By LACHLAN BOUGHTON, CHRISTOPHER HARRISON AND ELIZABETH FLATLEY
Whether rain, hail or shine (or even a pandemic), your professional indemnity insurance renewal comes around each year like clockwork. It’s all too easy to simply ‘tick and flick’ the renewal, but here’s why you should spend some time carefully considering what additional information you need to disclose to your insurer.
[body copy] No doubt, the arrival of your insurance renewal forms isn’t the time of year you look forward to most. For some, there’s a sinking feeling that accompanies the questionnaire and proposal form that lands on your desk requesting information to renew your professional indemnity insurance policy.
Here we explain why it’s essential to take your disclosure obligations seriously and the risks you face for breaching these obligations.
Duty of disclosure
The general duty of disclosure is an obligation enshrined in sections 21 and 28 of the Insurance Contracts Act 1984 and applies each time you enter into a contract of insurance.
The purpose of the duty is to ensure insurers are informed about all relevant matters before proceeding to insure a risk and helps them to determine the premium. This is particularly relevant in the context of professional indemnity insurance policies, where you may be left exposed to a claim made against you if you’ve failed to properly disclose all relevant matters.
As the insured, the core of your duty, as set out in section 21 of the Insurance Contracts Act, is to disclose all “relevant matters” before entering into the contract of insurance. Relevant matters are those things that you know, or a reasonable person in the circumstances could be expected to know, will be relevant to the insurer in its decision to accept the risk that is the subject of the contract of insurance and, if so, on what terms.
You’re not required to disclose matters that diminish the risk or are of common knowledge. Further, you don’t need to disclose matters that the insurer already knows or, in the ordinary course of its business, they ought to know. Nor must you disclose matters if the insurer has waived the duty of disclosure for those matters.
In most cases, you’ll record any relevant matters in a proposal form or renewal declaration online or in paper form. Where the renewal declaration is completed online and pre-populated with answers relating to the prior insurance period, you should carefully consider your responses to each question and determine whether there are any new, relevant matters that have arisen and ought to be disclosed. The importance of such consideration is particularly acute if you’ve undertaken or otherwise changed your activities since last renewing your professional indemnity insurance policy.
Consequences of disclosure
Section 28 of the Insurance Contracts Act sets out the consequences of failing to comply with the duty of disclosure. It also sets out the insurer’s remedies where there’s been non-disclosure.
If you’ve failed to comply with the duty of disclosure in section 21, the insurer may be entitled to reduce its liability under the contract in respect of a claim. However, if your non-disclosure didn’t have any impact on the insurer's decision to enter into the contract of insurance, or the premium and terms and conditions upon which the contract is agreed, then the insurer won’t be entitled to reduce its liability for non-disclosure.
The insurer's entitlement to reduce its liability for non-disclosure is limited to the amount that would place the insurer in the position it would have been if the failure to disclose had not occurred. For example, if the insurer would have required a larger premium had disclosure been made, then it will be entitled to reduce its liability by reference to the difference between the premium it would have required and the premium that was in fact paid.
If, however, your non-disclosure is fraudulent, the insurer may also have the option of avoiding the contract from its beginning.
These consequences underline the importance of ensuring you provide correct and updated information to your insurer each year when completing your renewal declaration, to ensure that all aspects of your activities are covered under the professional indemnity insurance policy.
The obligation to make disclosure of all relevant matters includes disclosing circumstances that might, but haven’t yet, given rise to a claim. If you don’t disclose prior known circumstances to your insurer at or prior to renewal, the insurer may be entitled to reduce its liability pursuant to the remedies available in section 28.
Many professional indemnity insurance policies have an exclusion clause for prior known circumstances. These are circumstances that you knew, or ought reasonably have known, might give rise to a claim at or prior to the start of the policy period. So, aside from the potential remedies in section 28 of the Insurance Contracts Act, your claim for indemnity may be excluded from cover if full disclosure of these matters was not made at the time of entering into the contract for insurance or at renewal.
Often insurance policies contain a continuity of cover clause that provides an exception to the prior known circumstances exclusion where an insured has held cover with the same insurer in unbroken successive periods and would have been insured but for the non-disclosure of the prior known circumstances (provided the non-disclosure was not fraudulent). If there’s an applicable continuity of cover clause, then usually you’ll be covered under the latter policy, but subject to the lesser limit of the two applicable policies.
Subject to the terms of the contract of insurance, it’s unlikely that a continuity of cover clause will enable you to escape the operation of section 28 of the Insurance Contracts Act; the insurer will nevertheless be entitled to reduce its liability to indemnify you by reference to any prejudice it has suffered because of your failure to disclose the prior known circumstances. For example, if the matter was relevant to the calculation of your premium and the insurer would have insured the risk under a higher premium had it known of the prior known circumstances, then section 28 will enable the insurer to reduce its liability by reference to the higher premium.
LACHLAN BOUGHTON and CHRISTOPHER HARRISON are Senior Associates and ELIZABETH FLATLEY is a Solicitor at Colin Biggers & Paisley. Colin Biggers & Paisley is a panel lawyer of QBE.
Realcover is underwritten by QBE Insurance (Australia) Ltd and managed by Marsh.
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The information contained in this article, which is current as at the date of publication, provides only a general overview of subjects covered. It is not intended to be taken as legal advice or advice regarding any individual situation and should not be relied upon as such.