Professional Liability Guide

CHAPTER 8 – NON-DISCLOSURE AND MISREPRESENTATION

CHAPTER 8 – NON-DISCLOSURE AND MISREPRESENTATION

It is well understood that an insured’s obligation to disclose true and correct information to an insurer before forming an insurance contract (including any renewal of an existing policy) is important in circumstances where most information relevant to an insurer’s decision whether to enter into such a contract is known only to the party seeking insurance, and an insurer cannot be expected to make a decision whether to offer insurance (and on what terms) without knowledge of all matters relevant to its decision. Although the duty of disclosure was established at common law, the introduction of Pt IV of the ICA, which provides for non-disclosures and misrepresentations, sets out the relevant disclosure obligations on both an insured and insurer. Non-disclosure Section 21(1) of the ICA makes it clear that an insured has a duty to disclose to an insurer before the relevant insurance contract is entered into every matter that: ƒ the insured knows to be relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or ƒ a reasonable person in the circumstances could be expected to know to be relevant, having regard to factors including, but not limited to: • the nature and extent of the insurance cover to be provided under the relevant contract of insurance; and • the class of persons who would ordinarily be expected to apply for an insurance cover of that kind.

Accordingly, there are two limbs to the disclosure obligation, one subjective (the insured’s actual knowledge) and the other objective (the knowledge of a reasonable person).

Who is an insured for disclosure purposes?

The party named as the ‘ insured’ in the policy schedule is obliged to comply with the duty of disclosure outlined in section 21 of the ICA.

In circumstances where there are co-insureds (i.e. more than one ‘ insured’ named in the policy schedule) and the information relevant to an insurer’s decision whether or not to enter into a contract of insurance is held by only one of the co-insureds, it has been held that: 485 ƒ section 21 imposes a duty on each co-insured separately to disclose a material matter to an insurer; and ƒ a single remedy is available against the co-insureds. That is, a fraudulent failure by one of those co-insureds to comply with the duty of disclosure can result in an insurer avoiding the contract pursuant to section 28 (discussed in further detail below).

Knowledge of company directors and senior managers is held to be knowledge of an insured company for the purposes of disclosure. 486

485 Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606. 486 JC Houghton & Co v Nothard, Lowe & Willis Ltd [1928] AC 1, 18–19.

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