Insurance

MASSEY UNIVERSITY

School of Accountancy

Lecturer’s NameFeona Sayles | Paper Number 155.210 | Paper NameCommercial Law |

Honesty Declaration -

* I declare that this is an original assignment and is entirely my own work. * Where I have made use of the ideas of other writers, I have acknowledged (referenced) the source in every instance. * Where I have used any diagrams or visuals produced by others, I have acknowledged (referenced) the source in every instance. * This assignment has been prepared exclusively by me for this paper and has not been and will not be submitted as assessed work in any other academic paper. * I am aware of the Code of Student Conduct on the Massey University web site http://calendar.massey.ac.nz/statutes/dr.htm, clause 2 (f), wherein it states [Students shall] “act with honesty and integrity in submitting material or imparting information to the university”. Assessment & Examination Regulations clause (6) clarifies further that “dishonesty” is a breach of the Code of Student Conduct and will be dealt with accordingly. | Family Name | Given Name(s) | ID number | Student Signature | Date | Yong | Jim Leon | 12104642 | JL Yong | 2/5/13 |

Introduction
There are 2 issues faced by James here. One of them is failing to disclose a material fact about the tenants of his house being first year Massey students. Is this fact material or not?
The other issue is failing to disclose the fact that the wiring of the house dates back to 1935. It seems that James didn’t feel that this would affect his claim. In fact, he didn’t seem to realize the significance of a house possessing 1935 wiring.
As we can see, both issues involve the subject of disclosure and it is therefore important to understand what disclosure actually is in the context of insurance.
Finally, in regards to the students, if the claim is upheld, will there be any action taken towards them?

We will look at the various laws around the topic of disclosure.

Disclosure
The relationship between the insured and the insurer is one of utmost good faith and places great importance upon disclosure. According to the Meriam Webster Online Dictionary, “disclose” is defined as to make known or public. In other words, it also means to reveal the truth about someone or something. Therefore, a customer’s full disclosure of material fact is crucial information for an insurance company, as they will use this information to assess the amount of risk a potential customer may possess. Risky customers are charged a higher premium or simply declined. That is why insurance companies tend to ask many questions at the earlier stages when the contract is being formed.
The failure to disclose a material fact from the outset of the insurance contract can cause the contract to be void upon a claim. In fact, although this common law applies to both parties, insurance companies tend to benefit from it more as it can be used to protect them from people who are incentivised to not disclose everything they know, just to keep their premiums low.

Materiality
Disclosure is important only when it is “material”. Question is how do we define whether something is material? Also, what kinds of information do insurers regard as being material?
Materiality can be basically defined as a particular fact that would make a difference to the risk being taken on. For example, if I were a smoker, this would be a material fact if I applied for health insurance, as it is well known that smokers are exposed to higher health risks. On the other hand, a fact that is not material is that I am left-handed, as that has nothing to do with affecting my health in any way unless you are into conspiracy theories.
Now that we know roughly what materiality is, we must then apply the “prudent insurer” test to really see whether or not insurers would consider a fact material. According to Sayles (2013), “a fact is material if it would affect the mind of a “prudent” insurer, either in deciding whether to take the risk on the terms of the policy or in fixing the premium.” Hence it does not matter whether one particular insurer believes that a fact is material, it must be assessed by how the “prudent insurer” would see it. For example, a particular insurer might see an isolated incident of underage drinking 17 years ago as being a material fact. However, if 5 other insurers are of a differing opinion, then the 5 represent the “prudent insurer”.

Innocent non-disclosure
There is another fact about disclosure that is very important. Even if the insured has answered all of the insurers questions in the proposal, he/she is still subject to the common law and the risks of the contract becoming void if there is a material fact that is not disclosed. This is because the Courts hold that the duty to disclose goes beyond simply answering the questions in the proposal. This is of course difficult for the insured, as they might not know which information that needs to be disclosed to affect the outcome. How much do they need to disclose and what sort of information do they need to disclose are the questions that cause confusion. An example of this from case law is in Misirlakis v NZI Ltd (1985) 3 ANZ Ins Cas 60-633: where Misirlakis failed to disclose that he had been convicted on four charges of false pretences and fined $400.

Disclosure of facts you do not know of
There are some cases where an insured person cannot disclose a material fact, simply because they do not know about it. An example of this is in State Insurance v McHale (1992) 7 ANZ Ins Cas 61-103:, where McHale rented out his house to a group of gang member but did not disclosure this to the insurer. However, he genuinely didn’t know that ‘gang’ meant a group whose members where likely to engage in behaviour that is damaging. Even though it was a material fact, the Courts had leniently let go of McHale because of his ignorance.

Types of risks
The insured party can present 2 types of risks: physical risk and moral risk. Example of physical risks in insuring a house would be how old the house is and what material it was made out of. In the case of health insurance, it would be whether or not someone smoked or how frequently he/she drinks. On the other hand, moral risks pertain to an individual and whether or not they are honest, have a criminal record, how many claims made previously, etc. An example of moral risk is in the case of Quinby Enterprises Ltd v General Accident etc PLC (1995) 5 NZBLC 103,714, where the primary shareholder was denied a claim because he did not disclosure that there were convictions, financial problems, and the breach of the Crimes Act and Securities Act. Bear in mind that financial and criminal convictions by themselves aren’t necessarily material. It’s usually the circumstance around this that determines its materiality. For example in Edwards v AA Mutual Insurance Co Ltd (1985) 3 ANZ Ins Cas 60-668, the insured failed to disclose a theft conviction of $19 during his teenage years. This is not a material fact.

Limiting Scope of Disclosure
In some insurance applications, the questions in the proposal are set out in a way that may possibly limit the scope of disclosure. This can genuinely cause the insurer to feel that he/she no longer requires to disclose more information about a particular subject. For example, in the case of State Insurance v Peake (1991) 2 NZLR 287:, the proposal form from State Insurance asks Peake numerous questions about details of her driving history and convictions. The last question asked whether there was any other information that was likely to affect her acceptance of the insurance contract, to which she said no. State Insurance later found out she did not disclosed all her other non-driving related convictions and declined her claim. However, the Courts ruled that State Insurance had limited their scope of disclosure by honing in on driving related offences on their proposal. This gave the impression that they were not interested in the other offences.

Misstatements
This is when the truthfulness of a fact is stated wrongly. Unlike disclosure rules that are covered by common law, misstatements are covered by section 5 and 6 of the Insurance Law Reform Act 1977. Section 5 states, “An insurer cannot rely upon any statement made in a proposal to decline insurance unless it is substantially incorrect and material.” Section 6 in turn defines what substantially incorrect and material means. Case example of this is in National Insurance v Van Gameren (1986) 2 NZLR 374:, where Van Gameren has denied an accident claim because he had made a false claim. Even though he later retracted that claim, the Courts held that the insurer was under no liability to pay.

Subrogation
This is the effect of the insurance company stepping into the shoes of the insured and taking on their legal rights and suing the third party. A very common example of this is when a third party car crashes into your car. Your insurance company would act on behalf of you and sue the third party for damages.

Issue 1
James can argue that the fact his tenants were first year Massey students isn’t a material fact. What is the difference between renting out a house to a group of students compared to working professionals or a family. This is irrelevant as this mishap could have happened to anyone and not because of the type of group the house was rented to. Students shouldn’t be any riskier than any other groups of people. They should not be generalised as they do not pose a physical risk or moral risk.
Furthermore, the question of the type-of-group-the-house-was-rented-to was not outlined in the insurance proposal. It wasn’t something that James wanted to hide and if it was really important, then it should in the proposal because renting properties to a group of students is very common. In fact, the insurer could have limited the scope of disclosure.

However, the insurance company would argue that student tenants tend to pose a higher risk, which is a material fact. In fact, the “prudent insurer” might argue that it is the case. The public perception of renting to university students is pretty bad and there are many landlords who prefer to rent their houses to working professionals or families. Also, according to Property Hawk (n.d), most insurance companies would propose a higher excess and premium when insuring a rental property rented out to students.
Finally, voiding a contract through innocent non-disclosure is still enforceable by the Courts as in the case of Misirlakis v NZI Ltd (1985) 3 ANZ Ins Cas 60-633.

Issue 2
When James was told that the house was in original condition, he did not understand that the wiring was original too. In fact, he probably didn’t know what the difference old wiring and new wiring would make to the house. Even though this can be considered a material fact, as it will influence the “prudent insurer”, his ignorance here is similar to McHale’s in State Insurance v McHale (1992) 7 ANZ Ins Cas 61-103:. He couldn’t reveal what he didn’t know or couldn’t understand. Although McHale was considered fortunate in his case, (not knowing what ‘gang’ meant), James’ case is pretty straightforward as many people who do not know much about electrical wiring would have fallen into the same ballpark as well.
Also, I feel that the insurance company should assume that since the house was built a long time ago, the wiring would be original too. If they had any questions regarding the wiring of the house, they should have asked James to find out.

The insurer can argue that the wiring of the house is a physical risk as it is very old. The non-disclosure of this material fact is a breach of common law and even if the proposal did not ask about this, James should have said something about it.

Student outcome
If the claim were upheld, it is possible that through subrogation, the insurance company would take over James’ rights and sue the students for the damages. They caused the fire by overloading the electrical wiring of the house. Although it was an accident, it is similar to instances where a third party car hits an insured car. The insurers of that car will take action against the third party, or the third party’s insurance company.
If none of the students had insurance, then they will all be liable for the damages according to Fitzherbert Rowe (n.d.). Conclusion
For James, this would be an interesting case as there are many factors that would swing the Courts decision. There were no misstatements but only disclosure issues, which means that we look to common law and not the Insurance Law Reform Act 1977.
In regards to my opinion about the issues; on issue 1, I felt that the Courts would favour the insurers because innocent non-disclosure can still make the contract void. On issue 2, they definitely favour James more as he simply can’t disclose what he doesn’t know. In the case of the students, the will unfortunately be liable for the damages of the house and will possibly be sued.

References: * Sayles et al (2013), Study Guide One, Massey University: Palmerston North * Property Hawk (n.d), Should I be a Student Landlord. Retrieved from https://www.propertyhawk.co.uk/index.php?page=magazine&id=403 * New Zealand Legislation (2013), Insurance Law Reform Act 1997. Retrieved from http://www.legislation.govt.nz/act/public/1977/0014/latest/DLM442536.html * Merriam-Webster Dictionary (2013), Disclose. Retrieved from http://www.merriam-webster.com/dictionary/disclose * Liam Hehir (n.d), Fitzherbert Rowe Lawyers: Flatting?Renting your Home? You Need to Read this. Retrieved from http://www.fitzrowe.co.nz/news.php?extend.60.11

References: * Sayles et al (2013), Study Guide One, Massey University: Palmerston North * Property Hawk (n.d), Should I be a Student Landlord. Retrieved from https://www.propertyhawk.co.uk/index.php?page=magazine&id=403 * New Zealand Legislation (2013), Insurance Law Reform Act 1997. Retrieved from http://www.legislation.govt.nz/act/public/1977/0014/latest/DLM442536.html * Merriam-Webster Dictionary (2013), Disclose. Retrieved from http://www.merriam-webster.com/dictionary/disclose * Liam Hehir (n.d), Fitzherbert Rowe Lawyers: Flatting?Renting your Home? You Need to Read this. Retrieved from http://www.fitzrowe.co.nz/news.php?extend.60.11