Insurance policies are contracted between the Insurer and Insured on the basis of “utmost good faith”. This means that each party who enters into a contract of insurance has a legal obligation towards the other party to act in good faith.
Section 21 of the Insurance Contracts Act (the Act) requires you to disclose to the Insurer, before a Policy of insurance is entered into, every matter known to you, being a matter relevant to their decision to accept the risk and if so on what terms. The reasonable person test is also applied in the Act which calls for you to disclose any matter which a reasonable person in the same circumstances would be expected to know to be so relevant.
When completing a proposal form to take out insurance both initially and at renewal or advising amendments as circumstances change, Insured’s have a duty to disclose every matter that is known to them and relevant to the risk, based on the reasonable person test. The details disclosed then become relevant to the Insurer’s decision whether to accept the risk of the insurance and if so on what terms.
If you fail to comply with your duty of disclosure, the insurer may be entitled to reduce its liability under the contract in respect of a claim or may cancel the contract.
Answering proposal questions incorrectly either in error or fraudulently can have detrimental effects. Careful consideration needs to be given to answering typical questions in an Insurance proposal form.