The duty of disclosure is a fundamental part of the relationship between the insured and the insurer up to the point in time when the policy incepts. If that duty is breached, the remedies available in Australia to an insurer are wide ranging.
However, it is not unusual for books of business (particularly in the life insurance space) to be transferred from one insurer to another insurer and beyond. In that case, what are the remedies available to the subsequent insurers if the insured has breached its duty of disclosure to the first insurer?
The Federal Court of Australia has recently touched upon this question.
The Duty of Disclosure
Section 21 of the Insurance Contracts Act relevantly provides as follows: -
(1) Subject to this Act, 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:
(a) 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
(b) a reasonable person in the circumstances could be expected to know to be a matter so relevant, having regard to factors including, but not limited to:
(i) the nature and extent of the insurance cover to be provided under the relevant contract of insurance; and
(ii) the class of persons who would ordinarily be expected to apply for insurance cover of that kind.
This section makes a key point – the duty of disclosure expires once the insured and insurer have entered the contract of insurance. That is a clue.
The Decisions of the Federal Court of Australia
The specifics do not really matter.
The factual theme of the decisions before the Federal Court involves TPD and Salary Continuance policies pursuant to which the insured made claims for indemnity when the underlying medical circumstances should have been but were not disclosed to the insurer before inception.
The Determinations of the Federal Court
The Federal Court confronted with this factual matrix, has observed that notwithstanding the failure to disclose the underlying medical conditions, the insured owed no duty to the subsequent insurers to disclose those conditions. Accordingly, those subsequent insurers were unable to take advantage of the relief available to insurers under the Insurance Contracts Act where there had been a breach of duty.
While insurers have remedies where the insured’s conduct can be characterised as a misrepresentation, the problem here is that the subsequent insurers need to demonstrate that they relied upon the insured’s representation.
It has been suggested that insured might have a general duty of disclosure outside the Insurance Contracts Act but over the years there has been little support for that suggestion.
The preferred view is that the Act represents a code. That remains the preferred view.
Undoubtedly it comes as a surprise to any insurer when it discovers that a claim being made against it rests on facts that were not disclosed.
The reality however for subsequent insurers is that the relief against such a non-disclosure is extremely limited if not non-existent. The risk needs to be managed at the time the book of business is acquired.
The names of the cases are: -
Sharma v LGSS Pty Ltd  FCA 167
Sharma v H.E.S.T. Australia Ltd  FCA 536