It goes without saying that, in the business of insurance, there is a significant emphasis on the duty of disclosure, a foundational principle of utmost good faith. Both parties – the prospective policyholder (insured) and the insurer – bear this responsibility, and failure to honour it can lead to severe consequences, including the invalidation of the insurance contract.
The Insured's Obligation
Before the insurance contract is concluded, the prospective policyholder must be forthright about all material facts and circumstances of which they are aware. The English Marine Insurance Act of 1906 articulates this explicitly. As per the Act, the insured is considered to be aware of every circumstance that they should know in the regular course of business. For instance, historical details such as previous policy cancellations, declined policies, or refusals for policy renewal should be brought to the insurer's attention. Overlooking or failing to reveal such material facts could lead to the insurance contract becoming voidable.
A pivotal case, Mutual and Federal Insurance Company Ltd v Municipality of Oudtshoorn (240/82) [1984] ZASCA at p432E – F, emphasised that both the insured and the insurer are bound by this duty to disclose all facts pertinent to the risk assessment or the calculation of the premium. Any lapse in this duty is tantamount to fraud, giving the aggrieved party the right to nullify the contract.
The criteria for determining materiality were outlined in Section 63(3) of the repealed Insurance Act. In essence, the Court evaluates whether the misrepresentation would likely have influenced the insurer's risk assessment. A significant disparity between the risk assessment based on the misrepresented facts and the actual situation signifies a material discrepancy. Such a disparity can render the contract void if, in the light of the truth, the insurer would have declined the risk or demanded different terms.
The Insurer's Responsibility
While the insured has the duty to disclose, the insurer too has obligations. Rooted in general principles of contract law, such as fair dealing and prevention of unethical conduct, insurers must provide all relevant information to the prospective policyholder. Any failure in this regard could be termed as 'culpa in contrahendo' – a clear duty to negotiate with care, avoiding any misrepresentation that might lead the other party to act against their interests.
Insurers need to present pre-contractual information in a manner that is timely, clear, understandable, legible, and unambiguous. A lack of such transparency should result in the insurer being held accountable. The insurer's obligation to inform isn't merely a reflection of good faith; it's rooted in the understanding that the potential insured primarily relies on the information provided by the insurer in the market.
If an insurer withholds material information or provides false details pivotal to the contract, it can be deemed as an actionable misrepresentation. In legal terms, this can make the insurance contract, in whole or part, voidable. In such situations, the policyholder can either rescind the contract and claim restitution or pursue damages on delictual grounds.
Understanding the pre-contractual duty of disclosure is crucial in the insurance domain. Material facts play an instrumental role in allowing the insurer to accurately gauge the risk and determine the viability of entering into an agreement and the terms thereof. Failure to uphold this responsibility, by either party, undermines the very foundation of the contract. Thus, for the insurance contract to stand firm, transparency and forthrightness from both the insured and the insurer are non-negotiable.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
