Information & Advice: A guide to non-disclosure
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Introduction
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This guidance is targeted at individuals who are having a problem with their insurance company that is refusing to pay a claim because of ‘non-disclosure’ of an ‘unspent’ conviction (the definition of ‘unspent’ is detailed below).
UNLOCK have taken this page from "UNLOCKing Insurance: A guide to non-disclosure"
‘Non-disclosure’ refers to the situation where a customer fails to reveal a relevant fact when applying for, or renewing, insurance. It is widely recognised that in some situations involving non-disclosure, applying the strict legal position can result in an unfair outcome for the customer. For this reason, when the Financial Ombudsman Service (FOS) deal with insurance cases involving non-disclosure, they take account of both the law and good industry practice, which can often result in a much fairer outcome for the customer
If you think you have unfairly suffered because of a situation relating to non-disclosure, first of all you need to tell your insurance company that you dispute their decision, and give them the opportunity to look into things and put right any problem. Prior to doing this, the FOS are unable to investigate.
This document gives you more information about the kind of issues the insurance company will need to look into, when it considers an insurance claim that involves apparent non-disclosure of an ‘unspent’ conviction.
If you remain unhappy after the insurance company has reviewed your case and told you what its position is, the FOS may be able to help. There is more information on their website (www.financial-ombudsman.org.uk) – or take a look at their leaflet which your insurance company should give you.
This document sets out the kind of issues that FOS would need to consider if you referred a dispute like this to them.
The legal position
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An insurance contract is a ‘contract of utmost good faith’, which means that all parties to the contract are under a strict duty to deal fully and frankly with each other. Customers must disclose all facts that are ‘material’ (or relevant) to the risk for which they are seeking cover, subject to certain exceptions.
A ‘material’ fact is one which would influence an underwriter when they were deciding whether to accept the risk, the terms and conditions that should apply, and the premium offered. The onus to disclose material facts extends even to those facts that would not necessarily have a decisive effect on the insurers acceptance of the risk or on the amount of premium charged.
If a customer fails to disclose a material fact and this induces the insurer to accept the proposed risk, the legal remedy is to ‘avoid’ the policy. This means the insurer is entitled to treat the policy as though it never existed. Unless fraud is involved, the insurer will normally return the premium and will not pay out on any claim made under the policy.
Good industry practice
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The Association of British Insurers (ABI) has previously provided important safeguards for policyholders. It published statements of practice which said that insurers should ask clear questions about facts they considered material. The ABI made it clear that customers were required to answer questions only to the best of their knowledge and belief.
Unfortunately, most of the ABI statements have been withdrawn and now the point of reference is the Financial Services Authority Insurance: Conduct of Business Sourcebook (ICOBS). This can be viewed at http://www.fsahandbook.info/FSA/html/handbook/ICOBS
ICOBS 8.1.1 provides that “an insurer must:
(1) handle claims promptly and fairly;
(2) provide reasonable guidance to help a policyholder make a claim and appropriate information on its progress;
(3) not unreasonably reject a claim (including by terminating or avoiding a policy); and
(4) settle claims promptly once settlement terms are agreed.”
ICOBS 8.1.2 provides that “a rejection of a consumer policyholder's claim is unreasonable, except where there is evidence of fraud, if it is for:
(1) non-disclosure of a fact material to the risk which the policyholder could not reasonably be expected to have disclosed; or
(2) non-negligent misrepresentation of a fact material to the risk; or
What is a complaint about non-disclosure?
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These are complaints about an insurance claim that has been rejected by an insurance company – because the company believes the consumer failed to disclose accurate information about their ‘unspent’ convictions when they applied for (or renewed) their insurance policy.
What are insurance companies entitled to know regarding criminal convictions?
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Insurance companies are entitled to know about a consumer’s criminal convictions so that they can properly assess the risk they are insuring.
However, in accordance with the Rehabilitation of Offenders Act 1974, they are only entitled to be informed of any criminal convictions that are classed as unspent (see table below). If the proposal form asks whether the applicant has ‘any previous convictions’, the answer can be 'no' if the convictions are spent. This is the case even if the conviction is relevant to the risk which the insurers will underwrite (for example, spent motoring convictions are not required on a proposal form for motor insurance). The table below is a brief guide to the periods of disclosure depending on the sentence length imposed by the courts, but does not cover all of the disclosure periods cover in the Act.
| Sentence | Length | Period (Adults) | Period (Children) | | Prison/ YOI | More than 30 months | Forever | Forever | | | 6 months - 30 months | 10 years | 5 years | | | Less than 6 months | 7 years | 3 ½ years | | Community Service | Any | 5 years | 2 ½ years | | Fine/ Compensation | N/A | 5 years | 2 ½ years | | Absolute Discharge | N/A | 6 months | 6 months |
If you have any questions about whether your conviction is spent or unspent, call Nacro’s Resettlement Plus Helpline on T: 0800 0181 259.
Unspent criminal convictions are regarded as material facts by insurers because they may indicate a higher level of risk. As a result, insurance companies should ask clear questions about any unspent convictions when you apply to take out an insurance policy with them. In return, you should answer clear questions from insurance companies to the best of your knowledge and belief.
There are some insurers will adopt a flexible approach to people with unspent convictions (including those that are on the UNLOCK List of Insurers), with common practice being for insurers to only take into account offences that are material to the risk, such as motoring offences for motor insurance, or arson and offences involving dishonesty for household insurance. Nevertheless, you are still required to disclose all unspent convictions, irrespective of whether you are asked or not. The existence of a material unspent conviction does not preclude you from insurance - it is for the individual insurer to decide - however our experience is that most mainstream insurers do not provide insurance to customers who have unspent criminal convictions.
However, if you believe that you were never asked a question about your convictions, it is possible that the FOS will find in your favour if the insurer is attempting to rely on non-disclosure of your conviction because no clear question was asked. This will be assessed on a case-by-case basis.
What if I gave the information to the firm I bought the insurance through?
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People often take out insurance through a firm such as an insurance broker, a financial adviser or a bank rather than dealing directly with the insurance company that actually insures them. In these cases, the firm that the customer has direct contact with is known technically as the intermediary firm because this firm acts as the ‘middle man’ between the consumer and the insurance company.
If the intermediary firm was acting, technically speaking, on behalf of the insurance company, then the insurance company cannot claim that information you gave to the intermediary wasn’t properly disclosed. However if the intermediary firm was acting, technically speaking, on your behalf, as the customer, then it is not automatically assumed that the insurance company would know the details you gave the intermediary.
Deciding whether the intermediary firm you dealt with was technically acting for the insurance company or for you depends on:
- whether the intermediary firm was ‘tied’ to just one insurance company (or a small number of companies) – and could only offer their products; or
- whether the intermediary firm was independent – and could advise on (or arrange) insurance from a wide range of insurance companies.
Generally speaking, if you dealt with an intermediary firm who falls into the first of these two categories, it is likely that the intermediary was technically acting on behalf of the insurance company, and therefore the insurer can be regarded as having been disclosed the information.
However, if you dealt with an intermediary firm who falls into the second of these two categories, it is likely that, technically speaking, they were acting on your behalf. In this instance, the intermediary is the one that is liable for the failure to disclose the information to the insurer.
There are a number of different factors that affect whether the FOS and/or the courts will recognise the intermediary as acting for you or for the insurer, and if you did tell your intermediary about your unspent conviction, you should make this clear to the insurer.
The insurance company has ‘avoided’ my policy – what does this mean?
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If you did not provide information of your conviction when you took out the policy (or renewed), the insurance company may be entitled to reject any subsequent claim – on the basis of ‘non-disclosure’. The insurance company may also be entitled to ‘avoid’ the policy.
To ‘avoid’ a policy is a technical term. It means cancelling the insurance policy as though it had never been taken out. ‘Avoiding’ an insurance policy is the strict legal consequence of ‘non-disclosure’ (i.e. failing to provide relevant and accurate information to the insurance company). Avoidance normally requires restitution, i.e. that both parties must be restored to the position they were in prior to the contract being made. Therefore, the policyholder may demand the return of premiums paid, providing the non-disclosure was no fraudulent.
However, to be able to ‘avoid’ a policy, the insurance company has to show that it would not have offered the same policy at the same price – if it had known the true facts.
This means that when the FOS is looking at a dispute about whether an insurance company was entitled to cancel (‘avoid’) a policy, the insurance company has to persuade the FOS that inaccurate information from the consumer led (‘induced’) it to offer insurance on terms (and at a price) that would not otherwise have applied.
What if the insurance company already knew the information?
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Under insurance law, customers are required to disclose unspent convictions in relation to every contract that is entered into. It is not sufficient for someone with a household policy with Insurer A, for example, to not disclose an unspent conviction when taking out a motor policy with the same insurer.
However, there may well be some circumstances whereby it could be claimed that the insurer already had the information (for example, when taking out multiple policies with the same insurer at the same time).
What to do if you think you’ve been unfairly treated: The Financial Ombudsman Service approach
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Who are the Financial Ombudsman Service (FOS)?
- “It’s our job to settle individual complaints between consumers and businesses providing financial services.
- We were set up by parliament to do this – as independent experts – and our service is free to consumers.
- We’re completely independent and impartial. This means that when we decide a complaint, we look carefully at both sides of the story and weigh up all the facts.
- If we decide a business has treated the consumer fairly, we will explain why. But if we decide the business has acted wrongly – and the consumer has lost out as a result – we can order matters to be put right.
- We can resolve many disputes informally, but some cases are more complex and take more time. We aim to settle most disputes within six to nine months.
- Consumers don’t have to accept any decision we make. They are always free to go to court instead. But if they do accept an ombudsman's decision, it is binding both on them and on the business.
- We don't write the rules for businesses – or fine them if rules are broken. That is the job of the regulator.”
(Extract from their website, www.financial-ombudsman.org.uk)
When the FOS deals with a dispute involving an insurance claim that an insurance company has rejected, because the consumer failed to disclose accurate information about their unspent conviction, they will look at whether:
- the insurance company asked a clear question about the information it wanted;
- the consumer failed to answer the question to the best of their knowledge and belief; and
- the insurance company relied on the inaccurate information when they accepted the consumer’s application.
If they find all these to be the case, they will still want to get to the bottom of why the consumer failed to provide the accurate information as required. This means deciding whether they think the consumer was ‘innocent’ or ‘inadvertent’ in their response to the insurance company – or whether they believe they were reckless or fraudulent in their ‘non-disclosure’.
Taking account of the law and good industry practice, the FOS approach non-disclosure cases in three stages:
- When the customer sought insurance, did the insurer ask a clear question about the matter which is now under dispute?
- Did the answer to that clear question induce the insurer; that is, did it influence the insurer’s decision to enter into the contract at all, or to do so under terms and conditions that it otherwise would not have accepted?
- Only if the answers to both (1) and (2) are ‘yes’, do they go on to consider whether the customer’s non-disclosure was an honest mistake, a dishonest attempt to mislead or due to some degree of negligence.
1. Clear questions
The insurer must provide evidence that it asked the customer a clear question when the customer asked to take out or renew a policy.
In many cases the transaction will have taken place over the telephone. If there is no evidence, such as a call recording and/or a copy of the statement of facts that the insurer has sent the customer, then the FOS will have to decide what is likely to have happened. A similar statement of fact would be required for internet sales; as would some evidence of the questions asked during the website process, as it existed at the time of the application.
In order for non-disclosure to occur, the insurer must show that it asked clear questions. Please note – this is only the FOS position, and not the legal position.
2. Inducement
Legally, the insurer must establish that the non-disclosure ‘induced’ (or influenced) its decision to enter into the contract. This was established in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd (Reported [1994] in Volume 3 of the Weekly Law Reports at page 677). If the insurer cannot prove inducement then the policy will remain valid, even if the non-disclosure was deliberate. It will often not be difficult for insurers to prove inducement, particularly for those who operate a blanket policy towards people with unspent convictions.
However, the FOS will still usually require evidence that inducement took place. This may be in the form of a statement from the underwriters and/or a copy of the underwriting manual.
3. The customer’s state of mind
Not all instances of non-disclosure breach the duty of ‘utmost good faith’. The FOS have identified four types of non-disclosure (deliberate, reckless, innocent, and inadvertent).
Deliberate – Customers deliberately mislead the insurer if they dishonestly provide information they know to be untrue or incomplete. If the dishonesty is intended to deceive the insurer into giving them an advantage to which they are not entitled, then this is also a fraud and – strictly speaking – the insurance premium does not have to be returned.
Reckless – Customers also breach their duty of good faith if they mislead the insurer by recklessly giving answers without caring whether those answers are true or false. An example of recklessness might be where a customer signs a blank proposal form and leaves it to be filled out by someone else.
Innocent – Customers act in good faith if their non-disclosure is made innocently. This may happen because the question is unclear or ambiguous, or because the relevant information is not something that they should reasonably know (e.g. somebody in your house has a conviction of which it is unreasonable for you to know about). In these cases, the insurer will not be able to ‘avoid’ the contract and (subject to the policy terms and conditions) should pay the claim in full.
Inadvertent – A customer may also have acted in good faith if their non-disclosure is made inadvertently. These are the most difficult cases to determine and involve distinguishing between behaviour that is merely careless and that which amounts to recklessness. Both are forms of negligence. Inadvertence occurs when the customer unintentionally misleads the insurer. This can occur just by failing to read and check the questions and answers thoroughly enough. When this happens there is no breach of the duty of utmost good faith. For example, a policy application may contain a clear question about motoring convictions and penalty points. The customer discloses a careless-driving conviction but fails to disclose that they have three penalty points for speeding. In that situation, the FOS might believe that the customer genuinely overlooked his conviction. The customer clearly did not intend to mislead the insurer because he disclosed the more serious offence; he simply failed to realise that penalty points were also part of the question. So the insurer should act as it would have done if it had been in possession of the full facts. Where there has been inadvertent non-disclosure, the FOS expect insurers to rewrite the insurance. This should be done on the terms they would originally have offered if they had been aware of all the information. In some cases this may result in a proportionate payment; in others it may result in no payment at all. This is because the inadvertently-withheld information would, if disclosed, have led to the firm declining the application altogether.
What decisions can the FOS make?
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- If the FOS decide that the consumer answered questions and gave information to the best of their knowledge and belief, they may conclude that there was no ‘non-disclosure’ – or that any ‘non-disclosure’ by the consumer was ‘innocent’. In cases like this, they may tell the insurance company to reinstate the policy and pay the claim.
- If they decide that the ‘non-disclosure’ by the consumer was ‘inadvertent’, they may tell the insurance company to reinstate the policy on the terms that would have applied – if the company had been given accurate information at the outset. Depending on the terms that then apply, they can tell the insurance company to:
- pay the claim in full; or
- pay a proportion of the claim (in cases where the insurance company would have charged a higher premium if it had known the true facts); or
- not pay the claim (in cases where the insurance company would have excluded cover if it had known the true facts).
- However, if they decide, after considering all the individual facts and circumstances, that the consumer recklessly, deliberately, or fraudulently failed to disclose accurate information about their medical history, they may agree that the insurance company was entitled to reject the claim.
For more information
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To download this guide, click here.
For information on the impact of convictions on your insurance, contact:
UNLOCK - The National Association of Reformed Offenders
35a High Street, Snodland, Kent, ME6 5AG
T: 01634 247360
E: enquiries@unlock.org.uk
W: www.unlock.org.uk
For information on the Financial Ombudsman Service, contact:
The Financial Ombudsman Service
South Quay Plaza, 183 Marsh Wall, London, E14 9SR
T: 0845 080 1800
W: www.financial-ombudsman.org.uk
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