EFFECT OF NON-DISCLOSURE OF FACTS IN INSURANCE

EFFECT OF NON-DISCLOSURE OF FACTS IN INSURANCE

Where there has been non-disclosure, whether innocent or fraudulent, sometimes called concealment the

contract is voidable at the option of the insurer. This is the position where the matter is not dealt with by a

policy condition. The ground is usually covered by a policy condition which may do no more than state the

common law rule.

REPRESENTATIONS

Representations are statements made during the negotiations with the object of inducing the other party to

enter into the contract: they must be distinguished from statements which are introduced into the contract,

and upon the truth of which the validity of the contract is made to depend. Representations may be as to a

matter of fact, and, if material must be substantially correct.

Where there has been misrepresentation it is necessary to decide whether it was fraudulent or innocent. A

fraudulent misrepresentation is one which was known to be false ; or which was made without belief in its

truth, or recklessly, careless whether it was true or false. Fraudulent misrepresentation of a material fact

entitles the insurer to avoid the policy.

Every material fact which the insured ought to know in the ordinary course of business must be stated; 

General Principles and Concepts of Insurance 

innocent misrepresentation of such a fact would entitle the insurer to avoid the policy. This must be so,

otherwise the duty to disclose material facts and to state them accurately would not be correlative.

ACTIVE AND PASSIVE DUTY OF DISCLOSURE

The question here is what method is used to acquire the material information.

Two different approaches are used in this respect. The first - an “active” duty of disclosure, and the second

approach is characterized as a “passive” duty of disclosure. The former argues that the duty to assess what

information is material for the insurer rests with the person effecting the insurance. On the other hand, a

passive duty of disclosure implies that the insurer will have to define what information is material through a

questionnaire. A passive duty of disclosure implies that information not asked for is not material.

The common law systems seem mainly to apply an active duty of disclosure, but elements of a passive duty

of disclosure is found in some countries in the form of proposals.

MORAL HAZARDS

Moral hazard is a situation in which one agent decides on how much risk to take, while another agent bears

(parts of) the negative consequences of risky choices.

The person who buys insurance is protected against monetary damages. Therefore, he may engage in more

risky behavior than if he has to bear the risk himself.

Moral hazard can arise in the insurance industry when insured parties behave differently as a result of having

insurance. There are two types of moral hazard in insurance: ex ante and ex post. Ex-Ante Moral Hazard -

Ed the Aggressive Driver: Ed, a driver with no auto insurance, drives very cautiously because he would be

fully responsible for any damages to his vehicle. Ed decides to get auto insurance and, once his policy goes

into effect, he begins speeding and making unsafe lane changes. Ed's case is an example of ex-ante moral

hazard. As an insured motorist, Ed has taken on more risk than he did without insurance. Ed's choice reflects

his new, reduced liability.

Ex-Post Moral Hazard - Marie and Her Allergies: Marie has had no health insurance for a few years and

develops allergy symptoms each spring. This winter she starts a new job that offers insurance and decides to

consult a physician for her problems. Had Marie continued without insurance, she may never have gone to a

doctor. But, with insurance, she makes an appointment and is given a prescription for her allergies. This is

an example of ex-post moral hazard, because Marie is now using insurance to cover costs she would not

have incurred prior to getting insurance.

Insurers try to decrease their exposure by shifting a portion of liability to policyholders in the form of

deductibles and co-payments. Both represent the amount of money a policyholder must pay before the

insurance company's coverage begins. Policyholders can often opt for lower deductibles and co-payments,

but this will raise their insurance premiums.

EFFECT OF NON-DISCLOSURE

Where there has been non-disclosure, whether innocent or fraudulent, sometimes called concealment the

contract is voidable at the option of the insurer. This is the position where the matter is not dealt with by a

policy condition. The ground is usually covered by a policy condition which may do no more than state the

common law rule.

REPRESENTATIONS

Representations are statements made during the negotiations with the object of inducing the other party to

enter into the contract: they must be distinguished from statements which are introduced into the contract,

and upon the truth of which the validity of the contract is made to depend. Representations may be as to a

matter of fact, and, if material must be substantially correct.

Where there has been misrepresentation it is necessary to decide whether it was fraudulent or innocent. A

fraudulent misrepresentation is one which was known to be false ; or which was made without belief in its

truth, or recklessly, careless whether it was true or false. Fraudulent misrepresentation of a material fact

entitles the insurer to avoid the policy.

Every material fact which the insured ought to know in the ordinary course of business must be stated; an