The current situation – Duty of full disclosure
Onus is on the customer to disclose what may affect an insurer’s decision to underwrite the risk.
Disclosure is an essential part of an insurance agreement but what and when to disclose may not always be fully understood by those who are applying for insurance cover.
When you first apply for insurance you are asked declaration questions by the insurance company. You are expected to provide answers for these questions to the best of your abilities, or knowledge. With current legislation, you are then typically asked to disclose any further information that may be deemed relevant to the insurer’s decision to insure you, which does not have to relate to any declaration question asked by the insurance company.
Relevant information that is required to be disclosed is defined as information that can change the decision whether to insure a risk, and at what premium & excess to insure the risk for.
Declaration questions and disclosure requirements are done to reduce the chances of Adverse Selection. Adverse Selection is a situation where you the buyer has information that the insurance company does not (or vice versa). For example, your house might have been deemed to be in a landslip vulnerable area by a local government body. This is not declared and known to the insurer, however it represents a significant risk to what the insurance company covers.
Essentially, declaration questions are used to help squeeze the gap towards symmetric information between the buyer and the seller. Insurance companies want to gather the best idea of the risk so that lower premiums can be charged for lower risk properties, while appropriate adjustments are made to riskier properties.
Therefore, full disclosure from insured parties is a critical part of an insurance agreement. Hence, when someone is deemed to have seriously breach this duty, the insurer may treat your policy as being of no effect and to have never existed.
The future – Duty to take reasonable care
Onus is on the insurer to ask questions that the insurer needs to make the decision to underwrite the risk. Onus simply on the customer not to take reasonable care and not misrepresent any information.
There is currently an Insurance Contract Law Review taking place.
Reviews are currently being done on proposals submitted for the government’s Options Paper which are looking to change the requirements around disclosure from insured parties. The proposals is to place more responsibility on insurers to gather disclosure information as they would like to take the onus away from the customer on what the insurance company might consider in their decision to insure.
Namely, it looks likely we will see a shift from a ‘Duty of Full Disclosure’ for insured parties, to a ‘Duty to Take Reasonable Care’, and to not make a misrepresentation.
This will mean insurers will have to guide more specific declaration questions, and takes away the general disclosure question asked by insurers that requires any relevant information to be known and disclosed by insured parties.
Learn more from leading law firm Minter Ellison, with a useful summary of the review