The consequences of not disclosing all relevant information to an insurance company can be serious, particularly when:
• Completing a new insurance application, or Renewing a policy.
• Non-disclosure may result in claims being declined and the policy cancelled.
It is also possible that you will be unable to obtain insurance in future. If you cannot get cover, you may not be able to obtain a mortgage or a loan. You may also be left with a damaged house or car on which you still owe money and that you cannot afford to have repaired.
The law does not distinguish between “an innocent mistake” and a deliberate attempt to mislead an insurer. Therefore it is important to be completely truthful when you complete an application for insurance.
Less than one percent (1%) of insurance claims are declined each year. However, one of the most common reasons for a claim being declined is the customer’s failure to tell their insurer something that would have affected the acceptance of their insurance. The simple rule is “when in doubt, disclose it”.
Insurers are conscious that people who deliberately withhold information are a minority. This information has been prepared to help genuine customers understand duty of disclosure and to help overcome problems that can arise when, as a customer, you might say “I thought it didn’t matter”.
Disclosure and the law
When completing a new insurance application a person has a duty to disclose all material facts regardless of whether or not a specific question is asked.
A material fact can either be:
• Physical – Something about or affecting the property being insured, or
• Personal – Something about the person(s) arranging the insurance, or who are insured under the policy. This is sometimes called the moral risk.
Customers may have different personal views on what is material. Therefore the law provides for an objective “prudent underwriter” test. This means that an insurance company does not have to prove what the customer thought was material, but that their opinion of what is material is consistent with normal business practice in the insurance industry as a whole.
Sections 5 and 6 of the Insurance law reform act 1977 set out the legal test which is applied. If a customer fails to tell an insurer something, or they say something that is “substantially incorrect and material”, and that something “…would have influenced the judgement of a prudent insurer in fixing a premium or in determining whether he would take or continue the risk upon substantially the same terms” the insurer can deem the policy to be void. It is as if the insurance had never been arranged.
In addition to the specific questions which insurance companies know are always relevant (ie. Previous accidents or losses, and traffic and criminal convictions) insurance applications usually ask a question along the following lines: “Is there any other information likely to affect the acceptance of this insurance?”
Each case is treated on its merits. You should always disclose matters which the Courts have held to be material, even if a specific question has not been asked. These could include:
• Dishonest behaviour that would have resulted in a criminal conviction had it been discovered
• Financial difficulties, including pending or past bankruptcies Insurance being arranged after a business has ceased trading
• House and contents insured shortly before a person leaves New Zealand on a long term or permanent basis.
This list is not exhaustive, but it does illustrate the types of issues the customer can be expected to know and which may affect the insurer’s view of the physical or personal (moral) risk.
On renewal of your policy
A customer’s duty of disclosure does not end when the insurance application has been completed. When the policy is renewed, the customer is obliged to disclose anything that has happened in the preceding period which may affect the insurance. A good guideline is to disclose everything that would change the answers on an insurance application if a new application was complete. For example, a person with a previous “clean” record may be convicted of drink driving.
Members of the Insurance Council include a statement with all their renewal notices that reminds customers of this obligation.
What you can do to help yourself
When you complete a new insurance application, there are a few simple guidelines that can follow to help avoid the serious consequences of failing to tell the truth.
1. Always answer all the questions on the insurance application in full. Ask for clarification if you do not understand the question. Do not guess as you may end up not telling your insurance company something it needs to know.
2. Remember you have a duty to disclose all information that may affect the acceptance of the insurance, regardless of whether or not a specific question is asked.
3. Common questions for all types of insurance cover include previous losses and criminal convictions. If you are insuring a car it is likely your insurer will want to know who is going to drive it, if you or the other drivers have had any accidents or traffic convictions and whether the vehicle has been modified.
4. Remember the law does not distinguish between something you “thought didn’t matter” (an “innocent mistake”) and information deliberately withheld.
Disclose all previous losses (whether or not you were insured at the time).
Disclose all convictions or pending prosecutions for criminal offences, not just the offences involving property. For example theft or burglary, or general dishonesty (ie. cashing a stolen cheque). Some people think they should not have to discuss “personal” offences such as assault or drug use.
However, any offence may have a bearing on moral risk and this is just as important to the insurer as the physical risk.
When insuring a motor vehicle you should disclose:
• All traffic offences, including fines and non –driving related charges (ie driving a vehicle without a current warrant of fitness or registration), and
• All vehicle modifications that are not in accordance with the vehicle’s original specifications. This may include (but is not limited to) engine, body, paintwork, wheels and tyres, suspensions, and “internals” such as stereo, and seats.
Eamon O’Connor is a director of O’Connor Warren Insurance Brokers, which specialises in transport and logistics insurance. He will be sharing his expertise on risk management and insurance matters in DIESELtalk. He can be contacted at: firstname.lastname@example.org