ISO Scheme Case Studies
This months's case studies take another look at non-disclosure when the clients say "But I told my adviser/ broker..."
Wednesday, May 9th 2012, 4:24PM 1 Comment
CASE STUDY 14: ("P" is Participant insurer and "C" is Complainant)
If you know information about your customer because it is common knowledge in your community and the law treats you as an agent of the insurer, the insurer may be deemed to be on notice of information which was not disclosed on the proposal.
Complaint No: 109111
Casebook Index: Common knowledge/ notorious fact, Non-disclosure - Convictions
C obtained Home and Contents insurance from his bank, underwritten by P. A fire caused major damage to C's house and contents. C made a claim to P in respect of the damage.
P appointed an investigator and discovered that C had a number of criminal convictions which he had not disclosed on the proposals. P declined to consider the claim and avoided the policies, on the basis that C had failed to disclose his criminal convictions on the proposals and at subsequent renewals.
C argued that he had disclosed his convictions to the bank officer. C further argued that, even if he had not disclosed his previous convictions, they were common knowledge in the small town in which he lived and the bank officer would have had knowledge of them.
Did the bank officer know about C's convictions?
C answered "No" to the question on the proposals, asking if he had any criminal convictions and C did not disclose any of his subsequent convictions at renewal. P regarded C's criminal convictions as material and a breach of the duty of good faith in the contract for insurance. This failure to disclose material information enabled P to avoid the policy and decline to consider C's claim.
Although C argued that he had disclosed his previous convictions to the bank officer when he applied for insurance and later when he increased his mortgage, the mortgage document, loan agreement and loan application did not ask any questions relating to previous convictions. There was no evidence that C had disclosed his previous convictions to the bank officer when he completed the proposals. No new proposals were completed when C later changed his insurance, as this was only an alteration to the existing policies.
The insured does not have a duty to disclose matters of common knowledge or notorious fact to the insurer. However, in case law, examples of notorious facts which are used are major events like war. Case law also recognises this as a very narrow exception to the duty of good faith. In Guthrie House Ltd v Cornhill Insurance Co Ltd (1982) 2 ANZ Insurance Cases ¶60-466, reference was made to the decision in the case of Bates v Hewitt (1867) LR 2QB 595, in which Cockburn CJ warned, at page 606, of the dangers of limiting that duty of good faith and allowing an insured to speculate about what was in the mind of the insurer at the time the contract of insurance was made.
The bank officer, who C said had knowledge of his convictions, stated that he did not have any such knowledge and he did not live in the area when C was convicted. Although C provided witness statements supporting his submission that the knowledge of his convictions was widespread, it was not sufficient to constitute common knowledge or a notorious fact, such as to enable him to argue P could be presumed to have had such knowledge. Therefore, the non-disclosure of material information was sufficient to allow P to avoid the policy ab initio.
Result Complaint not upheld
ISO Scheme Tip
It is important that if you know of information which is not disclosed on an application, even if your customer has not told you this information directly, you advise your customer to disclose it on the application and make a file note of that conversation.
CASE STUDY 15: ("P" is Participant insurer and "C" is Complainant)
All material information must be disclosed, even if you and your customer do not think the information is material. Err on the side of caution and advise your customer to disclose the information as it is the underwriter who decides whether information is material or not.
Complaint No: 112479
Casebook Index: Depression, Materiality, Non-disclosure - Other, Prudent underwriter, Completion of proposal/application, Total Disablement
In February 2005, C completed a proposal for life and disability cover with P through his broker.
In July 2006, C made a claim for the disability benefit, because he was unable to work, due to depression.
P requested medical information from C's doctor and psychiatrist. In September 2006, P accepted the claim.
In October 2006, P received medical information from C's psychiatrist. As a result of this information, P advised C it was declining the claim and avoiding the disability cover from inception, because he had not disclosed his previous use of marijuana and methylphenidate (Ritalin) on the proposal.
C's solicitor argued that C's drug use could be described as "experimental" and, in the case of both marijuana and methylphenidate, "the drug use stopped some five to six years ago". C's lawyer did not believe the drug use would have been material to P. C also said that he had disclosed his drug use to his broker.
What information did C fail to disclose and was it material?
When C completed the proposal, he was asked whether he had "ever used by mouth, injection or inhalation any drug not prescribed by a doctor other than medicines purchased at a chemist ...". C answered "No".
The psychiatrist's report stated C had abused marijuana and stimulants in the past. C's solicitor stated C used marijuana on a weekly basis, once a week, for a period of several weeks and he used methylphenidate on several occasions. In both cases, C ceased using the drugs 5 to 6 years earlier.
In order to determine whether or not the information which C did not disclose was material, the Case Manager presented the fact situation (with identifying details omitted) to 3 independent underwriters and asked how this would have affected their decisions to insure C. All 3 of the underwriters indicated the information would have affected their decisions to insure C.
C's solicitor had argued that, at most, if the drug use had been important to P, it would have meant an exclusion on the policy, which would not be relevant to the claim.
However, if the information would have resulted in an exclusion being placed on the policy, it would indicate the information was material information, because it would have influenced the terms on which the proposal was accepted. The information not disclosed does not need to be related to the claim.
P also needed to prove the non-disclosure of C's drug use induced it to enter the contract on the terms provided. P issued the policy on standard rates. P provided an opinion from its underwriter stating that, if disclosure of the drug use had been made, P would have placed a loading of +50%, with a longer wait and shorter benefit period to apply. On this basis, the Case Manager was satisfied that, but for the non-disclosure, P would not have underwritten the policy on the same terms.
Under the policy, because of the material non-disclosure, P was entitled to decline to consider the claim and avoid the policy.
Did the broker know about C's past drug use?
The Case Manager spoke to the broker who stated he had not been aware of the drug use and, if he had been, he would have written it on the proposal. However, he did not agree the drug use was material information.
Because there was contradictory evidence, the Case Manager was unable to assess whether C had made disclosure to the broker. On the basis of the documentation provided, C had failed to disclose information, which was material.
Result Complaint not upheld
A fact is material if it would influence the mind of a prudent insurer in deciding whether or not to accept a proposal for insurance and, if so, on what terms. Even if you do not personally believe information is material, you should advise your clients to disclose all information as it may be a combination of factors which makes the information material to a prudent underwriter.
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