In Professional Indemnity and D&O insurance, litigated examples have included the involvement of key individuals in previous insolvencies, historic allegations of fraud, and previous convictions. All of these have in various cases been ruled to be material risks which should have been disclosed to insurers during placement.
Moral Hazards are distinct from the insured's previous claims history (for example previous instances of mere negligence), and are typically the subject of separate questions on a proposal form.
When are Moral Hazards disclosable?
UAE law doesn't define the circumstances in which a Moral Hazard is disclosable. Instead, Moral Hazards are subject to the broad provisions at Article 1032(b) of the UAE Civil Code, requiring an insured to disclose all information that insurers may require in order to estimate the risk being underwritten. This is subject to an overriding obligation not to act in bad faith, common to all contracts.
English law is more specific, with the duty codified at Section 3(4) of the Insurance Act 2015: an insured must disclose to insurers every "material circumstance" which the insured knows or ought to know, or failing that disclose sufficient information so as to put a prudent insurer on notice that it needs to make further enquiries.
How is materiality established?
A few key principles apply:
- the threshold for establishing materiality is low: facts existing at the time of placement raising mere doubt as to the risk are sufficient. It is not necessary to show with hindsight that the facts actually affected the risk;
- it is not necessary for a circumstance to be decisive – it is enough that it would have been taken into account by a prudent insurer to reach the threshold of materiality;
- materiality is to be assessed from the perspective of the prudent insurer.
As to specific examples, a previous criminal allegation or conviction will usually be viewed as a material moral hazard, as it bears on the Insured's integrity/honesty. Allegations or convictions with a close relationship to the insured's business being insured (e.g. a previous conviction for fraud in the course of business activities), will almost certainly be material. However, a historic conviction entirely unrelated to the insured's business may not.
Inducement and Prejudice
Once a fact has been established as material, the effect of its non-disclosure must be considered. In English Law, under Section 8(1) of the English Insurance Act 2015 the insurer has the remedy of avoidance if it would not have entered into contract had the risk been disclosed; or a proportionate reduction in payment of a claim if it would have done so only on different terms. Recent case law has reiterated that insurers face significant evidential challenges in persuading a Court that it would have written on different terms: Scotbeef Ltd v D&S Storage Ltd & Anor [2024] EWHC 341.
UAE law reaches a similar position – insurers must demonstrate as a matter of fact the prejudice they have suffered as a result of the non-disclosure, and if they wish to avoid the Policy (absent bad faith), must demonstrate by evidence that they would not have written cover if the material risk had been disclosed.
Solutions to avoid tricky disputes
Some moral hazard issues speak for themselves and call for disclosure by the insured. In all other cases prevention beats cure. In particular, by ensuring clarity in the questions and statements in the proposal form ahead of time, insurers can support a later argument that they a) consider certain facts material (such as any previous criminal convictions or involvement in insolvencies), and b) that they would not as a matter of practice accept risks if such facts exist.
Similarly, many insurers' underwriting guidelines may provide for clear circumstances (such as the insured's previous convictions) in which their underwriters are prevented from accepting risks, or are at least required to escalate proposals to higher authorities for greater scrutiny. These, if carefully drafted, together with the approach of the specific underwriter to the moral hazard, can form important evidence to support a subsequent avoidance for non-disclosure of a Moral Hazard.
As such, a sensible risk-management strategy is for insurers to review and refresh where necessary their proposal forms and internal guidelines. This can help cover off any grey areas which might lead to tricky and costly disputes.
