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1 SECTION 18 OF THE MARINE INSURANCE ACT 1908 reads as follows:
18 Disclosure by assured
(1) Subject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance 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 void the contract.
(2) 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.
(3) In the absence of inquiry the following circumstances need not be disclosed, namely:
(a) Any circumstance which diminishes the risk:
(b) Any circumstance known or 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:
(c) Any circumstance as to which information is waived by the insurer:
(d) Any circumstance which it is superfluous to disclose by reason of an express or implied warranty.
(4) Whether any particular circumstance which is not disclosed is material or not is in each case a question of fact.
(5) The term circumstance includes any communication made to or information received by the assured.
2 While the 1908 Act applies only to marine insurance, it is well settled that, except for the reference in subsection (1) to constructive knowledge, s 18 states correctly the law applicable to all insurance contracts (see, for example, Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501, 518, 554).
3 The disclosure rule has its origin in the reciprocal duty of utmost good faith (uberrimae fidei) owed by and to each party to a contract of insurance. The business of an insurance underwriter is the assessment of risk. If there are circumstances affecting that assessment known to the insured, then the insured must disclose them. This is true in every case, but the reason for the rule becomes particularly plain when the insurer is not in a position to discover the circumstances affecting the risk. The ship the insurer is asked to insure may be on the high seas and unavailable for inspection, or the circumstance may be one that by its nature will not be known to the insurer – as, for example, where an insured seeks life cover after receiving a death threat. There can be no sensible quarrel with the basic fairness of an insured’s duty to disclose material circumstances.
4 The first problem with the existing law concerns what must be disclosed. The test of materiality is whether the circumstance is one which would influence the judgment of a prudent insurer in determining whether to accept a risk and if so on what terms. How can the ordinary consumer be expected to know what circumstances would influence the judgment of a prudent insurer? Doubtless there are plain cases where the insured should be expected to use common sense. An insured told recently by a doctor that he or she has only 12 months to live who seeks to obtain life insurance can reasonably be expected to know that an insurer would be interested to learn this prognosis. But there is much room for genuine misunderstanding, particularly in relation to what is known as “moral hazard”, a term used to describe the risks flowing from the insured’s lack of moral integrity. It will not always be apparent to a person seeking insurance cover that he or she is under a duty to disclose criminal convictions.
5 The insured will usually be totally ignorant of the niceties of insurance law. The second problem is that the insured’s disclosure duty is unaffected by the fact that he or she did not know and was not warned by the insurer of the nature or extent of the duty.
6 The third problem is allied to the second. An insurer is likely in a proposal form to ask specific questions of the prospective insured – about, for example, claims history, or health if the insured is seeking life or sickness cover or insurance in respect of medical costs. The law is quite clear that where an insurer chooses to ask the insured some questions the insured is not excused from volunteering matters that he or she is under a legal duty to disclose but that are outside the scope of the insurer’s questions (see, for example, Roselodge v Castle [1966] 2 Lloyd’s Rep 113; Quinby Enterprises Ltd (in liq) v General Accident Ltd [1995] 1 NZLR 736; Benjamin v State Insurance Ltd (unreported, HC, Auckland, 13 May 1997, CP 536/95)).
7 The fourth problem is that breach of the duty may have disproportionately harsh consequences for an insured. An insured’s failure to disclose a material circumstance allows an insurer to treat the contract of insurance as void from the start. So a person who took steps to insure against a loss which he or she then suffers may find that an insurer relies on non-disclosure of a material circumstance to cancel the contract with retrospective effect. Instead of being able to claim under the policy, the insured usually receives at most only a refund of the premiums paid under it. For example, in Quinby Enterprises Ltd (in liq) v General Accident Ltd [1995] 1 NZLR 736, the failure to disclose Mr Quinby’s criminal convictions and precarious financial position prevented his company recovering anything under a fire policy following a fire probably caused by an electrical fault. A non-disclosure allows an insurer to act this way even if disclosure of the material circumstance would not have induced the insurer to refuse outright to accept the risk (See, for example, Pan Atlantic Insurance Ltd v Pine Top Ltd [1995] 1 AC 501, 528–529). It is all or nothing.
8 In a letter dated 11 June 1997 from the Insurance and Savings Ombudsman Commission (ISOC) we were told that “non-disclosure complaints represent one of the largest single reasons for consumer dissatisfaction and complaint to the Insurance Ombudsman”. The letter also stated that between the office’s opening in January 1995 and April 1997 it had 129 resolved or pending complaints based on or involving non-disclosure, and knew of approximately 160 further disputes (not yet complaints). (See further the Annual Reports of the Insurance and Savings Ombudsman: (1995), paras 4.5 and 4.7; (1996), 7; (1997), 8–9; see also “Insurers urged to act openly”, National Business Review, 19 September 1997.) ISOC notes that as the law stands
there is an assumption that consumers know how insurance works, but in reality there seldom appears to be an appreciation that the information required goes beyond questions asked at inception and renewal.
ISOC also said that the Ombudsman notes a consistent theme in comments from insureds along the lines of: If they had wanted to know about that, why didn’t they just ask? ISOC provided the following example:
The Ombudsman has upheld a complaint where there was no question asked about the insured’s criminal history. The insurance product in question was targeted at a low socio-economic group and there was a broad statement in the declaration section which said:
“I/We declare that and warrant that:
1 No information has been withheld which is likely to affect the acceptance of this insurance.”
No specific questions about criminal convictions were asked. Although the proposal asked for disclosure of information likely to affect the acceptance of the insurance, without further amplification the insured in these circumstances did not appreciate that his convictions were relevant. The policy document was no more specific.
9 There have been calls for reform from New Zealand judges. In State Insurance v McHale [1992] 2 NZLR 399, Cooke P said that that case had
shown that the law of this country is in far from a clear or satisfactory state. In 1957 the Law Reform Committee in England recommended legislation as to disclosure adopting the test of what would have been considered material by a reasonable insured. The late Sir Brian MacKenna in Lambert [v Co-operative Insurance Society Ltd [1975] 2 Lloyd’s Rep 485] at 491 expressed his personal regret that the recommendation had not been implemented. Legislation on those lines has since been introduced in Australia. In effect I follow him in suggesting that it appears to be time that New Zealand did the same. (404)
Richardson and Hardie Boys JJ ended their judgment in McHale by noting
that the law in New Zealand as to materiality and the duty of disclosure is not satisfactory. It can lead to uncertainty and injustice. It is unfortunate that it was not addressed when the 1977 reforms were enacted. The test of the reasonable assured has much to commend it. The Australian legislation adopting that test, which we have already mentioned, could well be followed in this country. (415)
More recently, in Quinby Enterprises Ltd (in liq) v General Accident Ltd, Barker J observed that
[u]ncertainty and possible injustice may be caused by the current state of the law in New Zealand as enunciated. Legislation along the lines of the Australian Commonwealth legislation on the point was commended by Richardson and Hardie Boys JJ at the conclusion of their joint judgment in McHale’s case; no action has been taken by the New Zealand legislature. Therefore one must accept that, despite its potential harshness, the law in New Zealand on the insured’s duty of disclosure is generally as stated above. (740)
10 It was common ground shared by most if not all who made submissions on our draft report that the present law is defective in the respects referred to. Unfortunately there unanimity ceased. There is alas no agreement among law reformers who have considered this issue or among those who assisted us with submissions as to how to solve the problem. The available devices include:
– modify or abolish the right to cancel the cover retrospectively, or
– substitute for such right a right to abate the indemnity payment to which the insured would otherwise have been entitled to reflect the non-disclosure (in some cases this would reduce the indemnity payment to nothing).
In other words, substitute a right to claim damages from the insured (not available at common law: Legh-Jones, 1997, para 17.27) for the right to rescind the contract.
Although a perfect solution is likely to elude the reformer it is possible to devise a rule that holds the balance fairly between insurer and insured. This rule should avoid both excessive interference with existing commercial practices and the introduction of avoidable uncertainty.
11 The Law Commission (England and Wales) issued a working paper in 1979 and a final report in 1980: Insurance Law: Non-disclosure and Breach of Warranty. The report represented a marked shift away from the working paper proposals in a direction more acceptable to the insurance industry. It has not been followed by legislation. The principal proposals of the working paper were:
(d) Where there is no proposal form the insured should be under a duty to disclose those facts which a reasonable man in his circumstances would consider to be material in the sense that they would influence the judgment of a prudent insurer in accepting the risk or fixing the premium. The insured should however only be under a duty to disclose facts which he either knows or which a reasonable man in his circumstances ought to know.
(e) Where a proposal form has been completed by the insured the insurer should, subject to (i) below, be taken to have waived the insured’s duty in regard to any fact outside the scope of the questions asked.
(i) A residual duty should be imposed on the insured not deliberately to conceal facts which he knows to be material and of which he has actual knowledge even if they are outside the ambit of all the questions asked in the proposal form. In the event of a breach of this duty by the insured the insurer should be entitled to repudiate the policy and reject any claim that has arisen. The insurer should be required to give clear and prominent notice of this duty in the proposal form and to warn the insured of the consequences of breach.
(j) Insurers should not be entitled to ask a “general question” such as “Are there any other facts which you, as a reasonable insured, consider would influence the judgment of a prudent insurer in fixing the premium or accepting the risk?” An insured should be entitled to ignore any such question and insurers should be deprived of any remedy in respect of false information supplied in answer to any such question. However, insurers should be entitled to ask specific questions on any topics which they regard as material. (198–201)
12 In the report the recommendations were as follows. In lieu of (d) in the working paper the Commission proposed:
10.9 The duty of disclosure should be retained but it should be modified along the lines suggested in the Fifth Report of the Law Reform Committee [Conditions and Exceptions in Insurance Policies (1957), Cmnd 62]. A fact should be disclosed to the insurer by an applicant if:—
(a) it is material in the sense that it would influence a prudent insurer in deciding whether to offer cover against the proposed risk and, if so, at what premium and on what terms; and
(b) it is either known to the applicant or it is one which he can be assumed to know; for this purpose he should be assumed to know a material fact if it would have been ascertainable by reasonable enquiry and if a reasonable man applying for the insurance in question would have ascertained it; and
(c) it is one which a reasonable man in the position of the applicant would disclose to his insurers, having regard to the nature and extent of the insurance cover which is sought and the circumstances in which it is sought.
In lieu of (e) and (i) the Commission proposed:
10.13 The duty to volunteer information in addition to answering the questions in the proposal form should be retained. The duty would be the same as the duty of disclosure when there is no proposal form.
10.14 All proposal forms should contain certain clear and explicit warnings to the insured, presented in a prominent manner. The insured should be warned about the standard of answer to the questions that is required of him, and of the existence and extent of his duty to volunteer information, apart from answering the questions, and of the consequences of the failure to fulfil either of these obligations.
There was no equivalent provision to (j).
13 We disagree with the proposals of the final paper which seem to us to fall short of comprehensively correcting the problems of the existing law.
14 Founding the duty of disclosure upon what a reasonable applicant would disclose is not a workable answer to the problems discussed in paras 4–7 as to an insured’s ignorance of the obligation. The heavy reliance in 10.9(b) and (c) on tests of reasonableness seem to introduce unnecessary uncertainty. The problem of the disproportionally harsh penalty is also not addressed.
15 The Australian Law Reform Commission issued a working paper in 1978 and a final report in 1982: Insurance Contracts. The discussion paper proposed that innocent non-disclosure not be a ground for avoidance of a policy, and instead that insurers’ remedies should be confined to cases of an insured wilfully concealing material facts. But this proposal was criticised for the reason that a concealment test might be difficult to prove and so might make dishonesty more difficult to detect. A commentator suggested that the test of the innocence of a non-disclosure should be what a reasonable insured would have done in the circumstances. Despite considering that the difficulty of proving concealment could be exaggerated (because concealment could often be readily inferred from the nature of the undisclosed circumstances), the Commission ultimately rejected the concealment test.
16 The 1982 report also considered modifying the duty of disclosure so that the test of materiality depended on the judgment not of the prudent insurer but of the reasonable insured. The Commission considered, however, that the duty of utmost good faith was in any case owed by the particular insured rather than a hypothetical reasonable insured. Consequently, a “reasonable insured” test would in some cases be too stringent, and in other cases too lenient. By contrast, if the test became too subjective in nature, an insurer’s remedies would be restricted unfairly.
17 The Commission concluded that the insured’s duty should be retained but modified. An insurer should, before a contract is concluded, be obliged to warn an insured of the duty of disclosure. An insurer who did not comply with this recommended duty would be unable to rely on non-disclosure for a remedy unless that non-disclosure was fraudulent. An insured should be required to disclose facts which he or she knew, or which a reasonable person in the insured’s circumstances would have known, to be relevant to the particular insurer’s decision whether or not to accept a risk and if so on what terms. The Commission considered that this formulation of the duty was more consistent with the limits of the insured’s duty to exercise utmost good faith. The Commission also considered that (like the test in the English Commission’s working paper) the formulation would achieve a fairer balance between insured and insurer than would the more objective test recommended in the English Commission’s report. Finally, the Commission recommended that an insurer should be deemed to have waived disclosure in relation to matters that they questioned an insured on in proposal forms that the insured failed to answer or gave an obviously incomplete or irrelevant answer to.
18 The Commission considered that an insurer’s right to avoid from the start a contract of insurance was disproportionate to the harm caused by an insured’s non-fraudulent non-disclosure and so should be limited. The Commission suggested that a more proportionate response to non-fraudulent non-disclosure would result if insurers’ right to avoid a contract for non-disclosure was replaced by a right to damages. The Commission considered that assessing such damages could, however, be difficult.
19 The 1982 report considers and evaluates four ways of assessing damages for non-disclosure. Two methods (one English, the other European Union–French) were based on the notion of “proportionality”, under which the insured would bear the loss resulting from the greater cost to the insurer of the increase in risk caused by the non-fraudulent non-disclosure. The Commission indicated that these two approaches had been criticised as creating hypothetical calculations that were difficult to quantify and in some cases unrealistic. For example, an insurer might have responded to the disclosure of a matter by imposing a condition or excess rather than merely increasing a premium payable.
20 The third method of assessment required a “causal connection” between non-disclosure and the insurer’s loss, so that the insured could recover under a policy only where, and to the extent that, a non-disclosure caused a loss. The Commission identified two difficulties with such a method of assessing damages for non-disclosure. The first was that an insured’s duty is to disclose circumstances existing before a contract is concluded, and that these circumstances may not persist and cause a later loss. The second difficulty was that the causal connection test did not deal with cases where the undisclosed circumstances would simply have caused the insurer to decline to accept a risk.
21 The Commission ultimately recommended the fourth “common law” method used to assess damages for misrepresentation: damages for a breach of the duty would simply depend on what the insurer would have done had it known the true facts. The Commission considered that an insurer acting in utmost good faith could rely on a non-fraudulent non-disclosure to recover only the loss which it actually suffered as a result of the non-disclosure. Consequently, an insurer’s right to cancel retrospectively a contract of insurance for non-fraudulent non-disclosure should be abolished. The Commission recommended that an insurer’s right to cancel a policy from the start should, however, remain in cases of fraudulent non-disclosure. The insurer’s other remedies (if any) should depend on the response it would have made if it had known the undisclosed material circumstances. In particular, if the insurer would have responded by:
22 The Insurance Contracts Act 1984 (Aust) received Royal Assent on 25 June 1984, and most of its provisions came into operation on 1 January 1986. With one exception the Australian Federal Parliament appears have enacted, without material alteration, the provisions of the draft Act recommended in the 1982 report. The Federal Parliament departed from the Commission’s recommendations by adopting, in s 21(1)(b) of the Act (which concerns matters an insured is deemed to have known and should therefore have disclosed), a more objective test. The Commission’s draft s 21(1)(b) required an insured to disclose matters that “a person in the circumstances of the insured” could be expected to know were relevant to the insurer’s decisions. By contrast, the enacted s 21(1)(b) refers to matters that “a reasonable person in the circumstances” could be expected to know were relevant to the insurer’s decisions. The relevant sections of the Australian statute are set out in appendix C.
23 Provisions like those in the Australian Act are simpler than those proposed in England and would help solve some of the problems of the existing law. But we would prefer not to adopt unaltered the Australian provisions because:
24 In all provinces and territories, except Quebec, non-disclosure may be relied on to avoid a fire policy only if it is fraudulent (ie, if the insured knew the facts that ought to have been disclosed and had actual knowledge that they were relevant to the underwriter’s decision). Comparable provisions apply in all provinces and territories in the context of automobile insurance (Brown, 1997, 112–118).
25 We have considered whether an insured’s duty of disclosure should be abolished. Without the duty an insurer could by questions or inquiries (in proposal forms or otherwise) identify, and obtain from an insured, information necessary to assess accurately the risk to be accepted. As Kirby P observed in Barclay Holdings (Australia) Pty Ltd v British National Insurance Co Ltd (1987) 8 NSWLR 514:
In the real world of insurance cover, it is more appropriate to require insurers, who control such matters, to pay more attention to the language of their proposal forms than to extend the scope of the obligation of insureds to volunteer the whole history of their insurance-related past, lest some item in it might play a part, however minor, in the decision-making process of an insurance officer, however junior. (518–519)
In Gate v Sun Alliance (1995) 8 ANZ Ins Cas 75.806 Richardson J observed of the existing law that
good faith obligations apply to insurers as well as insured. It is at least arguable that . . . those insurers concerned about moral risk should put their cards on the table and signal that fair and accurate answers to all questions in the proposal may not discharge the proponent’s disclosure obligations. (75.817)
Does not the insurer’s duty of good faith therefore require an insurer – by asking appropriate questions of an insured – to notify the insured of the information required to assess accurately a risk to be accepted? Equally, does not an insured’s reciprocal duty of good faith require the insured to answer correctly an insurer’s questions? If these limits to the duty of good faith are accepted then the law could more simply provide an insurer with a remedy only for any incorrect responses which could constitute misrepresentations.
26 In the report of the Law Commission (England and Wales), Insurance Law: Non-disclosure and Breach of Warranty (paras 4.32–4.40), the Commission rejected abolition, though not limitation, of the insured’s duty of disclosure, with insurers relying instead on posing questions because
A fourth argument against abolition might be added – that self-regulation deals or could deal adequately with the problems of the existing law of non-disclosure.
27 We reject the first argument against abolition – that it would be impossible to draft questions covering all risks. An example often given is that it would be unrealistic for an insurer to ask a person seeking to insure his or her life whether or not he or she had received a death threat. The Law Commission in its 1980 report posed the question:
Suppose that prospective life insured’s life has been threatened. If there were no duty of disclosure he could then apply for life insurance, knowing this fact and knowing it to be material, and could say nothing about it unless it was asked, which would be unlikely to be the case. (para 4.32)
But this example would be met by a question to the insured such as “Do you know of any reason particular to you why you may not attain your normal life expectancy?”
28 We doubt too the second argument – that more numerous and detailed questions would impose costs on insurers and require higher premiums on all insureds for no better purpose than protection against a few defaulters. Disputes resulting from insurers declining to indemnify on the grounds of non-disclosure may well increase premiums as much as (if not more than) would more detailed and complex preliminary inquiries of insureds. The Australian Law Reform Commission observed in its Insurance Contracts report over 15 years ago that
[m]arketing methods are adopted which increase the risk of non-disclosure. Where intermediaries are not involved, there is no-one to bring the insured’s obligation to his attention. For reasons of cost and competition, proposal forms are often kept to a minimum. Relevant questions concerning the moral risk are not asked in case they should embarrass a prospective insured. The adoption of direct marketing techniques has increased pressure for brevity and simplicity. Within the foreseeable future, insurance, like many goods and services, may be purchased by means of computer-based communications systems. All these developments increase the risk of occasional innocent non-disclosure by an unsuspecting member of the public. (ALRC 20, para 183)
29 We accept, however, the third argument – that in effect substituting an obligation to answer questions correctly for an obligation to disclose would interfere unduly with existing commercial practices under which an insurer agrees to go on risk either immediately or sufficiently early after cover is sought to make impractical obtaining answers to questions asked. Our recommendation is tailored to meet this difficulty.
30 Considering the fourth argument, we note and commend as impressive the initiative and efficacy of the Insurance and Savings Ombudsman Scheme.1 We note that the Fair Insurance Codes (periodically revised) and Ombudsman’s jurisdiction provide real help to an insured, especially a private consumer. The relevant portion of the current code reads:
Duty of disclosure
Members will:
“a material fact is one which may influence a prudent insurer in deciding whether or not to insure you, and if so, at what terms and conditions and for what premium.”
But there is no real substitute for voluntary codes being underpinned by a sound legal system. First, the liquidator of an insurance company would be bound to reject all invalid claims whatever a fair insurance code might say. Secondly, the Ombudsman in any event makes it clear that disputes are reseolved in accordance with legal principles.2 A survey of British experience suggested that in the area of non-disclosure the benefits of self-regulation may be more perceived than real: Hamilton, 1995; see also the conclusions of Clarke, 1996, that consumers’ protection depends on code promulgators choosing to deliver benefits that codes promise (731). The 1996 Annual Report of the Australian self-regulator, General Insurance Inquiries and Complaints Ltd, criticised proposals drafted to rely heavily on an insured’s general duty of disclosure (Insurance Contracts Act 1984 (Aust) s 21), and recommended that insurers ask in their proposals the questions to which they need answers, precisely what we recommend in this report.
31 Any right that an insured’s non-fraudulent non-disclosure gives the insurer to cancel the contract from its inception (that is with retrospective effect) should have a time limit. That time limit would mean the right was exercisable only within the period that begins with the risk first attaching and ends ten working days later. Any right that the non-disclosure gives the insurer to cancel a concluded contract prospectively is unaffected. The recommendation would be implemented by the draft section in para 32 (see pages 59–81 for our complete draft Insurance Law Reform Amendment Act and commentary). So that related provisions on mis-representation and non-disclosure can be found easily together, and to avoid repeating some general provisions, the draft section has been prepared as a new section 7A of the Insurance Law Reform Act 1977 and uses language consistent with that statute. The following matters in the draft call for comment:
32 The new section 7A that we recommend is as follows (see pages 59–81 for our complete draft Insurance Law Reform Amendment Act and commentary):
7A Non-disclosure
(1) Any right of an insurer to cancel a contract of insurance by reason of the failure of an insured to disclose a fact to the insurer before the contract is concluded may only be exercised, if the cancellation is to take effect from a date earlier than the date on which it is notified to the insured, within 10 working days of the risk first attaching.
(2) This section does not apply
(a) to contracts of reinsurance; or
(b) if the failure to disclose a fact is blameworthy; or
(c) if, before the contract is concluded, the insured answers a specific question expressly put by the insurer in a way that is substantially incorrect because of the failure to disclose a fact.
(3) A failure to disclose a fact is not blameworthy unless the insured knew, or in the circumstances a reasonable person could have been expected to know, both the undisclosed fact and that disclosure of the undisclosed fact would have influenced the judgment of a prudent insurer in accepting the risk or the terms of such acceptance.
(4) For the purposes of subsection (2)(c),
(a) a question is not a specific question expressly put by the insurer if, in order to answer it, the insured must decide whether a fact is or might be relevant to the decision of the insurer to accept the risk or the terms of such acceptance; and
(b) an insured’s answer to a question is substantially incorrect only if the difference between what is stated and what is actually correct would have been considered material by a prudent insurer.
(5) This section has effect despite any warranty by the insured that the insured’s disclosure obligation has been complied with.
(6) For the purposes of subsection (1),
(a) a reference to a risk first attaching does not include the attaching of a risk on the issue of a policy replacing interim cover or on the reinstatement or renewal of a policy; and
(b) working day means a day of the week other than
(i) a Saturday, a Sunday, Waitangi Day, Good Friday, Easter Monday, Anzac Day, the Sovereign’s birthday, and Labour Day; and
(ii) a day in the period commencing with 25 December in a year and ending with 2 January in the following year; and
(iii) if 1 January falls on a Friday, the following Monday; and
(iv) if 1 January falls on a Saturday or a Sunday, the following Monday and Tuesday.
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