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

Misrepresentations that are not relevant to the risk
2.32 We end this section with a point of clarification. In most cases the issue is
whether a particular fact was or was not relevant to the risk – that is, to the
likelihood and magnitude of an insured loss. There has been a recent suggestion
- without a decision being reached - that a fact is not material unless it goes to
the risk insured: 27
The non-payment of premium is either material on its own or not, and
since it seems to go to the owner's credit risk, and not to the risk
insured, I would have thought it was not material. 28
However, there is conflicting earlier authority, 29 and it is difficult to reconcile the
suggestion with the clear wording of section 20(2) of the 1906 Act. The 1906 Act
applies to failures to disclose or misrepresentations of facts that are material.
What is material is defined in terms not as to what is relevant to the risk (that is
the likelihood that the insured will suffer a loss and its likely size) but what “would
influence the judgment of a prudent insurer in fixing the premium, or determining
whether he will take the risk.” 30 A failure to disclose or a misrepresentation about
the insured’s credit record is within the section if it would influence a reasonable
insurer’s decision whether or not to accept the risk.
Renewals
2.33 With the exception of some types of life insurance, most insurance policies are
for a fixed term. Typically this is one year, at the end of which the policy falls due
for renewal. Although the process is referred to as renewal, the legal position is
clear: a new contract is formed. The law of misrepresentation (and, as we shall
see, non-disclosure) therefore applies to renewals in the same way as it applies
to fresh applications for insurance.
NON-DISCLOSURE
The obligation to disclose material facts
2.34 The duty of utmost good faith puts the potential parties to a contract of insurance
under an obligation to disclose all material facts, subject to the exceptions
discussed below. Under current law the insurer may avoid the contract for nondisclosure
at the time of an application or renewal even if it asked no questions at
all.
2.35 Section 18(1) of the 1906 Act expresses the obligation on applicants in the
following terms:
27
North Star Shipping Ltd v Sphere Drake Insurance plc [2006] EWCA Civ 378, [2006] 2
Lloyd’s Rep 183, [50] by Waller LJ.
28 Similarly, in the 1980 Report, para 8.6, the Law Commission argued that the general law of
misrepresentation may give the insurer a right to avoid the contract when there has been a
misrepresentation of the insured’s ability to introduce other customers. This was thought to
be outside the scope of the duty under the 1906 Act, apparently because it is not material
to the risk but affects the insurer’s decision whether or not to enter the contract on the
relevant terms in some other way.
29 The Dora [1989] 1 Lloyd’s Rep 69.
30 See Marine Insurance Act 1906, s 18(2) and s 20(2).
30