What do you have to tell an insurer when you purchase cover? If there is a dispute about your disclosure under a D&O Policy, will the insurer advance costs to fund that dispute?
The question of whether or not there exists an obligation on the insurer to provide benefits conferred under an insurance policy in circumstances where a failure to disclose relevant information at the time insurance policy is entered into has been resolutely answered by the Full Court of the Federal Court of Australia in Onley v Catlin Syndicate Ltd as the Underwriting Member of Lloyd’s Syndicate [2018] FCAC 119, as “No”.
Insurance contracts operate on a duty of good faith. The necessity to disclose relevant matters prior to the formation of an insurance contract is a fundamental tenet of insurance law. An insurance policy is one by which risk is transferred from policyholder to insurer, in exchange for a fee. The insurer needs to make an informed decision whether to assume that risk and, if so, on what terms.
In this case, the policyholders were the subject of dishonesty charges, which they did not disclose when taking out insurance. The insurer sought to avoid the policy. In proceedings to determine whether the insurers could avoid the policy, the policyholders asked the insurer to advance (loan) defence costs under a provision of the policy. That is, they wanted the insurer to fund their case against the insurer.
The Court stated, at [50] that “[t]he purpose of disclosure is to permit the insurer to be as fully informed of the risk as the would-be insured’s special knowledge would provide so that it may introduce special limitations on the cover which it is to provide.”
The Court also noted, at [47], that “[t]he terms of a policy of insurance are usually agreed to by the insurer on the common understanding of the insured’s having performed an obligation to disclose to it all relevant facts which are or ought to be reasonably known to it which are relevant to the risk insured.”
Fraudulent pre-contractual non-disclosure, entitles the insurer to avoid the policy in respect of those who engage in the non-disclosure and exclude any benefits which were to be conferred by the contract. The non-disclosure goes to the formation of the contract. If the Insurer had been informed of the relevant facts it would not have entered into the contract or would have included an exclusion in relation to such circumstances.
In contrast, an insurer may not escape its obligations under the contract due to an allegation of post-contractual conduct which occurs within the term of the contract.
The case highlights the important distinction between pre-contractual and post-contractual non-disclosures as parties to a contract operating on a duty of good faith cannot rely on the benefits conferred under a policy when the insurer has a right to indemnify them in circumstances of pre-contractual non-disclosure.
It is a reminder that, to take the benefit of the policy, the policyholder must be full and frank when purchasing the policy.
Should you require any information about your obligations of disclosure when purchasing insurance please contact us.
