Material facts - Your duty of disclosure

At the time of writing this page (July 2013) the duty of disclosure rules are changing. Up until now it has always been the duty of a policyholder to disclose facts ‘material’ to a risk that may affect the insurers underwriting of a particular risk they are being asked to insure.

If the insurer failed to ask you any questions about a property then it was up to the policyholder to disclose anything which ‘in the insurers’ opinion’ was relevant to their acceptance criteria or underwriting of the policy.

Material Facts of property insurance can include any non standard materials used in the construction of a building, proximity to a stream / river / reservoir, proximity of trees, business activities and business visitors at the property, the property being unoccupied, criminal convictions, attempted thefts / illegal entry / vandalism and so on.

All change – On 7th June 2013 the Financial Conduct Authority (FCA) stated that they were looking to change the ‘duty of disclosure’ to insurers, to the consumers having a duty to take ‘reasonable care’ not to make a ‘misrepresentation’ during pre-contract negotiations.

This change tips the balance in favour of the policy holder as it would require insurers to have to prove that the policyholder ‘misrepresented’ the insurance risk and material facts surrounding it.

The FCA have not at this stage given any concrete examples of what may constitute a ‘misrepresentation’ at this stage. They have asked for comments on their plans by 6th August 2013 and will no doubt publish their decisions in the near future.

Do I still need to have to disclose material facts / changes ?

In short, yes you do – here’s an example.

Example 1
Mr Yang, 86 years old lives in a semi detached house in Northampton and he has renewed his policy with his household insurer on a standard home insurance policy.

2 months later Mr Yang has his third fall in recent months and breaks his arm. After a short stay in hospital Mr Yang and his family decide that he should move into a care home as his family live 40 miles away. He moves into a home shortly afterwards.

Neither Mr Yang nor his family inform his insurers that he has moved out of his home and is living is the care home.

Winter descends and Northampton has snow. Mr Yang’s pipes freeze and burst. As the main water tap has not been turned off, the property floods, bringing down ceilings, ruining carpets, furnishings and possessions in the property.

Mr Yang and his family assume that’s going to lead to a hefty insurance payout…..

A call to the insurer results in them declining the claim on the basis that Mr Yang had moved out of the property. He had not told the insurers, not disclosed a material fact and change which was relevant to their underwriting of the insurance so they voided the policy back to the date when he moved into the care home.

Example 2
Another example could be Miss Short who has a standard household policy covering the buildings and contents of her home. She moves in with her partner and lets her friend rent the house. Miss Short didn’t tell her insurers that she had moved out, nor that her friend had moved in.

The friend of Miss Short left some damp washing over the vent of an electric heater causing the clothes to ignite and set fire to the upper floor of the house.

Miss Short called her insurers who declined any indemnity under her policy as she had failed to inform them of facts material to the risk.

These are fairly typical examples of a change of situation that can easily occur during the life of a policy. This reinforces the advice that you need to keep the insurers up to date of any changes immediately it occurs. Regardless of the FCA rulings on initial disclosure, if the situation you have described to them in your original proposal changes, then the information you have supplied them becomes incorrect, and your policy becomes invalid.

You may be worried that a disclosure of a change in circumstances to the insurer may lead to unwelcome complications. However, that’s far preferable to paying for an insurance policy that will do you no good when you have to claim.