When you last purchased an insurance policy for your business, how seriously did you think about your Duty of Disclosure? If it contains half-truths, omissions or outright lies, your cover could be like a house made out of straw; fine and dandy on sunny days, but not much help in a storm.
A recent Professional Indemnity (PI) insurance claim highlights this point. Whilst PI should technically cover costs and claims for damages arising from any breach of duty in the delivery of a service, the insurer has the right to reject a claim and revoke the policy if you fail to disclose any relevant information in their application.
The case centred on a registered migration agent whose client, looking for help getting an Australian work visa, accused the agent of misrepresenting her chances of attaining the visa, mishandling the application process, and refusing to provide a refund after her application was denied.
In light of the client’s complaint to the Department of Immigration, the agent submitted a claim to their insurer for potential damages. But when the insurer reviewed the agent’s background they uncovered an extensive list of previous complaints for providing negligent advice, none of which were disclosed in their original application. One complaint in particular, for failing to provide adequate advice, was still being investigated at the time the insurance was taken out.
Once the investigation unveiled the previous complaints against the agent, the insurer refused to pay the agent’s claim and terminated their policy, based on the premise that they had not complied with their Duty of Disclosure.
The insurer highlighted the section in the application where the agent was asked if any claims had been made against the business in the previous 10 years, to which the agent’s response had been an unambiguous “No”.
The agent appealed the decision, claiming that the omission was a simple error. The insurer was adamant, however, that the client had knowingly neglected their Duty of Disclosure, and reminded the agent that when completing the application (and at subsequent renewals), they were obliged to report and provide full details of all circumstances of which they are aware that may give rise to a claim.
The case was closed and the agent was left to fight the charges themselves. All legal costs and subsequent payments associated with the claim had to be paid for by the agent.
There are significant take-ways from this case for business owners. An insurance contract needs to be based on honesty and full disclosure, regardless of what type of insurance you hold. The insurer has a responsibility to protect you from a set of risks in the event of a claim, and you have an obligation to pay the premium.
However, whilst the provider also has a legal responsibility to disclose all the terms and conditions (such as limits and exclusions) in the product disclosure statement (PDS), the insured also has a responsibility to disclose all relevant information at the time of the application and, in certain circumstances, during the term of the policy.
As a buyer of insurance, how would you feel if the insurer deliberately lied about your insured amount? Would it be fair if they tricked you into believing that Public Liability insurance protected you against cyber attacks?
Another important lesson here is that ignorance is no excuse. In this case there is plenty to indicate that the agent was aware of their requirements and knowingly omitted the previous transgressions. However, even if it was a genuine error they would be guilty of neglecting their Duty of Disclosure because “I didn’t know” is not good enough.
Like any relationship, the one between you and your insurer needs to be based on a foundation of honesty and disclosure.
Don’t lie in your application, and don’t second-guess what you should tell your insurer. Let them know of any significant changes and be upfront with your entire history. Be clear, be forthright and be honest, so that when a claim event occurs you’ll be protected.