The Lawyers Weekly - August 20, 2010

Reforming the disclosure duty in
INSURANCE
CONTRACTS
New forms of marketing insurance
products rely less on face to face deal-
ings, and increasingly on impersonal
interactions such as online applica-
tions. There is a corresponding increase
in potential for breach of the disclosure
duty when prospective insureds com-
plete application forms without the
assistance of intermediaries or the
opportunity to ask questions before
submitting proposals for insurance.
This emerging reality for marketing
insurance products, coupled with the
insurer’s right of nullification of the
insurance contract in the event of
breach of the disclosure duty, raises to
the question of whether the prudent
insurer test should still be used to
determine materiality. Adoption of a
prudent insured standard will not only
facilitate access to insurance, but will
also better reflect the reasonable
expectations of consumers.
Effective risk assessment by insurers
is important for underwriting deci-
sions; it ensures proper classification of
prospective insureds, for example as
standard or sub-standard risks, and
determines whether an insurer will
provide coverage and on what terms.
Insurers’ ability to adequately assess
proposed risks depends to a large extent
on information disclosed to them by the
applicant for insurance that the insurer
has no other means of knowing.
Online applications increase risk
The rationales for the disclosure
duty include avoiding moral hazards
and preventing insurers from being
deluded to provide coverage they would
otherwise not have assumed had the
insured fully disclosed all material facts
at the pre-contractual stage. A pro-
spective insured may not have deliber-
ately withheld information material to
the proposed risk with the intention of
misleading the insurer. Failure to dis-
close may be because the insurer did
not specifically request the information
in question, or the prospective insured
was unaware of either the obligation to
provide information even if not directly
asked about a particular condition and/
or the relevance of that information to
the insurer’s underwriting decision in
the circumstances.
Meanwhile, determination of
whether particular information is
material to the assessment of a pro-
posed risk depends on how prudent
insurers would view that information,
specifically if it would have caused a
reasonable insurer to have acted differ-
ently, for example by declining to insure
the risk or doing so on different terms.
It may take a person with some know-
ledge of the insurance system to appre-
ciate the materiality of particular infor-
mation for underwriting. Such
knowledge may not be readily available
or attributable to the average person
seeking to obtain insurance.
The effect of the prudent insurer test
is to hold many prospective insureds to
a normative standard that they cannot
realistically be expected to live up to.
This is like holding the average person
to the standard of experts or profes-
sionals in determining the appropriate
standard of care in negligence cases. It
is therefore questionable whether
determinations of materiality should
continue to be made solely from an
insurer’s perspective, without regard for
how a similarly situated reasonable
insured would have behaved or viewed
the information in question as relevant
for insuring the proposed risk.
The law should adopt a modi-
fied objective test that focuses
on what a reasonable
See Disclosure Page 10
ELIZABETH ADJIN-TETTEY
of inadvertent disclosure breaches

ALEX SLOBODKIN / ISTOCKPHOTO.COM

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