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

1.11 The 1906 Act therefore imposes heavy duties on those applying for insurance.
They are required to volunteer information to the insurer about anything that
would influence a prudent underwriter’s assessment of the risk. If the policyholder
fails in this duty, the insurer is entitled to refuse all claims. It can “avoid the
policy”, which means that it can treat the policy as if it never existed. Similarly, the
insurer can avoid the policy if the policyholder makes a material representation of
fact that turns out to be untrue. It does not matter that the policyholder had no
reason to know that the statement was untrue.
1.12 This leads to three difficulties:
(1) The duty of disclosure may operate as a trap. Many insureds, particularly
consumers and small businesses, are unaware that they have a duty to
disclose. It may not occur to them to volunteer information for which they
have not been asked. Even if they do realise they have such a duty, they
may have little idea of what would be relevant to an insurer.
Lambert v Cooperative Insurance Society Ltd 5
In 1963, Mrs Lambert took out a policy of insurance to cover the family’s
jewellery with the Cooperative Insurance Society (the Cooperative). She
renewed the policy every year.
Nine years later, she made a claim for loss of the jewellery. The Cooperative
refused to pay her claim on the grounds that Mrs Lambert had not disclosed
her husband’s previous criminal convictions. The Cooperative had never
asked Mrs Lambert any questions about criminal convictions, although it had
had an opportunity to do so when Mrs Lambert first filled out the application
form and every year at renewal.
The Court of Appeal reluctantly concluded that the Cooperative was entitled
to refuse to pay Mrs Lambert’s claim, despite the fact that she did not realise
that the Cooperative wanted to know about previous convictions.
The Court said the case showed the unsatisfactory state of the law. Mrs
Lambert “is unlikely to have thought that it was necessary to disclose [this]
fact… She is not an underwriter and has presumably no experience in these
matters. The defendant company would act decently if, having established
the point of principle, they were to pay her. It might be thought a heartless
thing if they did not.”
(2) Policyholders may be denied claims even when they act honestly and
reasonably. An insured who misunderstands a question on the proposal
form, and reasonably thinks that some information is not relevant to the
insurer, may find that the insurer can avoid the policy. The same is true if
the insured has given factual information that is inaccurate, or only partly
accurate, even though the insured honestly and reasonably believed that
what they said was correct.
5 [1975] 2 Lloyd’s Rep 485.
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