
In Hoff Trading Co v De Rougemont, where some bearer shares were insured against loss in transit from Riga to London, underwriters and brokers were called to show that it was material to show that the assured had put an excessive and fraudulent value of them.
In case of life insurance the evidence of a doctor will be admissible to show what facts are material. ‘It must be pointed out that in questions of life insurance the matters at issue are usually physiological, medical or neuropathic. The directors of insurance companies, however, are but rarely medical men. Seldom, if at all, do they personally see the proposer. They rely to a great extent on the reports and advise of medical men. The importance or otherwise of that which should be disclosed to a life insurance company may well be appreciated only by doctors or surgeons. Medical men may, therefore, often give a more useful opinion than the directors themselves as to what is or is not material or important.’
Thus, in Godfrey v Britannic Assurance Co Ltd a doctor of wide experience in advising life offices as to the prudence or otherwise of accepting certain risks was called to show the materiality of the fact that the assured had been suffering from a kidney condition, and that an X-ray indicated that he had a lung infection. In this case a manager of another insurance company with lifelong experience in this business also gave evidence on this point.
If no expert evidence is offered, the Court may make use of its own knowledge as to whether a fact is material, but such knowledge may not necessarily be the same as that of the ordinary man.
Thus, in Glasgow Assurance Corpn Ltd v William Symondson & Co, where no evidence was offered on the point, Scrutton J held that in a case of marine insurance it was not material to know that the risk had been previously refused by other underwriters saying:
‘Although in recent practice evidence has frequently been admitted of underwriters to state whether in their opinion facts would influence the judgment of a prudent insurer, no such evidence was tendered by either party in the case. I am, therefore, left to form my own judgment on the question from such knowledge as I have of insurance matters. The ordinary man in the street would, I am sure, think it material to know that the risk he was offered had been previously refused by six other underwriters; and many life insurance companies expressly ask the question: “Has your life been refused by any other office?’ But it is elementary marine insurance law that such refusals need not be disclosed to another underwriter. The ordinary business man would, I am sure, think it material to know that the underwriter wanting to reinsure thought so badly of the risk that he was ready to pay a higher premium than he received to get rid of [it], but no one has ever suggested that this need be disclosed.’
But although the Court can decide of its own motion whether something is material in a case where it is obviously material, nevertheless it should be slow to find a fact as material one, more particularly as it would be quite possible for underwriters to protect themselves by including a suitable clause in the policy.
J. THE DURATION OF THE DUTY OF DISCLOSURE
The duty of disclosure continues throughout the negotiations and until at least the contract has been completed by acceptance.
In Whitwell v Autocar Fire and Accident Insurance Co Ltd:
In a proposal form for motor insurance there was a question which asked the proposer whether any insurance company had declined his insurance. He gave the answer ‘No”. This was, in fact, a true statement at the time at which he made it. But in fact, quite unknown to him, two days before the proposal was accepted another insurance company had declined to insure him. Held, there was no duty to disclose this fact afterwards because the contract was concluded when the proposal was accepted.
But it is usual, especially in life insurance policies, for a clause to be interested into the contract that the risk of the insurance company is not to commence until receipt of the first premium. The effect of such a clause is that the period during which the duty to disclose exists is enlarged, so that any material fact coming to the knowledge of the insured must be disclosed right up to the moment that the first premium is paid.
In Looker v Law Union and Rock Insurance Co Ltd:
In a proposal for life insurance the proposer, in answer to a question, ‘Are you now free from disease or ailment? said, ‘Yes’. Five days later the insurance company sent a conditional acceptance of the risk stating that, ‘If the health of the life proposed remains meanwhile unaffected, the policy will be issued on payment of the first premium. The risk of the Company will not commence until receipt of the first premium.’ Five days after the receipt of this letter he became ill, and he died within 4 days from pueumonia, but no notice of his illness was given to the company. He sent the company a cheque for the first premium, but this was dishonoured on presentation.
Held, that the insurance company was not bound to issue a policy.
Acton J based his decision on two grounds. In the course of his judgment he observed:
‘The rule…is that the acceptance is made in reliance upon the continued truth of the representations made in the proposal which it was agreed should from the basis of the contract of insurance, in the belief that there has been no material change in the risk offered, and therefore, that if anything has happened materially to increase the risk between the proposal and the acceptance in the insurance company are not bound, because that which they have made a condition of the contract going to the root of it, has not been fulfilled…It is also said materially to strengthen the position of the insurance company that in this case their notice…in terms intimated to the proposer that any subsequent acceptance by them of premium and risk would be subject to the condition that the health of the life proposed should remain meanwhile unaffected. That it had not remained unaffected cannot be disputed. It is not indeed putting it too high to say that when the insurance company accepted the premium and the risk…the deceased was dying, and if the insurance company had known the facts, they would never have entertained the notion of accepting the risk for a moment. The second point …was that there was here a failure to discharge a duty incumbent upon all proposers of contracts of insurance such as these…namely, a duty to inform the insurers of any material change in the nature of risk to be undertaken by them…In my opinion, the contention for the insurance company on this point also is a sound one.’
Again, where the risk under a fire policy was not to commence until the first premium had been paid, a proposer, who had insured with one company and then applied for increased insurance with another company, was held to be under a duty to disclose a refusal on the part of the original company to continue the insurance. ‘There still was a time at which any circumstance coming to his knowledge material to be disclosed would have to be disclosed. I quite agree that in this case it is rather hard upon the assured because I do not see anything to throw doubt upon [his] bona fides…or anything to show that he had the least idea that he was bound to disclose the fact which had come to his knowledge as to the refusal of the [other] company, to renew the insurance; and, if so, it was rather hard upon him, but that it is the effect of this clause in the policy, which undoubtedly sometimes does work hardship to one of the parties…That, however, is the consequence of this law of insurance which upon the whole does justice between the parties and is rather necessary for the protection of insurers.,
In Harrington v Pearl Life Assurance Co Ltd:
In May 1912 a proposer signed a proposal for a life insurance policy which was accepted. He was examined by the insurance company’s doctor, and was passed as fit. But the proposal never came into force because the premium was not paid. He made a new proposal on October 1, 1912, stating that there had been no material change in his health since the examination. The proposal was accepted, and the policy was to come into force when the premium was paid. On November 6 he was taken ill, and on November 8 the insurance company received the premium, and he died the same day.
Held, that the insurance company was under no duty to issue the policy since the circumstances had so changed, and no disclosure of them had been made.
Where proposer had been passed as fit by the insurance company’s doctor and later became alarmed about the state of his health and consulted a specialist, who told him that he was in a dangerous state of health, it was held that he should have disclosed this fact to the insurance company. In answer to a question, ‘Whether now and ordinarily good health’, he had stated, ‘Yes and always’. ‘It proved beyond all reasonable doubt that at the time when the money was paid and the policy issued, [he] knew that his…answers to the …question…were no longer true, and…I can have no doubt that the difference between these statements and the facts as they then existed within his difference between these statements and the facts as they then existed within his knowledge were of such a grave character that they certainly ought to have been communicated to the company.’
But the party may agree that the insurance company is not to be at risk until the policy is actually delivered to the assured. In such a case the duty of disclosure will last even longer. So, in Allis Chalmers Co v Maryland Fidelity and Deposit Co:
A fidelity insurance policy was to come into effect from its ‘issuance’. It was agreed that the company should reimburse the insured in respect of any loss sustained by larceny or embezzlement by a named employee of theirs. On March 8 a policy was executed by the insurance company, but it was not finally delivered to the insured until April 18. On April 13 the employee left the insured’s office, and it was suspected by April 18 that he might have absconded. On that day the insured’s manager was informed of this, and he paid the premium and obtained the policy. Shortly afterwards the insured discovered defalcations by the employee.
Held, that they were not entitled to recover on the policy, for they should have made a disclosure of the fact that the employee had absconded since no contract had been concluded until April 18.
Earl Loreburn observed:
‘I therefore, come to the conclusion that there was no completed agreement…at any rate before April 18, and that prior to April 18 either party could have refused to proceed with this business of the insurance. When the policy was delivered and the premium paid on April 18, there was knowledge of a state of facts upon the part of the assured which admittedly ought to have been communicated to them; and it is agreed that in that state of facts it is impossible to recover upon the policy.’
Any material fact, therefore, which, at any stage of the negotiations comes to the knowledge of the proposed assured, including any alteration of circumstances which brings into existence a material fact, or in consequence of which a fact previously immaterial becomes material, must be at once communicated to the insurers for the purpose of enabling them to decide whether to continue or break off the negotiations: otherwise there is a failure to disclose a material fact which renders the contract voidable at the instance of the insurers.
In the same way, any statement made during the negotiations which, owing to a change of circumstances become inaccurate, or which is discovered by the proposed assured to be inaccurate, must be withdrawn or corrected, as the case may be. It is immaterial that the statement was accurate, or believed to be accurate, at the time when it was mad. If, therefore, the proposed assured fails to withdraw or correct his original statement, there is a breach of duty which avoids the contract.
On the other hand, the duty of disclosure ceases, when the contract is concluded, or the premium has been paid, or any other event specified in the policy has happened. The assured need not disclose any material facts which only come to his knowledge, or any facts which only become material after acceptance become inaccurate.
Where the policy is retrospective, the duty of disclosure applies not only to such facts as were material at the date from which the policy is to take effect, but also to all facts becoming material down to the actual date at which the contract is made.
Where the assured seeks at a subsequent date to procure an alteration in the terms for his benefits, his duty to make disclosure re-attaches to modified extent. He becomes bound to inform the insurers of any facts which may be material to such alteration, even though they have come to his knowledge since the completion of the original contract. He is not, however, bound to disclose any other facts which have since come to his knowledge, however material they might have been had he known them before the contract was made, inasmuch as they can have no bearing on the question of alteration.
K. THE EFFECT OF NON-DISCLOSURE
A failure on the part of the assured to disclose a material fact within his actual or imputed knowledge renders the policy voidable at the option of the insurers.
The assured’s conduct cannot be taken into consideration as in any way affecting this result. The policy is equally liable to be avoided whether his failure is attributable to fraud, carelessness, inadvertence, indifference, mistake, error of judgment, or even to his failure to appreciate its materiality. Even his ignorance of the fact will not excuse him, if it is one which he ought to have known.
As far as marine insurance is concerned, s 18(1) of Marine Insurance Act 1906, provides:
‘Subject to the provision of this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid contract.’
The insurers may, however, at any time after discovering that a material fact has not been communicated to them, waive the non-disclosure and thus affirm the policy, provided that at the time of doing so, they are fully acquainted with all the circumstances of the case. The mere fact that the insurers have not returned the premium to the insured has been held not to be a waiver of the non-disclosure.
1 Statement by BIA and Lloyd’s
In 1977 The British Insurance Association and Lloyd’s drew up a statement of non-life insurance practice which they recommended to their members. The statement applies only to non-life policy holders domiciled in the United Kingdom and insured in their private capacity only, and so far as non-disclosure and misrepresentation are concerned provides:
‘Except where fraud, deception or negligence is involved, an insurer will not unreasonably repudiate liability to indemnify a policyholder:
i on the grounds of non-disclosure or misrepresentation of a material fact where knowledge of the fact would not materially have influenced the insurer’s judgment in the assessment of the insurance…
[This] paragraph does not apply to marine and aviation policies.’
2 Statement by life offices’ Association
A similar statement as to long-term insurance practice was issued by the Life Offices’ Association and relates to policies by individuals resident in the United Kingdom in a private capacity.
The statement says that insurers will not unreasonably reject a claim. But fraud or deception will and negligence or non-disclosure or misrepresentation of a material fact may, result in adjustment or constitute grounds for rejection. In particular an insurer will not reject a claim on grounds of non-disclosure or misrepresentation of a matter that was outside the knowledge of the proposer.