Duty Of Disclosure Guide

 

A wall displaying a sign with the words Danger Disclosure

An application for professional indemnity insurance is normally made through the completion of a proposal form. This requires full disclosure of all 'material information' which will often include information not included within the proposal form. 

Please read this document carefully as a failure to disclose material information to an insurer can adversely affect 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) 

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. The proposal form is designed to ask about the main rating features of the risk eg fee income, activities, history, but it won't include everything deemed to be material. 

In recent years, insurance companies have reduced the amount of information required to provide a quotation by shortening proposal forms or even offering a one page 'Statement of Fact'. On the face of it, this seems to benefit the policyholder because it means less form filling, saving valuable business time. Often this is the case and it works well, but if the process is not carefully considered, it can also create potential non-disclosure problems for the Insured. Just because the proposal form doesn't ask the question, doesn't mean you won't need to tell your Insurer.

Proposal forms and Statements of Fact 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.

Declaration

'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.' 

When providing information or completing a proposal form the insured should take care that the details provided are complete and accurate. The insured should 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

It is your duty to make a fair presentation of the risk to the Insurer. In accordance with the Insurance Act 2015 you must disclose all material information which you know or ought to know. 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 and which should have been revealed by a reasonable search.

This requirement places considerable responsibility on the person in the business buying this insurance, because material information means any information that will influence an underwriters rating or decision on providing cover. Given that this is open to interpretation, it’s a grey area and a common cause of disputes with Insurers.

Who should complete the application?

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.  

When to Disclose

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.
Failure To Disclose

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.

Examples Of Material Information 
  • 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 previous declinature, refusal to renew, imposed terms, restrictions in cover etc.

This list provides some examples only, it is not an exhaustive list.

 

This guidance note is intended for information purposes only. It is not and does not purport to be legal or accountancy advice. Whilst all care has been taken to ensure the accuracy of the guidance note it is not to be regarded as a substitute for specific advice. This guidance note shall not be reproduced in any form without our prior permission. © Professional Indemnity Insurance Brokers.