Insurance Contracts CP - Law Reform Commission

―(i) In order to be entitled to avoid a contract of insurance or reinsurance, an insurer or
reinsurer must prove on the balance of probabilities that he was induced to enter into the
contract by a material non-disclosure or by a material misrepresentation.
(ii) There is no presumption of law that an insurer or reinsurer is induced to enter in the
contract by a material non-disclosure or misrepresentation.
(iii) The facts may, however, be such that it is to be inferred that the particular insurer or
reinsurer was so induced even in the absence of evidence from him.
(iv) In order to prove inducement the insurer or reinsurer must show that the non-disclosure or
misrepresentation was an effective cause of his entering into the contract on the terms on
which he did. He must therefore show at least that, but for the relevant non-disclosure or
misrepresentation, he would not have entered into the contract on those terms. On the other
hand, he does not have to show that it was the sole effective cause of his doing so.‖
3.31 There is no clear authority on the issue of inducement in modern Irish law although some dicta
in Anderson v Fitzgerald may appear to support the proposition. Such opinion as there is appears
against an inducement test. Keane J in Chariot Inns, at first instance, favoured the Australian decision in
Mayne Nickless Ltd v Pegler 40 while Kenny J in the Supreme Court also favoured Mayne Nickless,
observing that the law did not require an insurer to establish
―that the matter not disclosed did affect (and not merely might have affected) their
judgement.‖ 41
3.32 Insofar as Chariot Inns suggests that inducement is not part of Irish law, the Commission would
favour the adoption of a provision requiring an insurer to show that non-disclosure of a material fact
played a part in the insurer‘s decision to enter the contract.
3.33 The Commission provisionally recommends that an insurer should be required to show that
non-disclosure of a material fact played a part in the insurer‟s decision to enter the contract.
(1) Materiality: decisive influence or “what the insurer would like to know”
3.34 In the context of the duty of disclosure, where a broker or a team of brokers have been
engaged in assisting in the underwriting process, both Chariot Inns and the majority of the judges in Pine
Top v Pan Atlantic have favoured a disclosure test that is often criticised as being too favourable to the
insurer, unduly uncertain in its scope and impractical in terms of application. To state that a material fact
is one that a prudent insurer ―would want to know about‖, even if the fact would not ultimately affect the
underwriting decision, was, in the view of the majority of the Law Lords, the result of section 18(2) of the
1906 Act. This conclusion was heavily criticised by the two dissenting judges: Lord Templeman said that,
in his opinion, ―the judgment of a prudent insurer cannot be said to be influenced by a circumstance
which, if disclosed, would not have affected acceptance of the risk or the amount of the premium.‖ 42 Lord
Templeman went on to comment that if materiality was to be determined by reference to what a broker
would have ―wanted to know‖ or ―would have taken into account,‖ even if it would not have affected any
decision to take the risk or fix the premium, the law would ―give carte blanche to the avoidance of
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[1974] 1 NSWLR 228.
[1981] IR 199, at p 231.
[1994] 3 All ER 581 at 585. Lord Lloyd at p.638 summarised what he thought the law should be thus:
―whenever an insurer seeks to avoid a contract of insurance or re-insurance on the ground of
misrepresentation or non-disclosure, there will be two separate but closely related questions. (1) Did the
misrepresentation or non-disclosure induce the actual insurer to enter into the contract on those terms? (2)
Would the prudent insurer have entered into the contract on the same terms if he had known of the
misrepresentation or non-disclosure immediately before the contract was concluded? If both questions are
answered in favour of the insurer, he will be entitled to avoid the contract, but not otherwise. The evidence of
the insurer himself will normally be requied to satisfy the court on the first question. The evidence of an
independent broker or underwriter will normally be required to satisfy the court on the second question. This
produces a uniform and workable solution, which has the further advantage, as I see it, of according with good
commercial common sense.‖
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