What you Need to Declare
According to Airmic, the members’ association that represents individuals responsible for corporate risk management and insurance, innocent non-disclosure keeps corporate insurance professionals awake at night. In a survey published by Airmic in July 2013, 52.6% of the members who responded cited innocent non-disclosure as the top concern that caused them sleepless nights. Innocent non-disclosure by corporate bodies can lead to insurance claims being denied and cause losses of thousands, if not millions, of pounds. In a survey carried out in August 2012, Airmic members supported modernisation of insurance law. One of the principles under consideration was the removal of innocent non-disclosure as a ground for an insurer avoiding a claim.
What Is Innocent Non-Disclosure?
Insurers need to understand the risks that they are being asked to cover in order that they can adequately assess the premium that should be paid. The higher the likelihood of an event happening, the more an insurer will charge. There are some risks that insurers will not cover. However, potential policyholders cannot be expected to know what information an insurer will deem relevant. It is up to the insurer to ask all the relevant questions. The onus is then on the potential policyholder to answer the questions in an honest, open and transparent manner.
However, potential policyholders can withhold information required by the insurer accidentally and without any intention to mislead the insurer. If questions are ambiguous or unclear, the potential policyholder may give an answer that he thought was appropriate, only to find that, when a claim is submitted, the answer was wrong. The claim will then be refused.
Why Is Innocent Non-Disclosure an Issue For Companies?
Innocent non-disclosure can be a particular issue for companies because knowledge is spread across a number of different people. When an insurer asks an individual if she has ever required hospital treatment for a medical issue, she can be expected to remember her own medical history. However, in a company, personnel can change. The person answering the questions may be relatively new or have transferred in from another department and may not have a full understanding of past issues. No matter how thoroughly the person tries to investigate the issue, information may not come to light. However, there has been no fraudulent intention or reckless disregard.
In companies, communication systems are not fool-proof. Information can become trapped within departments and may not be communicated to the individual who arranges the insurance policy. Departmental managers may not have a full understanding of why the person who arranges the corporate insurance policies needs to know about changes on the ground. Again, without any dishonest intention, the individual arranging the insurance policy may get an answer wrong.
Getting an answer wrong, no matter how genuine the belief that the answer was correct, can prevent a payout in the event that a risk crystallises. In the 2012 Airmic study, it was clear that corporate insurance professionals understood the duties upon them. A majority recognised that it was incumbent upon them to disclose every material risk that a company knows or ought to know through reasonable enquiry, proportionate to the size and type of business.
What Approach Does the Financial Ombudsman Service Take?
The Financial Ombudsman Service (FOS) frequently has cases referred to it that centre on issues of innocent non-disclosure. These cases are referred to the FOS because the claimant is unhappy that the claim has been rejected through, as they may see it, no fault of their own.
The FOS has a clearly defined approach for dealing with these disputes. It firstly examines whether the insurer has asked a clear question which has been answered incorrectly. If the question is unclear, then the insurer cannot found upon it.
The FOS will then ask whether the incorrect answer induced the insurer to offer insurance at all or at the particular premium. If the answer is immaterial and had no impact of the evaluation of risk by the insurer, then the FOS is likely to find in favour of the insured person or company. Finally, the FOS will ask about the type of non-disclosure. This includes how the failure to disclose relevant information came about.
The FOS’s position is that every insurance application must clearly state that failure to disclose material facts will invalidate the policy and, consequently, any insurance claims made under it may fail. If the application lacks this warning, the FOS may find in favour of the insured.