When a person proposes (applies) for an insurance policy, the Insurance company needs to get certain information from the consumer to decide whether to offer (and renew) the insurance and to decide the price or other terms of the insurance to be offered to the consumer.

Contracts of insurance are fiduciary contracts – they involve a promise. This means they are contracts “uberrimae fidea” – contracts of the utmost good faith. The law imposes a duty of disclosure on policyholders when they seek to take out new insurance cover or to renew existing insurance cover. The reason the rule obliges one party to disclose is to prevent fraud and encourage good faith. One party knows all of the facts (the proposer) and the other needs to know all the facts (the insurer).

Non-disclosure occurs when one party to the contract fails to disclose a fact that is considered material. Every circumstance is material which would influence the judgment of a prudent underwriter in fixing the premium or determining whether he will take the risk.

Where non-disclosure occurs, the insurance contract is voidable on the part of the aggrieved party. In practice, it is usually the Insurer who seeks to void the contract. Courts however will distinguish between fraudulent and innocent misrepresentation. An insurer may avoid the contract if a non-disclosure or misrepresentation is fraudulent.

The courts have allowed insurers to reduce their liability to nil in circumstances where they would not have accepted the risk but for the non-disclosure or misrepresentation.

The reason we take out insurance in the first place is to protect us from calamity and to make good the damage or replace the asset. Therefore the refusal by an Insurer to pay a claim due to non-disclosure could have a disastrous effect on a business or on the survivors of a deceased person.

Proposers for insurance should always disclose material facts and if they have any doubt about a fact being material, they should disclose it anyway.