The Duty of Fair Presentation: An Essential Refresher
One of the most common arguments between policyholders and their insurers arises from an allegation that material information was omitted from disclosure provided to the insurer prior a policy’s inception. The consequences of such an allegation, if it can be sustained, range from very little (say, if the non-disclosure would not have affected the insurer’s underwriting, or if the policy contains an “innocent non-disclosure” clause), through to the very serious (i.e. avoidance of the policy).
It follows that one of the most effective ways for policyholders to avoid coverage disputes is to ensure that the disclosure process is fully understood, and that the correct disclosure is made to an insurer prior to a policy’s inception.
What is the Duty of Fair Presentation?
The requirement for policyholders to comply with a Duty of Fair Presentation before entering into (or varying) commercial (as opposed to consumer) contracts of insurance was introduced by the Insurance Act 2015 (the “Act”). It effectively brings together, into one duty, policyholders’ pre-Act obligations in respect of non-disclosure and misrepresentation.
In essence, the Duty of Fair Presentation requires those seeking insurance to volunteer and disclose the information that a prudent insurer would want to know when it is: (i) deciding whether to issue the policy and, if so, on what terms; and (ii) determining the premium payable for the cover sought.
The Act provides that a fair presentation of the risk is one which makes the disclosure referred to above in a manner that would be reasonably clear and accessible to a prudent insurer (in effect, banning the practice of “data dumping”, or the provision of brief/cryptic disclosure in respect of facts that warrant a fuller explanation to properly understand their implication), and in which every material representation as to a matter of fact is substantially correct, and every material representation as to a matter of expectation or belief is made in good faith.
What does this mean in practice?
Helpfully, the Act provides guidance on what should be disclosed by a policyholder in a “fair presentation” of the risk.
Disclosure is required of every material circumstance which the policyholder knows or ought to know. A “circumstance” includes any communication made to, or information received by, the policyholder. It is “material” if it would influence the judgment of a prudent insurer in determining whether to take the risk and, if so, on what terms.
Subsection 7(4) of the Act gives the following examples of things which might be material circumstances:
- Special or unusual facts relating to the risk;
- Any particular concerns which led the policyholder to seek insurance cover for the risk; or
- Anything which those concerned with the class of insurance and field of activity in question would generally understand as being something that should be dealt with in a fair presentation of the risks of the type in question.
Accordingly, if facts or matters could be relevant to, or impact on, the insurer’s decision making process in any way when it is assessing the risk for which cover is sought, they should be disclosed to the insurer.
When making that disclosure, care must be taken to ensure that factual information provided to insurers in respect of those circumstances is substantially correct. Statements of fact are “substantially correct” if a prudent insurer would not consider the difference between what was represented and what was actually correct to be material. Further any expressions of expectation or belief (e.g. “we do not expect [x] to occur during the policy period”) must be to be made in good faith.
Whose knowledge is relevant to fulfilling the Duty of Fair Presentation?
Where the policyholder is an individual (e.g. a sole trader) they can only disclose what is known to them and/or what is known to the person or persons who are responsible for procuring their insurance (e.g. their broker).
Where the policyholder is a company or partnership, it is required to disclose what is known by:
- its senior management team (being those individuals who play a significant role in the making of decisions about how the business’ activities are to be managed or organised); and
- the person within the business (e.g. risk managers), or externally (e.g. a broker), who is responsible for its insurance procurement.
In either case, circumstances which a policyholder ought to know about are those which could reasonably have been revealed by a reasonable search of the information available to it or by making reasonable enquiries. Those enquiries should encompass not just information held within the policyholder’s business, but also any external parties (e.g. agents) who might hold relevant information. Businesses should therefore have procedures in place to ensure that any potentially material circumstances are reported to senior management and communicated to the person(s) tasked with getting appropriate insurance cover in place.
A policyholder cannot circumvent the Duty of Fair Presentation by deliberately failing to investigate matters which might be, or become, material circumstances, so it can say that it had no knowledge of the relevant information prior to entering into the contract of insurance. The Act provides that an individual’s knowledge encompasses both their actual knowledge and matters which the individual suspected, and would have had knowledge about, but for their deliberately refraining from confirming or enquiring about those matters.
How far does the Duty of Fair Presentation extend?
At first blush, the duty appears to be an onerous one. However, the Act assists policyholders by providing that the Duty of Fair Presentation will be satisfied if the policyholder has failed to disclose every material circumstance, notwithstanding its attempt to do so, but has provided sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances before it issues the policy. This puts the onus on insurers to conduct their own enquiries if sufficient information is provided to reveal the need for such enquiries.
Further, the Act provides that a policyholder is not required to disclose a circumstance if:
- it diminishes the risk;
- the insurer already knows about it;
- the insurer ought to know about it;
- the insurer is presumed to know about it; or
- it is something as to which the insurer waives information.
For the purposes of (ii), (iii) and (iv), the “insurer” is anyone who participates in the decision making process by which the insurer determined whether to issue the policy sought and on what terms. For the purposes of (iv), the insurer is presumed to know things that are common knowledge and things which an insurer offering the type of insurance in question, and in the field of activity in question, would reasonably be expected to know in the ordinary course of business.
Treating proposal forms with caution
Many insurers require a proposal form to be completed. However, the Duty of Fair Presentation is not (absent an express waiver by an insurer) confined to simply answering the questions asked in that form. The policyholder is required to disclose material circumstances regardless of whether the insurer has specifically asked for that information or not, unless it can show that the reasonable person reading the proposal form (and applying the ordinary meaning of the words used in the questions asked) would be justified in thinking that the insurer had implicitly waived its right to receive all material information and/or consented to the omission of the particular information not disclosed (e.g. where the insurer could have, but fails to, ask questions in the proposal form that address an issue which it later claims to be material to its consideration of the risk).
Remedies: What can an insurer do if a policyholder fails to give a fair presentation?
If the insurer can show that, but for the policyholder’s breach of the Duty of Fair Presentation, it (i) would not have entered into the contract of insurance at all; or (ii) would have only done so on different terms, the insurer will have a remedy against the policyholder. What that remedy is will depend on whether the insurer can show that the breach was deliberate or reckless, or simply accidental/careless.
If the breach was deliberate or reckless, the insurer may avoid the policy (i.e., treat it as cancelled from the start) without returning any of the premiums paid and refuse all claims.
If the breach was neither deliberate nor reckless, but was accidental or as a result of carelessness on the part of the policyholder, the remedy will depend on what the insurer would have done had the proper presentation been made.
If the insurer would not have issued the policy on any terms, it may avoid the policy and refuse all claims, but must return the premiums paid.
If the insurer would have issued the policy, but on different terms (e.g. it would have excluded certain risks from the cover provided, say by way of a “specific matters exclusion”), the policy will be treated as if those different terms were put in place at the outset.
In addition, if the insurer would have charged a higher premium, the insurer may reduce proportionately the amount to be paid out in relation to any claim made on the policy. For example, if the premium paid for the policy was £750, but the insurer would have charged £1,000 but for the failure of the policyholder to comply with its Duty of Fair Presentation, the insurer will only be required to pay 75% of any claim made on that policy (i.e. the premium actually paid / the higher premium x 100).
As we note above, alleged breaches of the Duty of Fair Presentation are one of the most common reasons we see for disputes arising between policyholders and their insurers. It seems likely that declinatures/purported avoidances on this basis will only increase as insurers react to adverse market and economic conditions by taking a more forensic approach to the validation of claims, and by attitudes to running more aggressive arguments against a policyholder hardening.
Policyholders should therefore ensure that they seek appropriate guidance from their brokers to ensure that they have a full understanding of their obligations prior to purchasing (or varying) their insurances. Likewise, policyholders should err on the side of caution when completing proposal forms and/or making presentations to insurers – the risks of not disclosing something that may be material almost always outweigh the benefits of attempting to present (perhaps inaccurately or incompletely) a clean bill of health to an insurer.
The key takeaway should be that if you are in any doubt at all as to whether a fact might be material, disclose it.
 In the Scottish case of Young v Royal & Sun Alliance plc  CSIH 25 it was argued that the insurer had asked a ‘limiting question’ in the proposal form relating to the insolvency history of the insured and that the policyholder had reasonably inferred that the insurer did not want to know about information which fell outside the scope of that question. The policyholder did not succeed in that argument. The Court found that waiver is not readily to be inferred and that it was for the policyholder to prove the waiver. However, in Ristorante Ltd t/a/ Bar Massimo v Zurich Insurance plc  EWHC 2538 the Court found that, in relation to a similar question, the insurer had waived its right to certain information and/or consented to its omission by the way the question had been worded in the context of the proposal form as a whole. See article hereRead more News & Insights from Emma Hockley Read more about Insights