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Nondisclosure, Avoidance and the House on the Hill

News article

Publication date:

01 September 2021

Last updated:

01 September 2021

Author(s):

Flaxmans, Insurance Claims Advocates

This article considers disputed claims and nondisclosure inline with underwriting.

Under some circumstances, an insurer has a legal entitlement to avoid a policy where there has been misrepresentation. If the insurer is able to demonstrate from its underwriting guide that, had the full information been supplied by the Insured, the risk would not have been accepted on any terms, then the policy may be avoided ab initio; treated as if it had never existed.

This rule of law is tempered under The Insurance Act 2015 (TIA15) and the Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA) to the extent that, where the risk would still be acceptable to the insurer but on increased terms, those terms may then be applied and any claim settled on terms that are proportionate to the loss of premium.

The rule is tempered further for consumers under CIDRA, in that a misrepresentation is only a qualifying breach if the Insured has failed to exercise reasonable care (or, worse, where the misrepresentation has been deliberate or reckless). If an insurer is not able to demonstrate at least carelessness, then there is no breach and any disputed claim must be paid in accordance with the policy terms and conditions.

 

Disputed claims

There can be many reasons cited by an insurer for repudiating a claim. We contrast here the separate outcomes for an Insured dependent on whether there has been:

  1. A breach of warranty or condition; or
  2. A misrepresentation

Under TIA15, an insurer cannot use a breach of warranty or condition to repudiate a claim in certain circumstances as shown in the extract below:

1         Terms not relevant to the actual loss

  • This section applies to a term (express or implied) of a contract of insurance, other than a term defining the risk as a whole, if compliance with it would tend to reduce the risk of one or more of the following—
    • loss of a particular kind,
    • loss at a particular location,
    • loss at a particular
  • If a loss occurs, and the term has not been complied with, the insurer may not rely on the non-compliance to exclude, limit or discharge its liability under the contract for the loss if the insured satisfies subsection (3).
  • The insured satisfies this subsection if it shows that the non-compliance with the term could not have increased the risk of the loss which actually occurred in the circumstances in which it

It is important to note that, where there has been a misrepresentation that is not causative of the loss, the policy may still be avoided.

 

Example 1     

Home contents policy. The insurer wants all its policyholders to have 5 lever mortice deadlocks (5LMDLs) on all exterior doors. To achieve its objectives, the insurer can either:

  1. Include a statement on the Statement of Facts to the effect that all exterior doors are fitted with 5LMDLs and leave the Insured to accept or reject the statement, or
  2. Place a warranty on the policy that all exterior doors are fitted with 5LMDLs

The Insured suffers a burglary with the point of entry and exit being a broken window; but it turns out the doors’ locks had only 3 levers and not 5.

If the insurer had chosen option (a) and included the issue in the Statement of Fact, the policy may be avoided for a qualifying misrepresentation only as long as it can be shown the Insured had failed to exercise reasonable care (or was deliberate or fraudulent); and if the insurer can show it would not have accepted the risk, had it known of the locks’ deficiencies. Consequently, the claim would likely fail.

If the insurer had chosen option (b) it would not be able to repudiate the claim unless it could show the inferior lock was causative of the loss – which is most unlikely, as few burglars have the expertise to pick locks. Consequently, the claim would likely succeed.

Example 2

Public Liability policy. A painter and decorator effects PL with an insurer that wants to avoid claims connected to the application of heat. To achieve its objectives, the insurer can either:

  1. Ask a question at the proposal stage, do you carry out any work involving the application of heat, such as using a blowtorch, or
  2. Place a warranty on the policy excluding claims arising out of the application of heat, including blowtorches

The Insured is working on a property and causes damage by spilling paint on a carpet. During the investigation of the claim, it is revealed that the Insured regularly uses a blowtorch.

Under option (a) the insurer would be able to avoid the policy because, technically, the contract had never existed. (Again, assuming the risk would not have been accepted had underwriters known about the application of heat).

Under option (b) the use of the blowtorch was not causative of the loss and so the Insured would still be indemnified for any claim it receives for the damaged carpet.

 

Is the anomaly fair and reasonable?

Under both TIA15 and CIDRA, the insurer may avoid a policy for a qualifying misrepresentation. It is understood that misrepresentation strikes at the heart of the contract – yet, in the light of the improvements for policyholders under the two Acts, this stark option, without reference to what caused the claim that put the insurer on enquiry, seems very harsh indeed.

This is not a new problem.

The Ombudsman cites a case very similar to Example 1 above in connection with door locks.

The insurer attempted, not merely to repudiate the claim, but to avoid the whole policy. On the proposal form, the policyholder had confirmed that the final exit door of her home was fitted with a mortice deadlock conforming to British Standard BS3621. The loss adjuster had noted that the rear door of the policyholder's home had a deadlock which did not conform to the relevant British Standard. The policyholder's explanation was that she had answered the question in the proposal form under the mistaken impression that she had the required protection.

The insurer supplied documentary evidence confirming that it would not have accepted the policyholder's business if it had known the true position about the existing security locks. Strictly speaking, therefore, the insurer was entitled to avoid the policy on the grounds of misrepresentation.

However, I considered that the policyholder's insistence that she had not deliberately intended to mislead the insurer should be taken into account. There were questions of form and substance.

The insurer was quite reasonably requiring certain security precautions to be maintained by the policyholder. Some insurers deal with this by imposing a warranty that such precautions will be maintained, others do it by asking questions of the kind that had been asked in this case. Is it fair that technically different approaches to the same situation should produce radically different results?

The difference in this case was that if the security precautions had been the subject of a warranty, then the fact that the break-in had occurred through a window, rather than through one of the inadequately secured doors, would have meant that the loss was not materially connected with the breach, so that the claim could still succeed. Was it fair that the result should be different in the case before me? I did not accept that it was. I was satisfied that the policyholder had not intended deliberately to mislead the insurer. For the insurer to avoid the whole policy on the grounds that there had been an inadequately protected door which had no bearing at all on the theft seemed excessive. In the circumstances, I required the insurer to meet the claim.

Readers might be surprised to know that, despite the Ombudsman’s remarks, it is not universally accepted that an insurer should not avoid a policy for misrepresentation where such misrepresentation has little bearing on the underlying claim. It is even more surprising to note the lack of industry response bearing in mind the above comments made by the Ombudsman were by Laurie Slade in his 1995 Annual Review of the Insurance Ombudsman Bureau.[1] A quarter of a century later, we find ourselves holding the same conversation.

 

The House on the Hill

We know that the more enlightened insurer would not seek to avoid a policy for misrepresentation where there is no connection between the breach and the claim. But not all insurers hold to this reasonable practice.

Mr J insured his home with Ocaso. The Statement of Fact reflected the Insured’s understanding that his home was not within 200m of a water course. It later transpired that there was a river within 170m.

The property later suffered from a flood and the young family had to evacuate their home. The claim failed. Ocaso avoided the policy for misrepresentation because of the locality of the river. Readers might feel that was only to be expected.

However, it transpired that:

  • The property was located part-way up a hill
  • The flood had originated from a blocked culvert further up the hill
  • The loss adjuster opined that, because of the house’s location up the hill, it would never have been possible for the river to have caused a flood

Despite the fact that there was clearly no connection between the circumstances of the claim and the alleged misrepresentation, Ocaso still maintained its refusal to deal with the claim and went ahead with the avoidance. The matter was pursued through the complaints process and, surprisingly, the Ombudsman at the Financial Ombudsman Service (FOS) did not uphold the complaint. It is interesting to note there does not seem to be an institutional memory at the FOS that might otherwise have taken heed of Laurie Slade’s approach from 1995.

The Insured then attempted to resolve the position through solicitors but, because they could only tackle the strict legal position, that approach failed too. Consequently, the family home was only ever reinstated via the kindness and understanding of family, friends and strangers, none of whom have the slightest understanding of how an insurer could have let the side down in circumstances where the home’s locality to the river was a simple irrelevance.

 

A Remedy

The writers of this article have spoken to a number of insurers to see what they would have done had they insured the house on the hill. They would have paid up, they say. Perhaps that is easy for them to say but we are inclined to accept that most insurers would have rushed to help the family living up the hill if only because that would be the decent thing to do and it would be a demonstration of good faith.

The fate of claims where there is an unconnected misrepresentation wasn’t picked up by TIA15 or CIDRA but there would seem to be room for a suitable amendment. But this would take time and money and a political will to tackle what is, fortunately, a rare problem. However, if this is left untackled, we can see similar issues arising more frequently as more and more indemnity decisions are taken by lawyers rather than insurance professionals for whom the principle of good faith counts for something. It would not take much to modify the remedy for a qualifying misrepresentation so that an Insured would still be indemnified in cases where the misrepresentation was not causative of the claim. However, the insurer should still retain the option to underwrite the policy afresh so that it can be protected from continuing an insurance it would rather not have entered into – or would have done so on different terms.

The Association of British Insurers (ABI) used to issue market agreements otherwise known as Codes and Statements of Practice. One example related to insurers not declining a claim following a policy breach where the breach was not causative of the claim. That particular agreement eventually found its way onto the statute books. It would be good to see history repeating itself. That way, the family up the hill might yet obtain redress, and Laurie Slade will feel he has been listened to.

[1] Insurance Ombudsman Bureau Annual Report 1995 published 1996: Laurie Slade, MA (Oxon), FCIArb, Barrister Insurance Ombudsman 1994-1996

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This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.

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