Duty of Disclosure and Insurance Misrepresentation Explained
When arranging insurance, the information you provide plays a critical role in helping insurers assess risk, determine appropriate cover, and calculate premiums. Whether you are taking out a new policy, renewing existing cover, or making changes to your insurance program, it is important to ensure the information provided is accurate, complete, and up to date.
Failing to meet these obligations, even unintentionally, can have serious consequences if a claim arises. In Australia, insureds are subject to important legal duties when arranging insurance, including the Duty of Disclosure and the Duty to Take Reasonable Care Not to Make a Misrepresentation.
What is the duty of disclosure?
Under the Insurance Contracts Act, businesses applying for commercial insurance have a Duty of Disclosure. This means that insureds are required to provide information that may be relevant to an insurer's decision to provide cover, including information that could affect policy terms, conditions, or premiums. Businesses are expected to provide accurate and complete information when arranging, renewing, or amending their policies. The purpose of the Duty of Disclosure is to allow insurers to properly assess the level of risk they are being asked to insure.
What is the duty to take reasonable care not to make a misrepresentation?
Historically, all insureds were subject to a Duty of Disclosure under the Insurance Contracts Act. While this duty still applies to most commercial insurance policies, reforms introduced in 2021 changed the requirements for retail (personal) insurance contracts. For retail policies, insureds are now required to meet the obligations under the Duty to Take Care Not to Make a Misrepresentation. In practical terms, this means insurers are expected to ask clearer and more specific questions, rather than expecting applicants to determine what information may be relevant. However, insureds are expected to answer those questions honestly, accurately, and with reasonable care.
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Common disclosure mistakes businesses can make
When arranging or renewing insurance, it is important to ensure the information provided to insurers is accurate, complete, and up to date.
Common issues can arise when businesses:
- underestimate turnover or payroll figures
- fail to disclose previous claims or losses
- incorrectly describe business activities
- omit information about subcontracting or manufacturing activities
- fail to advise of changes to operations
- assume information provided previously is still accurate at renewal time
Even seemingly minor inaccuracies can become significant if they affect how the insurer assessed the risk or priced the policy. Importantly, disclosure obligations do not end once a policy is first arranged. Businesses should continue to review their information regularly and advise their broker of material changes to their operations, activities, or risk profile.
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Why accurate disclosure matters
Insurance works on the principle that insurers are provided with enough information to fairly evaluate the risk they are agreeing to insure.
Accurate disclosure helps ensure:
- appropriate cover is arranged
- premiums are calculated correctly
- policy terms reflect the actual risk
- claims can be assessed fairly and efficiently
The outcome of failing to meet disclosure obligations depends on the circumstances and whether the insurer was materially affected by the incorrect or incomplete information.
Potential consequences may include:
- reduced claim payments
- claims being declined
- changes to policy terms
- cancellation of the policy
The seriousness of the outcome will often depend on whether the issue was an innocent mistake, carelessness, or deliberate misrepresentation. This is why disclosure obligations are important not only for insurers, but also for insureds seeking certainty around their protection at claim time.
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Practical tips for businesses
Meeting your insurance obligations does not need to be complicated, however it does require businesses to regularly review the information being provided so that it accurately reflects their current operations.
To help meet your insurance obligations:
- Read all insurer questions carefully
- Take time to verify figures and business information
- Avoid guessing answers where possible
- Review renewal documents thoroughly each year
- Advise your broker of changes to your operations or activities
- Keep records and supporting information up to date
- Ask questions if you are unsure what information may be relevant
Regular communication with your broker can play an important role in ensuring your insurance program continues to evolve alongside your business.
How Coverforce can help
Insurance obligations can sometimes feel complex, particularly as businesses grow and evolve. At Coverforce, we work closely with our clients to help businesses better understand their responsibilities throughout the insurance process. If you are unsure whether changes within your business could affect your insurance arrangements, speak with a Coverforce broker today.
The information provided in this article is of a general nature only and has been prepared without taking into account your individual objectives, financial situation or needs. If you require advice that is tailored to your specific business or individual circumstances, please contact Coverforce directly.
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