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

(2) the matter was either one which the insured realised was relevant, or
which a reasonable person in the circumstances would have realised
was relevant.
5.63 The first limb represents current law. The second limb was effectively a
replacement for the “materiality” test currently set out in section 18(2) of the 1906
Act. This states that a fact must be disclosed if it “would influence the judgment of
a prudent underwriter in fixing the premium or determining whether he will take
the risk”.
5.64 As we explained in Part 4, some respondents found the way we formulated the
test in Issues Paper 1 confusing. Below we use slightly different words to make
the test clearer. However, we think the test is right in substance. As the Law
Commission argued in 1980, the ambit of the duty of disclosure should be
considered from the point of view of a reasonable insured, not a prudent
underwriter.
5.65 The test is designed to meet the long-standing criticism that the current duty of
disclosure is too stringent and produces something of a trap for policyholders. As
the Law Commission said in 1980:
an honest and reasonable insured may be quite unaware of the
existence and extent of this duty, and even if he is aware of it, he may
have great difficulty in forming any view as to what facts a prudent
underwriter would consider material. 19
The “prudent insurer” test does not fit with the reasonable expectations of the
business insured. The insurer should not be able to rely on non-disclosure of a
fact unless the reasonable insured would have realised that it would be a fact that
the insurer would take into account.
5.66 The same issue can arise in cases of alleged misrepresentation. Suppose the
insurer asked the proposer to list all uninsured losses, without specifying what
types of loss should be included. The proposer may reasonably think that an
insurer would not want to know about minor and routine losses which would not
be covered by the policy. At present, however, the law does not ask what a
reasonable insured should have realised was relevant, but asks what a prudent
insurer would want to know. 20 The test we have suggested for non-disclosure
should also apply to misrepresentations in these circumstances. The insurer
should not have a remedy unless the reasonable insured would have realised
that the inaccuracy or omission was relevant to the insurer, or it is shown that the
particular insured knew that the fact was relevant.
19
Insurance Law, Non-Disclosure and Breach of Warranty (1980) Law Com No 104, para
9.3.
20 Marine Insurance Act 1906, s 20(2).
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