An application for professional indemnity insurance is normally made with the completion of a proposal form. This requires the full disclosure of all 'material information' which may also include information not mentioned within the question set of the proposal form.
Please read this document carefully as a failure to disclose all material information to an insurer can adversely affect the performance of the insurance contract.
We recommend this guide is circulated to all Partners, Directors and Senior Managers for risk management purposes (and CPD, if applicable).
- Insurance application (the proposal form)
- What is material information?
- Who should complete the application?
- When to disclose
- Failure to disclose
- Examples of material information
An application for professional indemnity insurance is normally made through the completion of a proposal form, which requires the full disclosure of all material information. Proposal forms are designed to ask about the main rating features of the risk eg fee income, activities, history, but it won't necessarily include questions that cover everything deemed to be material.
In recent years, insurance companies have reduced the amount of information required to provide a quotation by shortening their proposal forms or even offering single page 'Statement of Fact' documents that just need signing. On the face of it, this seems to benefit the policyholder because it means less form filling which saves time. Often this works well, but if the process is not carefully considered, it can also create potential non-disclosure problems for the Insured. Just because a proposal form doesn't ask the question, doesn't mean you don't need to tell your Insurer.
Proposal forms and Statement of Fact documents normally end with an important declaration signed by the proposer. Wordings will vary but this is an example;
The Insurance Act
Under the Insurance Act 2015 an Insured must disclose all material circumstances known to its Senior Management and those persons responsible for this insurance. The Act defines Senior Management as those individuals who play significant roles in the making of decisions about how the Insured’s activities are to be managed or organised.
'I understand that I have a duty to make a fair presentation of the risk to be insured and that failure in this duty could result in the policy being invalidated and / or any claims not being paid or not being paid in full. If any information provided as part of this application for insurance materially changes before a contract of insurance is concluded, I will immediately inform you. All facts provided within this proposal form or provided separately as part of this application are true and are made in good faith.'
So when providing information or completing a proposal form, the insured must take care that the details provided are complete and accurate. They must note that their duty of disclosure is not only confined to the questions listed in the form. All material facts should be disclosed to insurers regardless of whether the insurer has asked for it.
Material information is information that would influence an Insurer in deciding whether a risk is acceptable and, if so, the premium, terms and conditions to be applied. As an organisation, you will be deemed to know all material information that is known to your senior management and those responsible for arranging your insurance, which should have been revealed by a 'reasonable search'. This places a considerable responsibility on the person in the business buying this insurance.
Given the importance of full disclosure and the potentially serious consequences of getting it wrong, we recommend responsibility for the annual application is undertaken by someone who has full knowledge of all aspects of the business. This includes its past history and any future change planned and who also has a fully vested interest in ensuring the presentation is 100% accurate. This is most likely to be a full director / shareholder or partner in the firm.
An insured’s duty of disclosure applies throughout the negotiation preceding placing of the insurance policy until the insurer has agreed to accept the risk and set the terms, premium and level of participation and the insurance contract finalised. A post-contract duty of disclosure extends to:
- When the insured wishes to vary terms of the original insurance contract so the insurer takes on additional risk.
- When a policy condition requires the insured to advise insurers of specific increase or alteration in risk.
- An extension to the policy period.
Serious non-disclosure by the insured may allow the insurer to avoid the policy even if the non-disclosure is accidental and irrelevant to a claim. An insurer can also seek recovery of any prior paid claims under the avoided policy.
- All business activities undertaken including historic
- New companies, acquisitions or disposals
- Additional offices
- New work with a higher degree of risk or liability
- All claims and circumstances, even if no payments were made
- Criminal conviction or regulatory investigation
- A previously declined application, refusal to renew, imposed terms, restrictions in cover etc.
This list provides some examples only, it is not an exhaustive list.
Because material information is defined as any information that will influence an underwriters rating or decision on providing cover, this can be open to interpretation. In other words it can still be a grey area and therefore remains a common cause of disputes with Insurers.
This guidance note is intended for information purposes only. It is not and does not purport to be legal advice or specific insurance advice. Whilst all care was taken to ensure its accuracy at the time of writing it is not to be regarded as a substitute for specific advice. If you require specific advice, please contact your brokers or call us on 0345 251 4000. This guidance note shall not be reproduced in any form without our prior permission. © All copyright is owned by Professional Indemnity Insurance Brokers Ltd.