What is Misrepresentation in insurance?
Misrepresentation in insurance occurs when a party to a contract of insurance is provided with false or inaccurate information. It’s often discovered when it’s too late to revisit the terms of the contract. It can amount to a breach of the duty of utmost good faith.
Misrepresentations are often captured in a contract of insurance by a “basis clause”, included as a term of the contract. Such clauses commonly require the insured to make declarations that the information provided in the insurance proposal is true and complete. Once the insurance policy is issued, it will contain the basis clause which is to be relied upon as an essential term of the contract of insurance.
Inaccuracy of information provided by the insured may result in a breach of the basis clause and hence a breach of the contractual duty. This may entitle the insurer to avoid liability under the contract of insurance. In order for an insurer to avoid a contract of insurance based on a misrepresentation, the misrepresentation must be material and must have induced the insurer into accepting the contract. The onus is on the insurer to prove that there was a material misrepresentation by the insured. Once the insurer establishes a material misrepresentation, the onus of proof is reversed. The insured must demonstrate that the insurer on a subjective basis was not so induced to enter the contract.
How do we identify Misrepresentation?
Misrepresentation can occur under common law. There are also other statutory provisions such as the Australian Consumer Law that deal with misrepresentation. Misrepresentation for insurance related disputes is regulated under the Insurance Contracts Act 1984 (Cth) (“ICA”).
The insured’s actions cannot amount to misrepresentation if they are made due to a misunderstanding. Section 23 of the ICA provides relief to an insured if they reasonably understood a question by the insurer to have a particular meaning. This prevents the insurer receiving the unfair advantage or asserting a misrepresentation cause against an insured when questions in an insurance proposal were ambiguous. The relevant test to the insured’s understanding is contained in section 23(b) of the ICA – that is: whether a reasonable person in the circumstances of the insured would have understood the question to have the same meaning as that understood by the insured when they provided their answer.
The insured’s liability is further limited by Section 26 of the ICA. An insureds statements will only amount to misrepresentation if the insured knew or should have reasonably known of the statement as a misrepresentation in the course of making the statement: section 26 (2). If an insured makes an untrue statement in connection with an insurance proposal which they believed to be true and a reasonable person in the circumstances would likewise have believed it to be true, such statement would not be a misrepresentation: section 26(1). The insured bears the onus of proving section 26(1) and the insurer bears the onus of proving section 26(2).
Where an insurer would have entered a contract of insurance on the same terms and for the same premium if it had known the truth of information misrepresented or not disclosed to it by an insured, section 28(1) provides no remedy to the insurer. The insurer can however avoid the contract in case of fraud under section 28(2).
Where an insurer is not entitled to avoid the contract because of the misrepresentation or non-disclosure, the insurers liability with respect to the claim is reduced to the extent that would place the insurer in a position in which the insurer would have been if the relevant failure had not occurred: section 28(3). Section 28(3) also applies if the insurer otherwise has the right to avoid the contract but elects not do to so.
When is misrepresentation fraudulent?
For a misrepresentation to be fraudulent, the proponent needs to be aware only that the statement is false and intend the insurer to accept and act upon it as true; Von Braun v Australian Associated Motor Insurers Ltd [1998] ACTSC 122. Von Brann was a case which involved the insured overstating the purchase price of their vehicle, in that case the court examined the relevant provisions of the ICA and held (amongst other things) that “the question as to whether a misrepresentation was made “fraudulently”, will be answered in favour of the insurer if such misrepresentation was made by an insured who knew that it was false or had no actual belief in its truth, or recklessly, without caring if it be true or false, with the intention that the misrepresentation should be acted on in whatever fashion the insurer might choose.”
Misrepresentations may give an innocent party the right to repudiate the contract of insurance.
The key for avoiding misrepresentation disputes is for the parties to act honestly, truthfully and make disclosures to the best of their knowledge. In addition, the insurer should design clear and unambiguous questions so that the insured or a reasonable person in their position would reasonably understand the questions.
Note: This is a general guide only. Circumstances may vary and advice should be sought about your specific circumstances.
Comments