A client’s duty of disclosure to an insurance company

Col Fullagar gains insight into the clients’ duty of disclosure towards insurance companies by studying a number of court disputes over this matter.

When the conversation turns to risk insurance it is not long before the subjects of application completion and underwriting are raised, and the inevitable follow-on is the insured’s duty of disclosure.

The duty itself resides in Section 21(1) of the Insurance Contracts Act (1984), but from there it is inevitably transferred to be prominently displayed in the insurer’s application form.

Risk Insurance 101 drums into financial advisers that, prior to the application being completed, it is essential to inform the client about their obligations in regards to disclosure.

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The duty itself has a beguiling simplicity about it – what can be so hard about filling out a form with information about a client’s health, occupation, pastimes, etc.

And yet, ironically, one way to gain an insight into the duty of disclosure is by studying the various court cases arising out of disputes between insurers and clients as to whether the duty has been met.

What follows is a small selection of recent cases which detail in a much abbreviated form the background, the investigations and the judicial findings.

Note that the following represents opinions based on a review of the summary findings. It does not, and should not, be considered as legal advice.

A formal legal opinion should be sought if clarification on any matter is needed.

Case one

Ms S v Royal & Sun Alliance Life Assurance Aust Ltd (2003) QCA 182

In September 1998 Ms S applied for TPD insurance. Questions asked included:

• “Other than those conditions stated above, have you had any symptoms, sickness, injury or consulted a doctor, chiropractor or other health professional in the last 12 months?”
  Answer: “No”.
• “What was the date of and reason for your last consultation with a doctor?”
  Answer: “June 1997 – routine check up (yearly) – no medical reason – fully fit”.

The application was accepted and the policy issued.

Two months later Ms S was diagnosed as suffering a psychogenic illness brought on by stress. The illness manifested as breathlessness.

In July 1999 Ms S resigned from work and lodged a claim for benefits.

The insurer undertook investigations and discovered a history of episodic breathlessness going back four years.

Ms S had attended her GP in regards to it on six occasions and also attended a specialist twice, the latest being in December 1997.

Comprehensive medical investigations were undertaken which; however, showed no abnormal results.

A cause for the breathlessness could not be found.

The insurer believed Ms S had breached her duty of disclosure and avoided the policy from inception.

Ms S commenced proceedings.

In regards to the first question, the trial judge found that:

“Given the intermittent nature of the symptoms and the normality of all tests, I find that for a lay person, given there were no sinister findings, she was justified in thinking that she had a ‘clean bill of health’, albeit she suffered from breathlessness from time to time.”

As a result the answer to the first question, although untrue, was not considered to be a misrepresentation because Ms S reasonably believed it to be true.

On the other hand, the judge said:

“It is difficult to see how her untrue statements that she had last consulted a doctor in June 1997, or that it had been for a routine check up only, could have been based on that belief …”

“In my opinion, in a policy of this kind, an insured’s statement as to when she last consulted a doctor and the reason for that consultation are statements which a reasonable person in the circumstances of an insured could be expected to know would be relevant to the decision of the insurer …”

The answer to the second question was considered to be a misrepresentation.

Some questions in the application form appear to be seeking an interpretive response and in regards to these, notwithstanding a correct answer is far preferable, an incorrect answer may not be a misrepresentation if based on the reasonable belief of the insured.

Other questions, however, may well require a factual response.

The challenge for the adviser and the client is to distinguish between the two.

Case two

Ms M v Royal & Sun Alliance, Supreme Court of WA, 24 July 2003

In October 1997 Ms M completed an application for term insurance.

The insurer obtained a PMAR (Personal Medical Attendant Report) which disclosed details of Ms M’s medical condition leading to a counter offer of +75 per cent being made.

As part of the counter offer, Ms M was required to sign the following declaration:

“I hereby declare that the above information is true and correct and that since the date of the application there has not been a material alteration in my circumstances, including health, occupation, or hazardous pursuits, which could affect final acceptance of the risk”

The declaration was signed and returned in April 1998.

Ms M died in June 1998

Investigations revealed that subsequent to the completion of the application but prior to signing the declaration, Ms M:

• Was hospitalised for seven days as a result of a deterioration in her known medical condition; and
• Applied to another insurer but her application was declined.

The insurer avoided the policy, citing that Ms M did not advise them of her hospitalisation or that she had applied to and been declined by another insurer.

Proceedings commenced.

This case did not revolve around the completion of the application but the alleged failure of Ms M to disclose relevant information prior to the insurer ‘entering into the policy’.

The court ruled that Ms M should have known:

• Her admission to hospital due to a deterioration in her health was a matter relevant to the insurer, as it was an indication of the seriousness of her condition; and
• Despite the application not asking whether the insured had been refused insurance by another insurer, Ms M should have known this information also would be relevant to the original insurer’s decision.

Both matters were judged a misrepresentation.

Circumstances may be such that particular information needs to be disclosed even though a direct question concerning the matter is not asked.

This could be particularly important to bear in mind when completing short-form applications – for example, under so-called takeover terms.

Also, albeit the insured is advised of the duty of disclosure prior to completion of the application form, there may be merit in providing a reminder prior to the policy being issued if there is a delay between the two.

Case three

Mr P v ING Life Ltd (2009) FCA 283

Mr P was 50 years old – weight trained regularly – swam two kilometres a week and cycled 300 kms a week. His doctor described him as being as fit as an elite athlete.

In November 2002, Mr P applied for a term insurance policy. Questions asked included:

• “Have you ever experienced, required or received medical advice, investigation or treatment for any of the following … indigestion, ulcer, hiatus hernia, bowel disorder or colitis …?
  Answer: “Swallowed fishbone, punctured oesophagus and caused gastric ulcer 6 years ago. Zoton once daily. nil six past years. Dr S.”

• “Do you contemplate seeking medical advice, undergoing any investigations or treatment or having any operation in the near future?”
  Answer: “No”

On 6 September 2003 Mr P died of oesophageal cancer. A claim was lodged

Investigations revealed:

• In January 1997 Mr P had tests which revealed the presence of Barrett’s oesophagus, ie, a change in the lining of the oesophagus that, amongst other things, increases the likelihood of developing oesophageal cancer;
• Mr P commenced long-term treatment, ie, taking one Zoton tablet daily to reduce acid levels in the stomach;
• Repeat tests were undertaken in April 1997, May 1998 and November 2001 which confirmed the condition.

On 3 December 2003 the insurer paid the claim for a reduced amount, citing that had Mr P complied with his duty of disclosure, the policy would have been loaded +50 per cent.

Mrs P commenced proceedings.

Mrs P maintained that Mr P would only have considered those matters relevant for which questions were asked.

The insurer had not asked a specific question about Barrett’s oesophagus, thus he would not be aware of its relevance.

The court ruled, however:

“It did not matter … that (the insurer) did not ask Mr P specifically whether he had Barrett’s oesophagus for Mr P to appreciate that his condition carried an increased risk of contracting cancer of the oesophagus…”

“It is evident from the nature of the insurance and from the breadth of the subjects canvassed by the questions in the application form and from the fact that the insurance was life insurance, that the (insurer) was seeking information relating to any matter which might affect the life expectancy of the applicant for insurance.”

It was found that the answers by Mr P were misrepresentations.

“Every matter” that is relevant to “the risk” – ie, the type of insurance being applied for – needs to be disclosed; and again, this disclosure may be required even if a direct question is not asked.

Case four

Australian Casualty & Life Ltd v Ms H, Supreme Court of Queensland Court of Appeal, 575 (1998)

In December 1990 Ms H applied for income protection insurance – to age 65, 14 day waiting period.

In response to various questions, she provided the following answers:

• “Have you ever had, or been told you had or received advice or treatment for … any other condition or injury?”
  Answer: “No”.
• “To the best of your knowledge and belief, do you now have any impairment or deformity or departure from good health?”
  Answer: “No”.

In 1992 Ms H went on to claim for a psychiatric disorder.

The insurer’s investigations found that Ms H had been referred to a specialist in July 1990 as a result of symptoms she had suffered for the previous six months.

The specialist wrote back to her GP:

“Ms H has quite a few problems; all of them are minor but they worry her:

• Tension headaches which occur three to four times a week, easily relieved by aspirin;
• Migraine headaches every one or two months;
• Chest wall pain, localised on one side of the chest or the other;
• Two episodes of tilting or rotation being probably vestibular, ‘possibly’ associated with sinusitis …”

The specialist noted “she is really quite well … I think she really has little to worry about…”

Ms H was given medication for the migraines but as they improved, she stopped taking it.

Both the specialist and the GP reassured Ms H in regards to her health.

The insurer avoided the policy for reasons of fraudulent non-disclosure.

Ms H commenced proceedings.

The judge found:

“The…duty to disclose is first directed to any matters known to the insured and once a matter is known…the next aspect…is whether the insured knows the matter to be relevant to the insurer...In my opinion, ‘known’…means more than suspected or believed. What is required is that the matter should be the subject of a true belief, held with sufficient assurance to justify the term ‘known’”.

“There was no doubt Ms H knew about the matters for which she has seen the physician, but did she know them to be relevant?”

The judge continued:

“What is clear from the (Ms H’s) evidence is that the symptoms for which she consulted (her GP and the physician) were matters which…became in her view minor ailments and unlikely to recur or cause her to be absent from work for more than 14 days”

The undisclosed matters were not considered misrepresentations.

Not only was the type of insurance relevant in regards disclosure, but also the details of that insurance, ie, the waiting period.

Further, the judge provided an opinion regarding the interpretation of “known”, ie, an assurance beyond what might simply be suspected.

Case five

Royal & Sun Alliance Life & Disability v Mr L, 10 ANZ Insurance Cases, 61-434

In June 1995 Mr L applied for income protection insurance. In response to a question concerning “…stress, tiredness, nervous conditions, depression…”, Mr L answered “No”.

In May 1996 Mr L stopped work and claimed for depression

The insurer’s investigations revealed that in March 1995 Mr L had seen his doctor because it was a:

“…very stressful time at work…”

The doctor’s notes recorded a diagnosis of “stress” but it was not clear if this was communicated to Mr L.

Mr L was referred to a counsellor for what he thought was advice on how to deal with personal relationship difficulties. He was given antibiotics and had six weeks off work.

He maintained that he did not know he was suffering from a medical condition of “stress” such that it warranted disclosure.

The court ruled…

“…the imprecise nature of the word ‘stress’ in the personal statement did sensibly require some limitation. The reference to stress, even in the context of the question relating to ‘symptom, sickness or injury’ and ‘consulting a doctor’ did not per se require disclosure…Something more was required, namely a medically diagnosed stress condition that went beyond that which is experienced every day”.

The design of the application form can play an important role in facilitating disclosure, and a relevant question might be whether the incidence of non-disclosure would reduce if generic questions were agreed to by insurers.

The importance of what is “known” as distinct from what might be suspected is again evident.

Summary

“An insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that:

• The insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or
• A reasonable person in the circumstances could be expected to know to be a matter so relevant”.

The cases discussed focus on interpretations of the key words in bold but, of course, in different situations, any component of the duty of disclosure may take on a particular importance.

Safety in advice is not just contingent on competence and compliance; it is essential everyday practices such as the briefing of a client as to their duty of disclosure are undertaken in a concise, consistent and, above all, an informed way.

Col Fullagar is the principal of Integrity Resolutions Pty Ltd.