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What is a “material fact” and why is it so important?

30th July 2014

When applying for insurance, you will be asked to disclose all material facts that could affect the risk. Why, because the law assumes you know everything about the risk you wish to insure and the insurer does not. For the insurer to be able to select the risks it wishes to insure, at the right price and on the terms and conditions which reflect your risk, you as the only party with that information, have to declare all relevant information to the insurer. This is what is referred to as material facts.

Should you fail to disclose (called a non-disclosure) or misrepresent a fact, then you risk the insurer only paying part of a claim, declining to pay all of the claim and possibly, declaring the policy invalid.

This briefing highlights your duties of disclosure and gives some examples of the information that insurers may view as material facts.

The client’s duty

To disclose accurate material facts before a policy begins and prior to renewal, including:

– information that would influence (that is, induce), an insurer to accept a risk, provide the extent of cover and the level of premium to be charged.

In other words, you must not withhold information that may have caused insurers, had they been aware of it, to:

  • refuse to issue the policy; or
  • change the policy terms; or
  • charge a higher premium.

Your loss history is also very important.

Whilst the policy is in force, you must notify your broker of any alterations that change the subject matter of the insurance to avoid difficulties in the event of a claim. Practical examples are absence of:

– sprinkler protection while the system undergoes repairs

– intruder alarm protection due to a fault or installation of an upgraded system

– facts known to an insurer or which the insurer ought to know do not need to be disclosed – e.g. information in the public domain.

The insurer’s role

The burden of proof is on the insurer to show, in order to decline a claim on the grounds of non-disclosure or misrepresentation of material information, that:

– the policyholder failed to disclose a material fact

– the non-disclosure induced the insurer to issue the policy

– it would not have issued exactly the same policy had it known the material fact.

Practical Guidance

Material facts can be divided into two categories – physical hazard and moral hazard. A few examples (but by no means an exhaustive list) are:

Physical hazard

Property/Business interruption policies

– geographical location of property (e.g. proximity to rivers)

– property type (e.g. construction and physical condition)

– change of use of premises (e.g. un-occupancy; re-development; acquisitions; extensions)

– changes in fire/security protection or detection, including decommissioning sprinkler systems or withdrawal of police response

– previous damage such as subsidence or premises built on made-up ground

– loss trends (e.g. a number of similar losses below an excess which have potential for similar but more serious incidents to result in a claimable loss)

Liability policies

– previous HSE prosecutions or improvement notices issued

– new products or services that do not fit within the current business description given to the insurer

– loss trends as described above

Moral hazard – all policies

– history of dishonesty or a criminal record or previous bankruptcy of management – the duty to disclose can be far-reaching if businesses are not run in a lawful manner; do not keep proper accounting records or may be in financial difficulty

– directors’ disqualification

– previous claims or losses whether insured or not

– an insurers’ refusal to insure a particular risk or renew a policy or pay claims due to breach of policy conditions such as warranties or conditions precedent

– history of insurers avoiding or cancelling policies

– the true nature of the business to be insured (e.g. trade or product diversification such as setting up sideline businesses that are different to the main trade).

And finally if in doubt as to what might constitute a material fact, please speak to Horner Blakey Insurance Brokers on 020 7929 0108

Remember that a change in your business activities including acquisition/disposal of subsidiary companies or change of name are material at all times.

Any views or opinions expressed in this briefing are for guidance only and are not intended as a substitute for appropriate professional advice. We have taken all reasonable steps to ensure that the information contained herein is accurate at the time of writing but it should not be regarded as a complete or authoritative statement of law.

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