innocent non-disclosure

We occasionally receive cases where a policyholder has failed to disclose a material fact. Previously in such cases, where we were satisfied the policyholder did not intend to mislead the insurer, we have often adopted a ‘proportional’ approach. This has involved performing a calculation to compare the premium the policyholder actually paid with the correct premium (that is, the premium they would have paid had the insurer known the full facts), in order to ascertain what proportion of cover the customer should now receive. However, we are not entirely satisfied that this is an appropriate approach to take as a general rule.

The ABI (Association of British Insurers) Statement of General Insurance Practice requires firms not to repudiate a claim on the grounds:

of the customer’s failure to disclose a material fact, if that fact was one that a customer could not reasonably be expected to disclose; or

of misrepresentation, unless it is a deliberate or negligent misrepresentation of a material fact.

The same Statement also requires insurers:

to include clear questions on application forms about matters insurers have commonly found to be material; and

not to ask questions requiring knowledge which the signatory could not reasonably be expected to possess.

In accordance with these principles, if the customer’s non-disclosure has been totally innocent, we may, in some circumstances, expect an insurer to pay the full amount of cover, rather than a proportionate sum. We assess each case on its facts, our aim being to ensure each party is treated fairly. Our approach is not in any way designed to protect those who have acted fraudulently and, from experience, we have found there are relatively few cases that we would consider to fall within the innocent non-disclosure bracket.

However, we are likely to consider a non-disclosure innocent when the question the insurer asks is unclear. When the question is clear, we are more likely to maintain a proportional approach. Obviously, when we suspect deliberate non-disclosure in response to clear questions, we will continue our approach of supporting insurers who have repudiated claims.

One example of non-disclosure arises in connection with motor insurance. At some point, most parents consider adding their son or daughter to their motor policies. In deciding whether to allow such an additional driver and what to charge to cover the additional risk, insurers generally use somewhat different standards, though few apply an absolute ban to such drivers. Assessing the risk of the new driver will normally take account of the other cars in the family and the type of vehicle covered. The usual procedure is to ask the policyholder to answer various questions and then make a decision.

If there is subsequently a dispute, then the issue becomes more complicated if the insurer made no record of the questions asked, other than a printed note of declarations. If the customer is not required to sign this, the insurer may find it difficult to establish that the customer has misrepresented the risk. The insurer is under a duty to ask clear questions about matters it considers important – ‘material’ – to its assessment of the risk. But even where it has asked clear questions, if there is no contemporaneous proof, it may find it difficult to demonstrate that it has done so.

We do not have any sympathy with policyholders who obtain insurance for their children’s cars by giving the insurance company false information. However, we do not believe that all parents who have added a son or daughter to their policy as ‘occasional users’ are trying to defraud the industry.

Investigating complaints of this type requires us to evaluate the alleged non-disclosure or misrepresentation, including looking at the questions the insurer asked and the answers they were given, as well as at the explanation for any discrepancies and the insurer’s guidelines for dealing with the risk it was actually going to underwrite. Only where we are satisfied that there was a deliberate non-disclosure or misrepresentation will we agree the appropriate remedy is for the insurer to cancel all cover and refund the premiums. The insurer is entitled to forfeit these if there is clear evidence of fraud.

The following case studies illustrate the range of cases we have considered.

case studies – innocent non-disclosure

07/18
motor – misrepresentation – owner of vehicle – father insuring son’s car – whether insurer entitled to cancel policy.

Mr H insured his car, with his son as a named driver. After the car was stolen from a supermarket car park, the insurer investigated Mr H’s theft claim and discovered the car was, in fact, registered in the name of the son, and the son was also responsible for the financing arrangement. The insurer refused to meet the claim and cancelled the policy from its start date.

Mr H admitted that he had taken out the policy in order to reduce the premium by using his no claims discount, but he argued that his son was the main user of the car.

complaint rejected
We accepted that the fact the son was the registered owner of the car was not conclusive. However, the evidence showed clearly that the son – rather than Mr H – was the main user. Mr H had misrepresented the position to the insurer and its decision to treat the policy as if it had never come into force was fully justified.

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07/19
motor – misrepresentation – whether innocent – whether insured entitled to full indemnity.

Mr L insured his car in April 2000, with his wife and son named as ‘additional drivers’. The car was stolen a few days later, after being driven by the son. The insurer concluded, after investigation, that contrary to his declaration on the policy application form, Mr L was not the car’s main user. However, the insurer did not cancel the policy. Instead, it offered to pay a proportional settlement. This was based on the premium it would have charged if it had known the son was the main driver and it was calculated at 52% of the total claim.

Mr L denied that his son was the main user of the car and he argued that the insurer’s investigators had misunderstood the answers he and his son had provided. He contended that the claim should be settled in full.

complaint rejected
There was sufficient evidence to satisfy us that Mr L’s son was the main user of the car and that the insurer had not misunderstood the answers. Both the son and Mr L had told the insurer that the son was the main user. Moreover, there were a number of discrepancies and inconsistencies in Mr L’s accounts. The strict legal position was that the insurer was entitled to treat the policy as if it had never come into force and to reject the claim, subject to refunding the premium. Its offer of a proportional settlement, based on the assumption that all the misrepresentations were innocent, was a fair and reasonable response to the dispute. We were not satisfied that the misrepresentations were innocent and there was no ground for requiring the insurer to increase its offer.

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07/20
motor – misrepresentation – whether named driver was ‘owner’ of car – whether insurer entitled to cancel insurance.

Mr D, a police officer who had taken early retirement on medical grounds, took out motor insurance for his new car. He stated that he owned the car and that his family did not own or use any other car. His adult son was named as a driver.

Two days after Mr D took out the insurance, the car was stolen. On investigating the claim, the insurer learnt that the purchase receipt was in the son’s name, as was the finance agreement and the direct debit mandate for the premium payments. The personalised registration number corresponded with the son’s initials. When questioned, both Mr D and his son agreed that the son’s old car had been sold in part exchange towards the purchase price. They did not dispute that Mr D also had another car.

The insurer cancelled the policy, on the ground that both the answers Mr D had given on the proposal were untrue. Mr D argued that his son was only an occasional user of the car and that the investigation did not prove otherwise.

complaint rejected
It was very difficult to believe that Mr D, rather than his son, was the car’s owner and main driver. Mr D had not been able to explain why it was necessary for him to use the car extensively when he had the use of another car, or why his son would use the car only occasionally when there were two cars in the family. We were satisfied that Mr D had not answered the questions on the proposal form correctly.

If the insurer had known the son was the car’s owner, it would not have issued this policy, since it was a policy offered only to retired police officers to cover their own cars. In the circumstances, the insurer was entitled to treat the policy as if it had never come into force.

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07/21
motor – non-disclosure – whether clear questions asked – whether insurer entitled to cancel policy.

Mrs B took out insurance for her car, with her son as a named driver. She was asked various questions, one of which was whether she had ‘use’ of another car. She later received a printed ‘Statement of Facts’ which recorded her answer to that question as ‘No’.

Almost two years later, her son was involved in an accident. Mrs B completed a claim form, on which she stated that she had ‘access’ to another car. The insurer cancelled the policy, rejecting the claim and denying liability for damage to the third party vehicle, on the ground that Mrs B had misrepresented the risk. Mrs B explained that she did not normally drive the other car, which belonged to her husband and that she was the main user of this car. However, the insurer contended if it had been aware she had access to another car, it would only have covered this car for a premium of £4,319.

complaint upheld
There was no evidence of the questions the insurer had asked Mrs B at the outset, other than the Statement of Facts. We were not satisfied that asking Mrs B if she had ‘use of another car’ was a clear question. The insurer had issued no guidance as to the meaning of the question and Mrs B had interpreted it as asking whether she wanted the policy to cover more than one car.

We did not accept that the fact of Mrs B’s having access to another car made a material difference to the risk she had represented to the insurer when she took out the policy. We were satisfied that she was the main user of the car and that the son was an occasional user. The situation was not altered because she occasionally drove her husband’s car. We therefore required the insurer to deal with Mrs B’s claim. In addition, we awarded Mrs B £200 compensation for the mishandling of her claim.

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07/22
motor – total loss – salvage – whether insurer entitled to retain salvage – compensation for wrongful disposal of salvage.

Miss G's car was damaged in an accident and the insurer settled her claim on a ‘total loss’ basis. She wanted to keep the salvage, but the insurer refused and passed the car to salvage agents. Some months later, Miss G learnt from the Driver Vehicle Licensing Agency that someone had applied to re-register the car, apparently with a view to repairing it and putting it back on the road. She complained to the insurer and demanded compensation for the additional cost she had incurred in having to buy a new vehicle, plus interest.

The insurer explained that it was unwilling to allow its policyholders to keep cars which were unroadworthy. In this, it believed it was acting both in the public interest and in accordance with industry and government guidelines. However, it accepted that, on this occasion, it should have allowed Miss G to keep her car. In recognition of its error and other minor failings, the insurer offered her £500 compensation.

complaint rejected
The salvage of a car remains the policyholder’s property until settlement has been agreed. Insurers are not entitled to dispose of the salvage without the policyholder’s express permission. Where there is some unusual delay in reaching agreement, the insurer could ask for the policyholder’s permission to dispose of the salvage. This would prevent storage charges accruing, particularly where the only point in dispute is the amount offered.

If a policyholder seeks to retain and repair a car, the insurer should consider the request on the basis of the extent of repairs required. Where the car has sustained structural damage which cannot be repaired economically, then there will be serious issues of road safety to resolve. However, where much of the damage is cosmetic, it would not be unreasonable to agree to a policyholder’s request to keep their car.

In this instance, we were satisfied that the insurer's compensation offer was reasonable, in the absence of any evidence that Miss G had suffered financial loss, distress or inconvenience except as a result of the insurer's retaining and disposing of the salvage. The offer was in line with awards we had made in similar situations. By settling Miss G’s claim on a ‘total loss’ basis, the insurer had already paid her enough to enable her to replace her car with a similar one.

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