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The Effect of Non-Disclosure & Misrepresentation on Insurance Coverage


March 14, 2005

Patients are apparently in the habit of under-reporting their alcohol consumption to physicians. As a rule of thumb, medical students are taught that to determine the actual amount of alcohol consumed by a patient, they should take the number of reported drinks and double it. If patients make this same non-disclosure or misrepresentation to their life insurers, their beneficiaries may ultimately find that coverage is denied.

In most business situations, parties negotiating a contract are not required to proffer information, regardless of how relevant it is to the transaction, unless they are specifically asked about it. This is not the case where the contract in issue is for the provision of insurance coverage. Parties to an insurance contract are required to deal with each other with the utmost good faith. A corollary of this duty of good faith is that a party seeking insurance coverage must make full and complete disclosure of all material information so that the insurer can properly: 1) assess the risk of providing coverage, and 2) if coverage is provided, charge an appropriate premium. This duty of full and complete disclosure has been applied by the courts for over 200 years. The seminal statement was made by Lord Mansfield in Carter v. Boehm in 1766:

Insurance is a contract upon speculation. . . . The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only: the under-writer trusts to his representation, and proceeds upon confidence that he does not keep back any circumstances in his knowledge, to mislead the under-writer into a belief that the circumstance does not exist. . . . Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact, and his believing the contrary.1

In many cases, an insured is also required to notify the insurer of any known change in risk that is material to the insurance coverage. This duty of full and complete (and often continuing) disclosure is imposed by the courts and by statute because the information required to properly assess the risk of providing insurance coverage is often exclusively within the knowledge of the insured. It follows from the underlying purpose of this duty that the insured is not required to disclose information that is generally known to the public or that ought to be known to the insurer.

Generally speaking, information is "material" if it would have influenced a reasonable insurer, and this particular insurer, to either decline coverage or to charge a higher premium (thus, the test has both an objective and subjective component). For example, whether a building is left unoccupied may be material to fire insurance; whether a vehicle is routinely used for work may be material to automobile insurance; diagnosed cirrhosis of the liver or rampant alcoholism is very likely material to life insurance.

Depending on the type of coverage, non-disclosure or misrepresentation of material information may either void related coverage or permit the insurer to treat the entire insurance contract as if it never existed. With respect to some types of coverage, such as life insurance, the insurer is entitled to treat the coverage as void even if the non-disclosure was made innocently. In one case2, an insurer was permitted to avoid its obligations under the insurance contract where a misstatement, although accurately conveyed by the insured to his agent, was inaccurately recorded by the agent on the insurance application that was eventually signed and submitted by the insured. That being said, the court has fairly broad discretion to grant "relief from forfeiture" where: 1) the insured has acted reasonably and in good faith, and 2) the insurer has not suffered any prejudice.3

Thus, in order to ensure that coverage cannot be avoided by the insurer, it is important to make full and complete disclosure of all information which may be material to the insurance coverage. If it is unclear whether information should be disclosed, an insured is best advised to consult his/her insurance lawyer.

1 Carter v. Boehm (1766), 97 E.R. 1162 (K.B.) at 1164.

2 Urbancic v. London Life Insurance Co. (1995), 25 O.R. (3d) 710 (C.A.)

3 It is important to note that this theory does not apply in Québec.


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