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Chapter 5 Good faith 5/11

Insurers’ remedies for qualifying misrepresentations

Qualifying The insurer may avoid the contract if a qualifying misrepresentation was deliberate or
misrepresentations were reckless. In such a case, the insurer need not return any of the premiums paid, except
deliberate or reckless: to the extent (if any) that it would be unfair to the consumer to retain them.
Qualifying In such a case, the insurer’s remedies are based on what it would have done if the
misrepresentation was consumer had exercised reasonable care not to make a misrepresentation.
careless:
• If the insurer would not have entered into the consumer insurance contract on any
terms, the insurer may avoid the contract and refuse all claims, but must return the
premiums paid.
• If the insurer would have entered into the consumer insurance contract, but on
different terms (excluding terms relating to the premium), the contract is to be
treated as if it had been entered into on those different terms if the insurer so
requires.
• If the insurer would have entered into the consumer insurance contract (whether the
terms relating to matters other than the premium would have been the same or
different), but would have charged a higher premium, the insurer may
proportionately reduce the amount to be paid on a claim.

The formula to calculate how much the insurer may deduct from the insured amount to be paid, is the
same formula which applies in business insurance under the Insurance Act 2015 as stated above.

Example 5.7
William takes out a private medical insurance policy but carelessly forgets, when completing the medical declaration Chapter
on the proposal form, to mention that he has a persistent back problem. This omission comes to the insurer’s
attention after William has submitted a claim. The insurer decides that it would have excluded this and related 5
conditions. As a result, the insurer need not pay William’s claim that would have fallen under the exclusion but must
pay all other valid claims. Furthermore, if the insurer would have charged more premium to include the back
condition, it should then pay a proportion of William’s claim.

D3 Breach by the insurer Reference copy for CII Face to Face Training

Neither IA 2015 nor CIDRA contain any provisions about the insurer’s breach of the duty of fair
presentation of the risk.
Section 17 of MIA 1906 states:
A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith
be not observed by either party, the contract may be avoided by the other party.

However, s.14(3) of IA 2015 omits the words ‘and, if the utmost good faith be not observed by either
party, the contract may be avoided by the other party’. Therefore, a contract of marine insurance under IA
2015 is still a contract based upon utmost good faith.
Furthermore, IA 2015 does not overrule any common law rule which imposes a general duty to act in
good faith. As a result of this duty, the insurer may be required to act in good faith at the pre- and post-
contractual stage in the form of disclosing material information to the insured and to act in a fair and
businesslike manner in claims handling. It seems, therefore, that the insurer’s duty of good faith will be
decided by common law and MIA 1906.
An insurer may be deprived of the right to avoid a policy because of its own lack of good faith.

E Compulsory insurances

There is certain insurance required by law which impacts an insurer’s rights following a breach of the
duty of disclosure. The most common example is motor insurance (third-party personal injury and
property damage) where the legislation usually prevents an insurer from avoiding liability on the grounds
of certain breaches of utmost good faith.
The same rules of disclosure apply to motor insurance policies as to other non-life insurance. However,
the law is mainly concerned that the victims of road accidents should be adequately compensated, and
this aim would be defeated if an insurer could avoid paying claims on the grounds of non-disclosure.
Insurers must, therefore, meet all claims for personal injury and property damage. Once they have done
so, they then have a right of recovery against the policyholder.