Insurance Underwriting Notes: Non-Disclosure, Misrepresentation, and Hazards

Non-Disclosure and Misrepresentation

  • A breach of the duty of disclosure arises in two circumstances:
    • Non-disclosure
      • The proposer fails to disclose information that they know would have caused the insurer to either decline the contract or alter its terms.
    • Misrepresentation
      • A substantially false statement that pertains to the proposal's subject matter and influences the insurer's decision to enter the contract.

Fraudulent Breach of Duty

  • If the non-disclosure or misrepresentation is fraudulent (concealment):
    • The policy is voidable.
    • The insurer can retain the premium and pursue damages.
    • The insurer can disregard the breach of good faith, allowing the policy to continue and requiring the insurer to pay the claim.

Physical and Moral Hazards

  • The insurance industry uses 'hazard' and 'peril' with specific meanings.
    • Peril: The direct cause of a loss.
    • Hazard: Influences the operation of the peril.

Example 1.5

  • Insuring a wooden structure against fire.
    • Fire is the peril (cause of loss).
    • Wood is the hazard (enables fire to spread).

Elaboration on Hazard

  • Hazard can be further broken down as follows:

    • Physical Hazard: Relates to the physical nature of the risk and includes measurable dimensions.

      • Examples:
        • Motor insurance: age of driver, vehicle condition.
        • Shop security: better security systems.
        • Personal accident and sickness: proposer's occupation (construction worker vs. clerical worker).
        • Property construction: higher construction standard means lower physical hazard.

    • Moral Hazard: Arises from people's attitudes and conduct, including insureds, employees, and society.

      • Examples:
        • Carelessness: a driver's lack of care increases accident risk and severity.
        • Dishonesty: making fraudulent or exaggerated claims.
        • Social attitudes: lack of social disapproval for cheating insurers.

Distinguishing Between Physical and Moral Hazards

  • It is sometimes difficult to distinguish between physical and moral hazards because they are often symptomatic of each other.
    • Example: Poor factory management (moral hazard) can lead to unguarded machinery or lack of flammable material signs (physical hazard).