Misrepresentation, Non-Disclosure and Breach ... - Law Commission

Thus if a business insured ought to know the material circumstance, it has a duty
to disclose it. If it fails to do so, the insurer may avoid the policy. The presumption
appears to be irrebuttable, in the sense that it is no answer for the insured to
prove that in fact it did not know the material circumstance.
5.37 We do not think it would be appropriate to retain this irrebuttable presumption in
the scheme we propose below. This is for two reasons.
5.38 First, we are asking whether the law should distinguish between “deliberate or
reckless” behaviour and negligent behaviour, so that an insurer only has an
automatic right to avoid where the insured has behaved in a way that is not
honest. If this approach were to be adopted, it would often be necessary to
decide whether the proposer’s non-disclosure or misrepresentation was
“deliberate or reckless”, or merely negligent. Part of our proposed test of whether
an action was “deliberate” would involve asking if the proposer knew the truth.
5.39 Given that section 18(1) provides that business insureds are deemed to know
what they ought to know in the ordinary course of their business, the effect of the
section under our proposed scheme might be unfortunate. A business insured
that failed to disclose a matter that they did not know, but ought to have known in
the ordinary course of their business, might be treated as if they knew the
information and had acted deliberately in failing to disclose it. We think that would
be inappropriate.
5.40 Secondly, we think it would be better to replace the “deemed to know” test under
section 18(1) with a simple test of whether or not the insured who was unaware
of a material fact, and therefore did not disclose it, was reasonable or negligent.
8 See paras 2.35 and 2.36 above.
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