The duty of disclosure needs to be reconciled with the new ways insurers are collecting and processing policyholder information
The duty of disclosure has long been a cornerstone of insurance. Although, law reforms over the past 30 years have made the duty fairer for policyholders, it remains at the heart of the insurance transaction – at least in relation to non-consumer policies. But it may be reaching its use by date.
The rationale for the duty rests on two assumptions. First, that the facts relevant to the assessment of the risk to be insured lie, most commonly, in the knowledge of the insured. Second, that the insured is in a position to identify and volunteer all matters known to it that are relevant to the risk to be insured.
While these assumptions may have once been well founded, they don’t necessarily hold good in 2018, especially for small- to medium-sized businesses. Insurers are now able to access large data sets of historic risk information, which allow them to incorporate more scientific pricing and underwriting algorithms into increasingly sophisticated and automated underwriting processes.
At the same time, for marketing and cost purposes, insurers are limiting the scope of questions asked of insureds. This has been hastened by the industry’s renewed focus on customer experience and made possible by insurers’ enhanced capacity to identify and quantify risks in other ways. However, the rationalisation of questions asked by insurers has resulted in insureds having less information to identify what’s relevant to the insurer.
The rise of ‘insurtech’ business models will further enhance these trends. Daniel Fogarty, CEO and Founder of Evari Insure, a notable player in the insurtech space, which targets its products solely at SME business, says the duty of disclosure can be a challenge for customers, ‘Unfortunately many buyers of insurance don’t trust insurers, when a disclosure issue arises it just reinforces that perception. Small business owners are experts in their own business and not in insurance, so what is “reasonable” to an insurance professional can be very different to what is “reasonable” to a plumber on site who just wants to know they’re covered’.
Evari, other insurtechs and incumbent insurers are ‘all working to increase sophistication of underwriting analysis, and bring as much data to the analysis as possible, to reduce reliance on customer disclosures; but some disclosure is still required’ says Mr Fogarty. Insurers need to continue to work hard get there ‘so that we can achieve the right underwriting outcome and the right outcome for the customer’.
A hardening of the courts’ approach to non-disclosure
Against this background, courts have taken a restrictive approach to the range of matters a ‘reasonable person in the circumstances’ could be expected to know to be relevant to an insurer. Two recent cases in the NSW Court of Appeal demonstrate this.
In the first case, a brothel owner, insured under a specialist adult industry policy, did not have a duty to disclose that its sole director and manager were members of the Comanchero outlaw motorcycle gang.
In the second, a service station operator was insured under a policy that provided cover for pollution, which was the direct result of a ‘sudden, specific and identifiable event’ occurring during the policy period, but not for historic or gradual pollution.
The court found the insured did not have a duty to disclose an environmental report which identified historic underground contamination below the service station or that the contamination was above notifiable levels and had been notified to the Environmental Protection Authority. Nor was it required to disclose that levels of some contaminants had increased before renewal of the policy.
These cases both involved small businesses undertaking activities which could be expected to have heightened exposure to the same type of risks inherent in the matters the insurers complained ought to have been disclosed. Yet, in neither case did the insurer choose to ask any questions to inform itself about such matters. The Court queried how a reasonable insured in the circumstances could be expected to know these matters were relevant to the insurer.
The future of the duty of disclosure
The industry must work to reconcile traditional approaches to the duty of disclosure with the new ways in which insurers are collecting and processing policyholder information and pricing risk.
Insurers that focus underwriting and risk pricing on aggregated data at the expense of specific information are likely to find it difficult to fall back on non-disclosure defences at claims time.
But insurers may not be ready to let go of the safety net of the duty of disclosure altogether, even for small business. That step would require confidence that the cost of paying claims, which might otherwise have been declined because of non-disclosure, could be fully offset by the savings from streamlining the underwriting process and the improved customer experience generated by simpler applications and fewer claims disputes.
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This article was previously published by insuranceNEWS (June/July edition) and written by Principal Andrew Sharpe. Please contact us if you have any questions or if you would like further information.
Disclaimer: This information is current as of June 2018. These articles do not constitute legal advice and do not give rise to any solicitor/client relationship between Meridian Lawyers and the reader. Professional legal advice should be sought before acting or relying upon the content of these articles.