Analysis of the Insurance Law - Essay Example

Lecturer: Introduction In insurance law, misrepresentation is a misleading or false ment that if material and intentional, can permit the insurer to reject the insurance contract. Some state laws and insurance policies through which insurance contracts provisions are governed differ on the very details of the situation of coverage avoidance. In the U.K, such variations are normally denoted amendatory endorsements of the state1. On the other hand, non-disclosure is the situation where a client fails to avail a pertinent fact applying for or renewing an insurance contract. Non-disclosure or misrepresentation in insurance applications may lead to severe ramifications. Incorrect, incomplete or incorrect answers during application or material fact non-disclosure may go up to the contract’s roots and jeopardize its continued existence. The association between the insured and the insurer is regarded as one where mutual responsibilities of good faith and trust are overriding. During application time, indispensable facts are customarily recognized by the applicant but may be challenging to the insurer to make certain. The insurer is thus, vulnerable and needs the material facts so as to establish whether to issue a policy or not, what particular omissions it may need, and the amount of premium to charge. Analysis In fact, there are two diverse duties on the applicant at the time of the application. Normally, a broker or an agent interviews an applicant to complete the process of application. Based on the nature, as well as, type of the insurance coverage wanted, the application will have numerous questions concerning the background, health, business activities and various other aspects of the applicant. The application will characteristically have a declaration that is executed by the applicant and that the answers availed are complete, full, and true. Consequently, there are two isolated essential issues2. The first issue is that of any misrepresentation of answers by the applicant in the questions on the application. The second issue is that of non-disclosure of any facts by the applicant that are within his or her knowledge, and which are essential to the insurance. In the event that an insurer takes a stand that a policy is void because of non-disclosure or misrepresentation, it is not required of the insurer to determine the insured’s motives. The motives of the insured are irrelevant provided the misrepresentation are of a fact identified by the insured that could be viewed by a rational insurer as substantial to the risk. Typically, the insurer sets out in the application a sequence of particular questions concerning the applicant, and issues pertinent to insurability, numerous authorities have considered the extent to which the questions of application limit, modify or alter the general responsibility of disclosure. Generally, the fact that specific questions regarding the risk are put to the applicant does not relieve him of the independent responsibilities to disclose the entire material facts. Nonetheless, the specific questions form may bear on the duty and scope of disclosure and may lead to establishing that the insurer has availed a waiver. In events where the applicant completes the application with the assistance of a broker or an agent, the factual situations surrounding the application completion are pertinent to establishing if there was non-disclosure or misrepresentation3. Where the broker or the agent misinterprets the question or avails incorrect or misleading to the insured, the insured is not held responsible for incorrect answers. Additionally, in the event of any uncertainty in the purview and scope of the answers required, the issue is resolved in favor of the insurer. Specifically, with the rules that apply to misrepresentation and non-disclosure in insurance contracts changing from time to time because of the changing economic situations and due to the changing insurance market, the European Union rules applying to non-disclosure and misrepresentation have not been significantly altered, as it was a century ago. The British insurance law was developed in the 18th and 19th century4. The insurance law was significantly codified in the 1906 Act. The general provisions of the 1906 Act have been held to be pertinent to all types of insurance. The Act is an imposing piece of work as it covers much ground, in addition to being written in clear up-front terms. Discussion Several rules apply to misrepresentation and non-disclosure in insurance contracts in the E.U. Firstly; insurers require acquiring information from potential policyholders regarding the risk’s nature. They utilize this as their decision basis on if to accept risks, and, if so, on what terms and price. Such information can only be acquired form the potential policyholders. Thus, the 1906 Act imposes substantial duties to persons applying for insurance. Such persons are required to provide information to the insurer regarding any matter, which would affect a discreet risk assessment by an underwriter5. In the event of a failure by the policyholder in this duty, the insurer, therefore, has the right to reject any claims. Further, the insurer can also avoid the policy in the event that the policyholder makes a material representation of facts, which turn out to be not true. At this point, it matters not if the policyholder had no reason to comprehend that the statement was not true. For instance, in the case of Cooperative Insurance Society Limited vs Lambert, Mrs Lambert, in 1963, applied for an insurance policy with Cooperative Insurance society to cover jewellery that belonged to the family. Mrs Lambert renewed the policy on yearly basis6. In 1972, she made claims for loss of jewellery. However, the insurance company rejected her claims on the basis that she had not disclosed the previous records of convictions of her husband. The insurance company had however, never asked her any questions regarding criminal convictions, even though it had a chance to ask when she first filled out the application form. Nonetheless, the court of appeal hesitantly concluded that the insurance company was entitled to refuse to compensate Mrs Lambart, notwithstanding the fact that she never realized that the insurer wanted to know about past convictions. The second rule is that policyholders may be deprived of claims even when they act reasonably and honestly. An insured that miscomprehends a question, and reasonably thinks that some information is not pertinent to the insurer, may find that the insurer could avoid the policy. This is also similar in the event that the insured has availed information that is not accurate, or semi-accurate, although the insured reasonably and honestly believed that what they said was true. Thirdly, insurers have an apparent interest in making sure that policyholders take safeguards against loss7. Thus, the law takes a sturdy approach to enforcing the promises of the policyholder. The Act of 1906 sets out severe consequences where a policyholder makes a promise that a specific thing shall be undertaken or shall not be undertaken, or that particular condition shall be achieved. Further, the law where the holder of the policy negatives or affirms the existence of a specific state of facts applies the same approach. Promises of this kind are referred to as warranties and it is necessary that they be complied with, regardless of whether or not they are material to the risk8. Thus, the insurer is not needed to compensate any claims that come after the date of breach, even when the breach is later resolved or had no relationship to the loss in question. Therefore, the insurer could utilize the warranties of present or past facts to add to the remedies that are already availed by the law of misrepresentation. Where the contract incorporates a law that is made into a warrant, and the stated facts are untrue, the policy may be treated as discharged by the insurer. This is also applicable even when the statement was irrelevant to the risk. In such a case, the insurer never relied on it, in addition to having no connection to any claim that has risen. In the case of Hartley vs De Hahn, in 1779, an insurance policy was taken out on a ship that was sailing to British West Indies from Liverpool. This business was dangerous and the insurance policy described the ship as having sailed with 14 six-pounders, small arms, swivels, and 50 upwards and hands. Nonetheless, the vessel had only 46 hands as it set off from Liverpool. The vessel docked at Anglesey several hours later where six more men were picked up. The vessel then sailed with 52 hands to Africa. The ship was captured and lost off the coast of Africa with the 52 hands9. Consequently, the insurer refused to compensate the loss, a matter that the court agreed. According to the court, the warranty was not sternly true. It was not relevant that it had been remedied only several hours later whilst the vessel was still in the comparatively secure waters around Britain. Further, a proposal form statement may be converted into a warranty utilizing obscure words that are incomprehensible to most insureds10. In case a potential holder of a policy signs a statement on a form of proposal indicating that the answers availed form the contract basis, this has the impact of transfiguring all the responses into warranty. The inaccuracies, even those that did not elevate the risk may course the insurer to avoid the risk. For instance, in the case of Bonnin vs Dawsons Ltd, Dawsons, a furniture removal firm based in Glasgow took out an insurance policy for its removal lorry. The clauses in the proposal form include the proposal that was to be the basis of that contract and be held as incorporated therein. This transformed all the answers into warranties. Initially, after filling out the form, Dawsons gave its address in central Glasgow. Dawsons gave this address as the location of parking of the lorry. In fact, the lorry was normally parked outside Glasgow. Unfortunately, the lorry was damaged in a fire prompting Dawsons to put up a claim. However, at court, it was said that Dawson’s’ mistake regarding the address had no relevance to the risk and disputably reduced it. Thus, according to the court, this mattered less and that the insurer had the rights to refuse to compensate all claims under that policy. Additionally, in cases where a holder of a policy gives a warranty regarding future actions, any kind of breach would discharge the insurer from any additional liability, even from those claims that are not related to the breach. For instance, if a holder of a policy warrants that they will have a burglar alarm, not doing so, of course depending on the contract’s construction, allows the insurer to reject a claim for flood or storm damage11. Further, the insurer can also reject claims for theft arising after repairing of the alarm. In that, case therefore, non-disclosure and misrepresentation prior to the contract is made in the time when the contract is made via an intermediary. Often, insurance is arranged via an intermediary or a broker. In the event that a holder of a policy gives correct information to the broker, but the information is not passed on to the insurer by the broker, or the broker passes it on inaccurately, the insurer will often have the right to circumvent the policy even though the holder of the policy may be blameless. The holder of the policy may have thought he was working with the insurer’s representative and that the insurer may have been better placed to prevent occurring mistakes. In cases of corporate insurance applicants, the individual workers knowledge, or the directors with the duty of arranging the insurance of a company will be imputed to the insured corporate. Nonetheless, situations may arise where the individuals are not aware of a material fact recognized by another employee or direct. In such a case, the attribution rules are essential to apply to see if the individual’s knowledge should be attributed to the company’s knowledge12. For instance, in the case of Global Funds Management Asia Limited against Securities Commission of 1995, Lord Hoffmann indicated that that there existed no attribution rule applicable to the case. Instead, the pertinent attribution rule was based upon the situation’s context and the functional rule of law leading to the rise of the question. An instance of the application of this rule is seen in Rix J judgment in Zurich Insurance Co vs Arab Bank Plc of 1998. The case was about a fraudulent non-disclosure in a composite policy of insurance. According to Rix J, the policy by its composite characteristic expressly differentiated the claimant company’s individual directors from the company. This was since the policy availed that only the fraud guilty directors would be debarred from reclamation under the policy and not the company. Rix held that the knowledge of a director could be attributed only to the company for the purpose of that composite policy in which case the concern director established the correct ego, or the directing will and mind of the company. Conclusion A close analysis of the discussion above identifies that there are numerous forms of misrepresentations. Such forms include fraudulent misrepresentation or deceit that include false statements made knowingly, carelessly and recklessly regarding whether be it untrue or true. Other forms of misrepresentations include negligent misrepresentations, and innocent misrepresentations. Usually, cases arise when the insurer, who avoids the policy, rejects the claims of the insured. Often, the insurer basis their decision on the grounds that the insured never availed accurate data in the time of taking out the policy. Nonetheless, there exists numerous remedies for misrepresentation. Such remedies include rescission and damages. The numerous case examples in the discussion above have illustrated clearly the application of the rules of misrepresentation and disclosure in insurance law. Notably, failure to give correct information on the part of the insured could lead to the insurer avoiding the policy. In cases of corporate insurance applicants, the individual workers knowledge, or the directors with the duty of arranging the insurance of a company will be imputed to the insured corporate. However, it is pertinent to note that maters of exclusion or proportionality only come to be where the conduct is categorized as inadvertent. In the case where the carelessness level is more severe than this, it is only required of the insurer to illustrate that absent data would have influenced the terms of policy writing. The insurer, therefore, needs not to illustrate that the alteration in terms would have averted any claim that could have risen. For instance, in the case of Cooperative Insurance Society Limited vs Lambert, Mrs Lambert, the insurer only required to illustrate that the missing information regarding the previous criminal convictions of Mrs Lambert’s husband would have changed the terms of the policy. The insurer only required to illustrate that had the knowledge of the previous criminal convictions of Mrs Lambert’s husband had been brought to attention; properly the premiums would have been different. References Birds, John. Birds modern insurance law. Sweet & Maxwell, 2013. Cartwright, John. Misrepresentation, mistake and non-disclosure. Sweet & Maxwell, 2012. Cartwright, John. Misrepresentation. Sweet & Maxwell, 2002. Clarke, Malcolm A. "The law of insurance contracts." (2006). Colinvaux, Raoul P., and Sidney Preston. The law of insurance. Vol. 85. Sweet & Maxwell, 1984. Craswell, Richard. "Contract law, default rules, and the philosophy of promising." Michigan Law Review (1989): 489-529. Furmston, Michael Philip. "Cheshire, Fifoot and Furmstons Law of contract." (2007). Marsh, Peter David Victor. Comparative Contract Law: England, France, Germany. Gower Pub Co, 1994. Matos, Ana Almeida, and Gerard Boudol. "On declassification and the non-disclosure policy." In Computer Security Foundations, 2005. CSFW-18 2005. 18th IEEE Workshop, pp. 226-240. IEEE, 2005. Merkin, Robert M. Colinvauxs law of insurance. 2nd supplement. Sweet & Maxwell, 2009. Smith, Stephen A., and Patrick S. Atiyah. Atiyahs Introduction to the Law of Contract. Oxford University Press, 2006. Read More