Insurance Law: Duty of Disclosure

Insurance policies are first and foremost, contracts just like any other. However, one salient distinguishing feature of an insurance contract as against other contracts is that insurance contracts are contracts uberrimae fidei. What this means is that the parties are under a duty to exercise the utmost good faith to make a full disclosure of all material facts known to them which may concern the insurance contract. In other types of contracts, parties are not placed with any legal obligation to make voluntary disclosures of information on the contract and it is basically caveat emptor. But not so with insurance contracts.

Why are contracts of insurance or insurance policies subject to this duty of disclosure? Lord Mansfield in the celebrated case of Carter v Boehm [1766] 3 Burr. 1905 held that "Insurance is a contract upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only: the under-writer trusts to his representation, and proceeds upon confidence that he does not keep back any circumstance in his knowledge, to mislead the under-writer into a belief that the circumstance does not exist; and to induce him to estimate the risqué, as if it did not exist. The keeping back such circumstance is a fraud, and therefore the policy is void. Although the suppression should happen through mistake, without any fraudulent intention; yet still the underwriter is deceived, and the policy is void; because the risqué run is really different from the risqué understood and intended to be run, at the time of the agreement. Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain, from his ignorance of that fact, and his believing the contrary."

Therefore, the law makes an assumption that a person who enters into such a contract is possessed of facts which may influence the decision of a prudent insurance company in computing the risk to be undertaken. Without full disclosure, the insurer is unable to make a correct assessment of the risk he is about to insure and it is based on this inequality of knowledge that the Courts have developed the duty of disclosure. In many jurisdictions, the duty of disclosure has been given such importance that the legislature has passed laws to that effect.

Generally, the duty of good faith requiring a policy holder to disclose material facts is applicable at the time the insurance policy is concluded. The policy holder has a duty to disclose information having material bearing on the risk to be insured when he fills up the proposal form. It does not mean that he has to disclose all knowledge that he possesses. It requires disclosure of material facts only.

What are material facts which require disclosure to the insurer? How are material facts determined? Though there are conflicting views on this, it is widely accepted that an insured's duty of disclosure is limited to information considered to be material by a reasonable insurance company as opposed to information considered to be material by a prudent insurance company.

What happens when the insurance company subsequently finds out that you have failed to disclose such material facts? In such an instance, the insurance policy becomes voidable at the option of the insurance company. What this means is that the insurance company is entitled to waive its rights and continue with the insurance policy as if disclosure was made or to treat the insurance policy as void from inception. The privilege lies at the hands of the insurance company to choose whether to continue with the insurance policy or to rescind the insurance policy.

It is therefore of utmost importance that a person who wished to take out an insurance policy faithfully discloses all material facts within his knowledge to the insurance company when applying for insurance coverage.