What is ‘Duty of Disclosure’ and why is it so important?

At a Glance: Duty of Disclosure

• The Core Risk Insurance is a contract based on “utmost good faith.” This means that if a business fails to disclose a “material fact”—something that would influence an insurer’s decision to provide cover or set the premium—the policy can be invalidated. In such cases, the insurer may legally refuse to pay a claim, potentially leaving the business to face a catastrophic loss alone.
• Resilience Strategy Since the Insurance Act 2015, commercial policyholders have a duty to make a “Fair Presentation of Risk.” This requires a “reasonable search” for information within your business. You must ensure that all relevant facts are shared in a way that is “clear and accessible,” explicitly avoiding “data dumping”—the practice of providing excessive, unorganized information to hide important details.
• Risk Mitigation: The duty of disclosure is not just for when you first buy a policy; it is continuous. You must update your insurer at renewal, when you change your business activities, or if your circumstances alter mid-term (such as moving premises or a change in senior management). If you are ever unsure whether a fact is important, the safest strategy is always to disclose it.
• Pro-Tip: “Senior Management” knowledge is key. Under the law, your business is deemed to know anything known by the people who make high-level decisions. To ensure a fair presentation, create a formal internal process where directors and department heads review and sign off on the information provided to your broker.

It can be confusing when it comes to both consumer (personal) and non-consumer (business) insurance as to what you are required to disclose, and when and why it is important to do so correctly and sufficiently. This is also more commonly as the duty of disclosure.

Consumer vs Non-Consumer: Duty of Disclosure

As a policyholder, it is important that you are aware of the issues and implications that could arise if the information you provide is not accurate. Under English law, there are noticeable differences between consumer (personal) and non-consumer (business) insurance contracts. The Consumer Insurance (Disclosure and Representations) Act 2012 provides more protection and support to consumers than businesses (who are expected to provide information that may not be specifically requested). Consumers, though, must still take reasonable care to ensure the information they provide is accurate and honest, in response to the questions asked of them.

With this in mind, it is important to remember to read thoroughly the documents provided to you at both renewal and when you first join us as a client. With respect to business insurance contracts, you are required and expected to make a full disclosure to your insurance broker or underwriters without necessarily being asked about each and every material circumstance.

Read: The Insurance Act – what it means for businesses.

What matters do not need to be disclosed?

Non-consumer (commercial) Insurance:

• Matters of Law
• Factors that lessen the risk
• Facts known by the insurers and those which the insurers ought to know
• Information that is waived by the insurers
• Facts which the proposer does not know (unless they ought to know)
• Convictions that are ‘spent’ under the Rehabilitation of Offenders Act 1974 (as amended by the Legal Aid, Sentencing and Punishment of Offender Act 2012)

(CII Study Text: Insurance Law 2021)

Position at renewal

When entering into an insurance contract and declaring information, it is important to understand that your duty of disclosure recurs at renewal. Consequently, when renewing a policy, you will once again have a duty to declare any changes to the risk or new material facts that have come about over the policy period. If no such declarations are made, insurers will assume that all facts remain unchanged; this could leave you open to issues with claim payments and cover, should something be uncovered that has not been declared.

There are only two situations in which you would be required to disclose changes to material facts during the length of the insurance contract, which is known as ‘continuing duty of disclosure’:

• Changes in the Contract – where there is an agreed change to the contract
• Increase Risk Clause – if it is specifically stated within a clause in the policy, that you are required to inform insurers of any material facts that change or increase the risk

Implications for a failure to disclose – non-disclosure

The implications for failing to disclose material facts is very much dependent on the type of contract and whether it is consumer or non-consumer.

Consumer: If it is proven that a consumer has failed to exercise reasonable care to not make a misrepresentation then insurers can follow one of two courses of action:

• If they would not have entered into the contract, had been aware of the true circumstances, they may avoid the contract and refuse all claims but would have to return premiums paid up to that point
• If they would have accepted the contract but on alternative terms, the contract is to be treated as if it were entered into on those terms (e.g. at a higher premium or with a condition or warranty potentially added)

Non-Consumer: The insurer’s course of action (remedy) will depend on whether the policyholder’s action is considered deliberate or reckless.

• If actions of the insured were found to be deliberate or reckless, insurers are entitled to avoid the policy from inception and retain any premiums paid
• If found not to be deliberate or reckless, remedies would mirror those of consumer insurance, with the addition that if a higher premium should have been charged, they can reduce any claims payments proportionately.

Key Points to Remember with the Duty of Disclosure

• It is essential when applying for insurance that the information you are providing is accurate, as failure to comply could result in cancellation of the cover or no claims payments being made
• You are legally required to make a fair representation by disclosing all information and circumstances relevant to the risk you want covering
• It is important to read through documents provided at both renewal and when you are a new customer, thoroughly, to ensure that the information you have provided is accurate
• When renewing a policy, you will once again have to declare any changes to the risk or new material facts (your duty of disclosure) that have come about over the policy period. Again, failure to comply could result in cancellation of the cover or no claims payments being made, should something be uncovered that has not been declared.

**Moral Hazard: this refers to the attitude or conduct of people that could increase the possibility of a loss. For example, an employer’s indifference to Health & Safety regulations and protocol, poor administration could indicate a poorly run business which could imply a higher risk, a nonchalant attitude towards insurance or only covering for the bear minimum may also be a moral hazard, equally excessive over insurance could be considered a poor moral hazard. These are hazards that could increase the risk for insurers.

Physical Hazard: this refers to a physical condition that could increase the possibility of a loss. For example, the material a building is made of could make it more susceptible to fire, the lack of security at a property or the reputation of its location could make it more susceptible to theft or vandalism, the lack or servicing to plant or machinery could make them less safe and this increase the chance of a liability claim. These are hazards that increase the risk and could be identified with inspection of the risk.

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