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DUTY OF DISCLOSURE

INTRODUCTION
 Under the law of contract the general rule is : in the absence of fraud or
misrepresentation, if any party fail to disclose all facts (relating to the contract
or the subject matter of the contract) when entering into the contract, the
other party have no right to avoid the contract.

 Caveat emptor principle (buyer beware) – parties to the contract have the
responsibility to ascertain all information relating to the contract or the
subject matter of the contract before entering into the contract.

 This general rule however does not apply to insurance contract since insurance
contract is a contract uberrimae fidei (utmost good faith.)

 uberrimae fidei contract necessitate all parties to the contract to disclose all facts
which are material to the contract to each other. If this is not observed by one
party, the contract may be avoided by the other party.
 Contracts uberrimae fidei refer to a class of contract whereby certain facts material
to the contract are within the exclusive knowledge of one party only. Therefore
other party depends upon the good faith of the party having the knowledge to
impart the knowledge to him.

 It is a positive duty to disclose fully & accurately


- all matters known to be material to the contract
- all matters ought to be known as material to the contract

 Rationale : the insured know all the fact relating to the item being insured. As such
he has the responsibility to inform the insurer all material facts relating to the item
being insured to enable the insure to assess the risk involved. If there is no
obligation on the insured to disclose the facts there will be possibility that the
insured might leave out certain information which might cause the insurer to reject
the policy, increase premium etc
CARTER v BOEHM (1766)
Lord Mansfield : ‘Insurance is a contract upon speculation.The special fact which
the contingent chance is to be computed lies mostly in the knowledge of the insured
only.The underwriter trust his representation & proceed upon confidence that insured
does not keep back any circumstance in his knowledge ,to mislead the underwriter to
belief the circumstance does not exist & induce him to estimate the risk as if it does not
exist’

RozanesV Bowen
‘the underwriter know nothing & the man who come ask him to insure knows
everything. It is the duty of the insured to make the full disclosure to the
underwriters without being ask about the material circumstances’

 Breach of this duty renders the insurance contract voidable.


(VOIDABLE: valid until the aggrieved party exercises the option to treat it as void)
How To Perform this Duty ?
 The duty is usually performed when the Insured fill in the proposal form

 Proposal form – A form issued by the insurer containing various questions which
the insurer requires the insured to answer. The information contained in the
form enable the insurer to assess the risk, to ascertain the amount of premium
and condition to be imposed (if any)

 See eg of PF attached Houseowner_Householder_Proposal_Form.pdf

 PF is just one of the means by which the disclosure of material facts can be
made. It does not mean that the duty is done merely by answering the PF

UNITED M’SIAN INS CO LTD v LEE YOON HENG (1964)


The proposer is not relieved of his duty merely by correctly answering the Qs
therein.
 Insured have the duty to disclose material information eventhough it is not
asked in the proposal form

TEH SAY CHENG v NORTH BRITISH & MERCANTILE INS CO. LTD
The court rejected the argument raised by the insured (in denying non-
disclosure ) that as a person who had never insured b4 & was ignorant of
insurance law, he was justified in assuming that the insurer required no more
information than was sought for by the Qs in the proposal form.
 Effect of failure to answer question in proposal form: - does it amount
to non-disclosure?
Depends on the effect of such omission:

1) if the omission carries with it the irresistible inference that the


proposer intends that part of the answer to be negative, then living such
Q unanswered is a non-disclosure.
eg : do you have any familiar or genetic history to cancer?
have you ever had any operation?

2) On the other hand, if an entire Q is left unanswered & yet the


insurer issues a policy without further inquiry, the insurer can be said
to have waived the non-disclosure of such information.
Duty of Insurer & Insured
The duty of disclosure applies to both insurer & insured.

Carter v Boehm
Lord Mansfield: ‘The policy would equally be void against the underwriter if he
concealed as if he insured a ship on her voyage which he privately knew to be arrived and
an action would lie to recover the premium.’

Duty of the Insured


 It is the duty of the insured in all types of insurance contract
Non-Consumer Insurance Contract
Para 4(1) of sch 9 of FSA - Before a contract of insurance is entered into, a proposer
shall disclose to the licensed insurer a matter that—
(a) he knows to be relevant to the decision of the licensed insurer on whether to accept
the risk or not and the rates and terms to be applied; or
(b) a reasonable person in the circumstances could be expected to know to be relevant.
Consumer Insurance Contract
Para 5(1) of sch 9 of FSA - Before a consumer insurance contract is entered into or varied, a
licensed insurer may request a proposer who is a consumer to answer any specific questions
that are relevant to the decision of the insurer whether to accept the risk or not and t he
rates and terms to be applied.

Para 5(2) of sch 9 of FSA - It is the duty of the consumer to take reasonable care not to
make a misrepresentation to the licensed insurer when answering any questions under
subparagraph (1)

Para 5(3) of sch 9 of FSA - Before a consumer insurance contract is renewed, a licensed
insurer may either—
(a) request a consumer to answer one or more specific questions in accordance with
subparagraph (1); or
(b) give the consumer a copy of any matter previously disclosed by the consumer in
relation to the contract and request the consumer to confirm or amend any change to
that matter.
Para 5(4) of sch 9 of FSA - It is the duty of the consumer to take reasonable care not to
make a misrepresentation to the licensed insurer when answering any questions under
subsubparagraph (3)(a), or confirming or amending any matter under sub subparagraph (3)
(b).

Para 5(8) of sch 9 of FSA - Subject to subparagraphs (1) and (3), a consumer shall take
reasonable care to disclose to the licensed insurer any matter, other than that in relation to
subparagraph (1) or (3), that he knows to be relevant to the decision of the insurer on
whether to accept the risk or not and the rates and terms to be applied.

 The insurer have the duty to make sure the insured perform this duty

Non-Consumer Insurance Contract


Para 4(4) of sch 9 of FSA – a licensed insurer shall before a contact of insurance is entered
into, varied or renewed, clearly informed the proposer in writing of the proposer pre-
contractual duty of disclosure under this paragraph, and that this duty of disclosure shall
continue until the time the contract is entered, varied or renewed
Consumer Insurance Contract
Para 5(7) of sch 9 of FSA - A licensed insurer shall, before a consumer insurance contract is entered
into, varied or renewed, clearly inform the consumer in writing of the consumer’s pre-contractual
duty of disclosure under this paragraph, and that this duty of disclosure shall continue until the time
the contract is entered into, varied or renewed.

 No Duty of Disclosure on the insured when:


Non-Consumer Insurance Contract
Para 4(2) of sch 9 of FSA - The duty of disclosure does not require the disclosure of a matter that—
(a) diminishes the risk to the licensed insurer; (b) is of common knowledge;
(c) the licensed insurer knows or in the ordinary course of his business ought to know; or
(d) in respect of which the licensed insurer has waived any requirement for disclosure.

Para 4 (3) of sch 9 FSA - Where a proposer fails to answer or gives an incomplete or irrelevant answer
to a question contained in the proposal form or asked by the licensed insurer and the matter was not
pursued further by the licensed insurer, compliance with the duty of disclosure in respect of the matter
shall be deemed to have been waived by the licensed insurer.
Consumer Insurance Contract
Para 5(5) of sch 9 of FSA - If the licensed insurer does not make a request in
accordance with subparagraph (1) or (3) as the case may be, compliance with the
consumer’s duty of disclosure in respect of those subparagraphs, shall be deemed
to have been waived by the insurer.

Para 5(5) of sch 9 of FSA - Where the consumer fails to answer or gives an
incomplete or irrelevant answer to any request by the licensed insurer under
subparagraph (1) or subsubparagraph (3)(a), or fails to confirm or amend any
matter under subsubparagraph (3)(b), or does so incompletely or provides
irrelevant information, as the case may be, and the answer or matter was not
pursued further by the insurer, compliance with the consumer’s duty of
disclosure in respect of the answer or matter shall be deemed to have been
waived by the insurer.
 Remedies to the insurer for breach of duty of disclosure by
the insured :

1. rescind the contract without having to pay back the


premium paid

2. Decline to pay the claim


Duty of the Insurer
 Insurance intermediaries(agent/broker) also have a duty of disclosure.

Re Bradley & Assex and Suffolk Accident Indemnity Society(1912)


Farewell LJ: ‘contract of insurance are contracts in which uberrimae fides are
required not only from the assured but also from the company assuring.

 Duty
Para 11(1) of sch 9 FSA No licensed insurer or insurance agent, in order to induce a
person to enter into or offer to enter into a contract of insurance with it or through
him—
(a) shall make a statement which is misleading, false or deceptive, whether
fraudulently or otherwise;
(b) shall fraudulently conceal a material fact; or
(c) in the case of an insurance agent, use sales brochure or sales illustration not
authorised by the licensed insurer.
 Remedies available to an insured for a breach of such a duty by the insurer
rescind the contract
demand back premium

Para 11(2) sch 9 of FSA - Where a person is induced to enter into a contract
of insurance in a manner described in subpara (1), the contract of insurance
shall be voidable and the person shall be entitled to rescind it.

In Banque Keyser Ullman SA V Skandia Ins Co.ltd


HOL: The insured does not have a remedy in damages. The contract can be
avoided & should return back the premium.
MATERIALITY

 Facts which will influence a prudent underwriter in deciding


acceptance of the risk or the premium to be charged.

 Only facts which are material to the risk need to be disclosed.

 Materiality of a fact depends on the nature of the proposed


insurance.

 The determination of the materiality or non-material of facts which


are not disclosed, forms the basis of any action to avoid a contract of
insurance on the ground of non-disclosure.
 Something which is regarded as material in one case cannot be regarded as
material in all subsequent cases.

 The materiality of a particular fact has to be determined within the context of


the case itself.

 Decision on the materiality of a particular fact can therefore be regarded only as


guidelines in subsequent cases.

 Facts regarded as material have traditionally been classified into 2 categories:

Facts relating to Physical Hazards:


Any facts which increases the risk of loss of the insured subject matter.
Eg: in life insurance material facts will include the age, health, occupation &
hobbies of the insured. If the insured engages in dangerous pastimes such as sky-
diving, this may be taken to increase the likelihood of accidental death & will
need to be disclosed.
Eg: in property insurance, material facts will include the age & condition of the
subject matter, how it will be used, its location & security arrangement.

But can pose problems especially in life or health insurance because an insured may
not be aware that a particular condition is symptomatic of a more serious health
risk.

JoelV Law Union & Crown Insurance Co (1908)


“ I will suppose that a man has, as is the case with almost all of us, occasionally had a
headache. It may be that a particular one of these headaches would have told a brain specialist
of hidden mischief, but to the man it was an ordinary headache indistinguishable from the
rest. Now, no reasonable man would deem it material to tell an insurance company of all the
casual headaches he had had in his life, & if he knew no more as to this particular headache,
there would be no breach of his duty towards the insurance comp. in not disclosing it.
Facts relating to Moral Hazards :
relates to the character of the insured.

It relates to the risk of a claim being made by virtue of the insured’s own
general reputation & credibility.

It includes matter such as claim history, previous refusals of cover and criminal
record.

JamesV CGU General Ins plc (2002) Lloyd’s Rep 206


The fact that the insured, a garage owner, had defrauded customers & was in dispute with the
Inland Revenue & the Customs & Excise Commissioners was held to be material to the insurers.
INSURING – pls determine the
material facts
 Warehouse from fire

 Employee from medical problem and hospitalization

 The life of one’s child

 A vehicle from theft and damage due to accident

 A construction site from any liability from employee


Test of Materiality
Prudent Insurer Test
 A material fact is one which prudent insurer considers it to be a relevant /
important / necessary for the purpose of making a decision in relation to the risk
to be insured.

 i.e one which would influence the judgment of a reasonable insurer in deciding
whether to accept the risk, how much premium to charge and what condition to
attach (if any)

IonidesV Pender
All should be disclosed are facts which would affect the judgment of a rational insurer
governing himself by the principles & calculations on which underwriters do in practice.

Mutual Life Insurance Co of New YorkV Ontario Metal Product Co Ltd


It is a Q of fact in each case whether, if the matters concealed or misrepresented had been
truly disclosed, they would, on a fair consideration of the evidence, have influenced a
reasonable insurer to decline that risk or to have stipulated for a higher premium.
• There was no necessity to show that the final decision reached by such
insurer would in fact have been different

• Enough if show that the information is relevant to the insurer’s decision

Container Transport International InsV Oceanus Mutual Underwriting


Assiciation (Bermuda) Ltd (marine insurance)
Held at 1st instance that the application of this test meant that an insurer could only
succeed on a defence of non-disclosure if they could show that a prudent insurer
would have declined the risk altogether or would have charged a higher premium if
they had known the non-disclosed facts.

COA rejected the previous decision and held: to succeed on such a defence it was
sufficient if the insurer could show that the underwriting judgment of, or the
assessment of risk by a prudent insurer would have been influenced by such facts.
In Teh Say Cheng V North British & Mercantile Ins Co ltd
A case involving a fire policy, an attempt was made to persuade the court to reject the
prudent insurer test in favour of the reasonable insured test b’coz prudent insurer test
only applied to cases of marine insurance. This argument was flatly rejected by ct
who instead endorsed the application of the prudent insurer test in all areas of
insurance law.

 Prudent insurer test is also applicable in Malaysia


Para 8 of sch 9 of FSA - Subject to subparagraphs (1) and (3), a consumer
shall take reasonable care to disclose to the licensed insurer any matter,
other than that in relation to subparagraph (1) or (3), that he knows to be
relevant to the decision of the insurer on whether to accept the risk or not
and the rates and terms to be applied.
 RTA defines the term ‘ material’ in relation to compulsory 3rd party
motor insurance as any fact of such a nature as to influence the
judgment of a prudent insurer in determining whether he will take the
risks & if so at what premium & on what conditions (Sec 96(5) of
RTA.)

 This definition reinforces the fact that it is the prudent insurer test that
is applicable in Malaysia.

 Facts which need not be disclosed:


para 4(2) sch 9 FSA
1. Fact which are common knowledge
2. fact which are known or ought to be known to the insurer in the
ordinary course of its business
3. Facts which diminish the risk
4. Facts which the insurer waived disclosure – see also para 4(3), 5, and
6 sch 9 of the FSA
Under Life insurance
 In Malaysia, as far as contract of life insurance are concerned, the above test can
only be applied in a limited sense.

 This is b’coz the insurer’s ability to avoid a life policy on grounds of non-
disclosure is greatly restricted para 13 (2) and (3) of sch 9 FSA which reads:

(2) A licensed life insurer shall not dispute the validity of a life policy after the
expiry of two years from the date on which it was effected on the ground that a
statement made or omitted to be made in the proposal for insurance or in a report of a
doctor, referee, or any other person, or in a document leading to the issue of the life
policy, was inaccurate or false or misleading unless the licensed life insurer shows that the
statement was on a material matter or suppressed a material fact and that it was
fraudulently made or omitted to be made by the policy owner.

(3) For the purpose of subsection (2), “material matter” or “material fact” means a matter or fact
which, if known by the licensed life insurer, would have led to its refusal to issue a life
policy to the policy owner or would have led it to impose terms less favorable to the policy
owner than those imposed in the life policy.
Duration of duty to disclose
 At common law, duty starts from negotiation until insurance is
effected.

 All material facts must be made known to the insurer at the time
when he makes his decision whether:
1) to accept or reject the risk &
2) if he decides to accept the risk, as to the rate of premium to be
charged.

 The obligation to disclose continues until a binding agreement is


signed by the party.

 Once there exist a binding agreement, there is no longer any


obligation to disclose unless this requirement is expressly
incorporated in the policy.
 In general insurance contract, duty to disclose is frequently extended
beyond the inception of the contract via a policy condition or continuing
warranty.

 If the policy is a short- term policy which is subject to renewal, then


every renewal is a fresh contract & the duty of disclosure must be
complied with, prior to every such renewal.

 The duty of disclose is revived at renewal since a renewal of policy


constitutes a new contract.
LEE BEE SOON & ORS v M’SIA NATIONAL INS BHD. (1980) 2 MLJ 252.
The plaintiffs had a Hull Policy in respect of a vessel, with the defendant. The vessel
having sunk in bad whether, the P made a claim. The insurer denied liability , on
the ground of non-disclosure of material facts. In the proposal form the vessel was
used to carry passenger and sundry goods. P however had used the vessel to carry
sand and stones.
Yusoff J said: “in this sense the duty of the assured to disclose all material facts to
the insurers must be done b4 the contract is concluded. Hence if every thing
material be communicated up to the time of initialing the ‘slip’ (or proposal) by the
underwriter but something material arising between that time & the time of
executing the policy is not disclosed, there is no non-disclosure so as to vitiate the
policy….”
ONUS OF PROOF – who have to prove

 The legal burden of proving non-disclosure of a material fact rests


upon the party alleging the non-disclosure by showing
1. There is non disclosure at material time
2. The undisclosed fact is material fact

 Once this burden has been discharged, the onus then shifts to the
other party to rebut it either by showing that
1. there had been a disclosure or
2. that the fact allegedly not disclosed was in fact not material.
TUTORIAL 2
Malik was a single father and a successful businessman. He used to get treatment for heart problem 10 (10)
years ago. He now believe that the problem he no longer have the problem since he had not required treatment
for a long time. One day, he met Mamat, an insurance agent from Successful Prudential Insurance Company
(SPIC) to purchase a life insurance policy for himself. He named his daughter as beneficiary in the policy. This
is was submitted to Mamat :
(a) Have you or any applicant to be insured, seen a doctor / specialist (except as a routine check-up), and been under
continuous medical treatment or been hospitalized, or undergone any surgical operations, or been from recurring
illness in the past? ________________
(b) Have you or any applicant to be insured currently suffering from any form of physical impairment, congenital
abnormality, or in poor health? ________NO_____________
(c) Have you or any applicant to be insured ever been treated for or has been told of having high or low blood
pressure, diabetes, high cholesterol, heart disease, arthritis, piles, thyroid disorder, asthma, tuberculosis or disease of respiratory
disorder, and other serious illness, disease or injury? _______________

After reading the proposal form, Mamat asked Malik whether he had answered every question correctly and
truthfully. Malik answered “YES”. Five (5) months after purchasing the insurance policy, Malik suffered heart
attack. He passed away twelve (12) days after being admitted to the hospital. Maria submitted a claim to SPIC
for Malik’s death. SPIC however rejected the claim on the ground that Malik had failed to disclose information
concerning his medical problem. Advise Maria. Support your answer with relevant provision in the Financial
Services Act 2013 and ONE (1) decided case.