Disclosure – Utmost Good Faith for Commercial Insurance

May 2021

The principle of utmost good faith is the foundation stone of any insurance contract. A commercial policyholder, defined as any purchase of insurance for a business need, is obliged to give the insurer a fair presentation of the risk to the insurer, allowing the insurer to make an informed decision on whether the risk is acceptable, the level of premium and cover, terms and conditions which would apply.

Policyholders will need to provide material information such as:

• What the business does - this is known as the “business description” and should cover all of the activities and services undertaken by the business.
• Claims information - typically, insurers require details of any claims or incidents over the past 5 years, including any incidents which could have led to a claim but ultimately did not, any claims which would have been insured had insurance been in place at the time, and any claims which fall within the policy excess.
• Property information such as premises addresses, security and construction.
• Unspent criminal convictions, any personal bankruptcies or connections with any business (either as director or shareholder) which have had liquidations, insolvencies, or administrations and any personal or business county court judgements (CCJ’s) or individual voluntary arrangements (IVA’s). Even historical incidents such as these need to be declared.
• Any previous insurance declinature, refusal to renew or imposed special terms (such as co-insurance).
• Health and Safety background.
• Wages and Turnover including splits between clerical and manual work.
• Use of Bona Fide Subcontractors.

Full disclosure to insurers is imperative. Breaching the duty of disclosure typically leaves the insurer the following ‘remedies’ as set out by the Insurance Act 2015 (these remedies will be set out in your policy documents):

• In the event of deliberate or reckless misrepresentation Insurers will be entitled to refuse any claim, terminate cover immediately and retain all premium paid.
• In the event of inadvertent non-disclosure;
  • if the Insurer would not have entered in to the contract at all, then it can terminate cover but return any premium.
  • if the Insurer would have entered in to the contract but on different terms (such as an increased excess), it can retrospectively apply these terms.
• If the premium would have been higher but for the mis-representation or non-disclosure most Insurers will proportionately reduce the amount of indemnity for the claim (so if it would have charged twice the premium, it will pay only half the claim), although some Insurers will simply retrospectively charge the Policyholder the correct premium.

If there is any doubt regarding whether a disclosure ought to be made to the insurer, this should be discussed with the insurance broker who can advise.