Disclosure of relevant medical facts to an insurer may not be enough for a subsequent claim to be paid. Helen Tilley explains

Robert de Niro has been in the news recently after allegedly misrepresenting his health status just days before filming was due to start on the film Hide and Seek.

The US insurer, Fireman’s Fund, is suing de Niro for the $1.8m pay-out it made for four months of delayed film production costs while he underwent cancer treatment.

It alleges that he misled it by failing to disclose when he signed a health declaration on 13 October 2003 that he had just undergone a prostrate biopsy.

De Niro’s case is that although he accepts that he underwent a biopsy on 10 October, he did not receive the diagnosis of cancer until 15 October. Therefore, he was truthful when he indicated that he had “never been diagnosed” with or “treated for” a prostrate disorder. His lawyer states that when the actor had undergone the biopsy he had assumed that the results would be negative.

Conflicting statements

Fireman’s Fund is pursuing recovery stating that de Niro’s knowledge that he had undergone the biopsy constituted information he knew “might alter or otherwise conflict” with the statements he made he signed the health status declaration.

If similar facts were presented to an English court, the exact wording of the application questions would be dissected.

It is usual to ask for information about recent investigations and whether any test results are pending. If such a biopsy were revealed, in similar circumstances here, at the very least the insurer would have postponed its decision.

What an applicant believes should be disclosed sometimes does not match the information that the insurer regards as material to its consideration of an application.

The test for materiality in the context of non-disclosure or misrepresentation at the application stage is one aspect that was raised in the Law Commission’s paper on non-disclosure and misrepresentation, which was published in September 2006.

That paper included various tentative proposals intended to generate debate prior to publication of the Law Commission’s formal consultation report, due out this summer.

The English and Scottish Law commissions conducted a joint review of insurance contract law with the intention that any reform recommended would apply to both jurisdictions.

At present, the remedy for an insurer who can show material non-disclosure or misrepresentation is avoidance of the policy from the beginning – as if it never existed – whether the non-disclosure or misrepresentation was innocent, negligent or fraudulent.

This has long been said to be too harsh an outcome, particularly for consumers who may not be conversant with insurance law principles, and is one of the main drivers behind reform.

In 1980 the English Law Commission published a report, which covered non-disclosure, but this did not lead to reform.

However, it recognised that an honest and reasonable insured may find it difficult to form a view on what facts a prudent insurer would consider material.

“What an applicant believes should be disclosed sometimes does not match the information that the insurer regards as material to its consideration of an application

After 1980 the ombudsman scheme has become available to consumers, and its approach in about 200 cases was studied prior to the commission’s paper being published.

Clear questions

The ombudsman’s current approach is that the insurer must ask clear questions on the application, failing which the insurer can be criticised and left without a remedy against the insured for material non-disclosure or misrepresentation.

Although the duty on an applicant to volunteer information is already limited in a practical sense by the operation of ICOB 7.3.6, which states that an insurer cannot refuse a claim for non-disclosure where the “customer could not reasonably be expected to disclose it”, this is said not to go far enough.

It has been proposed that the residual duty of disclosure should no longer apply in consumer cases, but continue to apply to business policies. This would operate as a further incentive to ask fair questions, but if implemented may result in a shift towards longer application forms.

The Law Commission also proposed that the test for materiality be changed. It would still be necessary for the actual insurer to show that it was induced to enter into the policy contract on those terms.

It was proposed that the insurer must show either that the applicant appreciated that the fact in question would have affected the insurer’s mind in the assessment of the risk, or that a reasonable insured in the circumstances would have appreciated the facts significant to the insurer.

The commission proposed in its paper that it advocated a proportionate response in certain situations. Such an approach is followed by the ombudsman when there is “inadvertent” misrepresentation, and the ombudsman currently approves avoidance for clearly reckless or deliberate misrepresentation.

Another proposal which could have a significant impact on how applications are dealt with in the UK is the suggestion that where the insurer indicates that it may obtain information from a third party.

For example, by obtaining a signed consent, under the Access to Medical Reports Act 1988, to approach the applicant’s doctors the insurers should not be allowed to rely on a non-fraudulent misrepresentation (or failure to disclose) if the insured reasonably thought the insurer would check with the third party.

The UK’s non-medical limits are higher than most other countries. However, many applicants and GPs may baulk at a significant increase in GP report requests.

Therefore, particularly at lower sums assureds, it may be increasingly necessary to ask the applicant to confirm on the application form that he understands that the insurer may not check the information with the applicant’s doctor unless a claim is made.

Whether the wide-ranging tentative proposals culminate in an Insurance Contract Law Act in about 2010 or in some other form is still very much up for debate.

But it is clear that this is an ideal opportunity for the insurance industry as a whole to embrace the process so that some changes can be made to enhance clarity and customer confidence.

In the past, the industry has used other means such as Statements of Best Practice. Therefore, we may see an industry initiative in the transitional period leading up to 2010 or instead of a statute. IT

‘ Helen Tilley is a partner at Davies Lavery solicitors