A CRITICAL ANALYSIS OF THE DUTY TO DISCLOSE IN ZIMBABWE: A SYNOPSIS

BY VUSUMUZI MI BHEBHE 2013

INTRODUCTION: This essay will critically analyse the duty of disclosure in insurance law and specifically linking it to the law of Zimbabwe. The essay will begin by explaining the relationship between the doctrine of uberrimae fidei and the duty of disclosure, discuss the concept of materiality and offer recommendations that are needed in Zimbabwe in order to curb the adverse ramifications of the duty of disclosure. Utmost good faith: In modern case law and literature, insurance contracts have been classified as contracts of the utmost good faith (contracts uberrimae fidei). Contracts of this type have been said to impose a duty on the contracting parties to display the utmost good faith towards one another during the course of their negotiations preceding the contract.1 The duty of good faith is preeminently concerned with pre contractual negotiations between the parties to an insurance contract and has a close relationship with the duty of disclosure.2 Requiring the utmost good faith rather than mere good faith has been a way of expressing the fact that in contracts of this kind the contracting parties duties has been stretched beyond reasonable honesty and integrity.3 Reinecke et al is of the view that the reference to utmost good faith does not indicate a distinct principle of law as there are no degrees of good faith such as little, more or utmost good faith.4 However what must be established in limine is that the duty of good faith and the duty of disclosure are mutual and fall upon both insurer and the insured.5 It is also clear that the requirement that the insurer and the insured act in utmost good faith towards

1 2 3

MFB Reinecke, S van der Merwe, JP van Niekerk and P Havenga(2002) General Principles of Insurance Law page 110. Ibid. The Law Commission and the Scottish law Commission Insurance Contract Law Issue Paper 6 Damages for late payment and the insurers duty of good faith page 30. 4 MFB Reinecke, S van der Merwe, JP van Niekerk and P Havenga(2002) General Principles of Insurance Law page 110. 5 AA Tarr and J Tarr International and Comparative Law Quarterly: The insureds non -disclosure in formation of Insurance contracts (2001) vol 50 page 579.

each other is not confined to the duty of disclosure and a duty not to misrepresent material facts.6 In the law of contract, a party as a general rule is not obliged to disclose every material facts known to him or her but unknown to the other party.7 Insurance law is therefore an exception to this general rule through the doctrine of ubarimmae fidei. In the case of Brownlie v Campbell Lord Blackburn held that In policies of insurance, there is an understanding that the contract is ubarrimae fidei, that, if you know any circumstance at all that may influence the underwriters opinion as to the risk he is incurring, and consequently as to whether he will take it, or what premium he will charge, if he does take it, you will state what you know. There is an obligation therefore to disclose what you know, and the concealment of a material circumstance known to you, whether you thought it material or not avoids the policy.8 What is important to note therefore is that an insurer will avoid the claims by an insured who did not disclose material facts at the conclusion of the contract. Whether this is fair or not and whether a fact is material or immaterial are matters that will be addressed later in the essay. The duty of good faith as it relates to the duty of disclosure is generally justified by the reasons infra. The insurer requires extensive information about the risk in order to be able to quantify the possibility of loss to a degree of probability, calculate the risk and come to a decision on whether or not it is prepared to accept the risk and if it is, to what extent and on what terms, especially at what price it is prepared to do so.9 The special facts which form the basis of these calculations are regarded as being within the knowledge of the insured. 10 It must however be understood that theoretically the duty of good faith applies to both the insured and the insurer. The insurer may be equally liable for breach of the duty. 11 Although insurers apparently rarely commit breach of the duty of good faith, or, more probably, are rarely sued for such breaches, examples do occur, both of pre-contractual breach and of breach during the existence of the contract.12 The duty of disclosure in particular, is also theoretically applicable to both the insurer and the insured but practically it falls exclusively on the insured because of the belief that the insurer knows nothing about the risk and the

6 7 8

Ibid page 580. RH Christie (2001) The Law of Contract 4 (ed) page 320. (1880) 5 App Cas 925 (HL). 9 MFB Reinecke, S van der Merwe, JP van Niekerk and P Havenga(2002) General Principles of Insurance Law page 113. 10 MFB Reinecke, S van der Merwe, JP van Niekerk and P Havenga(2002) General Principles of Insurance Law page 113. 11 Ibid page 117. 12 Ibid.

insured knows everything pertaining to that risk as was held in the case of Ritchie v Delta Pension Fund.13 At what time does the duty of disclosure arise: According to Joubert JA the duty of disclosure is imposed ex lege. It is not based upon an implied term of the contract of insurance.14 The duty of disclosure continues throughout the negotiations and terminates when the contract is concluded.15 Material facts which come to the insureds knowledge before the contract is concluded and facts which though previously immaterial become material owing to changed circumstances before then, must be disclosed.16 Once the contract has been concluded, however, the insured is not obliged to disclose further material facts.17 In indemnity insurance the duty to disclose attaches to the renewal of the contract to the same extent as it does to the making of the original contract for a defined period which entirely replaces the contract which has expired by the effluxion of time.18 This means that the renewal of an insurance contract is taken to be a new exercise all together so if there are issues that have become material prior to the renewal even though not in the original contract, they should be disclosed. The relevance of the Insurance Act (Chapter 24:07): It must be noted that the Act does not say much about disclosure. The insurer is under an obligation to inform the insured clearly in writing that the insured has a duty to disclose every fact that would be material.19 Material facts are stated as those that would affect the calculation of the risk and the decision whether or not to enter into the policy. 20 If an insurer does not inform the insured of the duty to disclose, it shall not be entitled to avoid any liability under the policy concerned on the ground of non-disclosure unless the non-disclosure was fraudulent.21 This is not sufficient protection of the insured in that they are presumed to know what a prudent insurer would consider material which is an undue burden upon the insured. Tests for materiality:

13 14

1992 (2) ZLR 413 (SC) page 416. 1987 (3) SA 506 (A) at 433 B. 15 DM Davis (2002) Gordon and Getz: The South African Law of insurance 4 (ed) page 126. 16 Ibid. 17 Ibid page 127. 18 DM Davis (2002) Gordon and Getz: The South African Law of insurance 4 (ed) page 127. 19 Section 83 A (1). 20 Ibid. 21 Ibid subsection 2.

In Mutual and Federal Insurance Co ltd v Oudtshoorn Municipality Joubert JA said that there is a duty on both insured and insurer to disclose to each other prior to the conclusion of the contract of insurance every fact relative and material to the risk or the assessment of the premium. This duty of disclosure relates to material facts of which the parties had actual knowledge or constructive knowledge prior to conclusion of the contract of insurance.22 In the case of Lion of Zimbabwe insurance Company Ltd v Tabex (Pvt) Ltd the court held that there are four possible tests of materiality which are (i) Facts which the insured believed to be material, (ii) Facts which a reasonable insured ought to believe to material, (iii) Facts which a particular insurer believed to be material and (iv) Facts which a reasonable insurer ought to consider to be material.23 The court applied the test of a reasonable and prudent insurer which is (iv) supra holding that a fact is material for the purpose of duty of disclosure if it is one which would influence the judgment of the insurer in deciding on whether or not to accept the risk or in deciding the amount of premiums or whether or not to impose terms and conditions in the policy.24 One issue that comes to mind is that the duty of disclosure practically lies on the insured and it is therefore apparent that to apply the reasonable and prudent insurer test produces undesirable outcomes in that it oppresses the insured. It is therefore recommended that the test of a reasonable insured in terms of (ii) supra. Categories of disclosure: There are basically four categories which courts consider to be material and subsequently to be disclosed by the insured, failure of which would entitle the insurer to avoid liability. The insured is under a duty to disclose previous refusals.25 In the case of Locker and Woolf,Ld v Western Australian Insurance Co which involved an insured who had their premises insured against fire, they were asked in a proposal form whether they had any policy that had not been previously refused and they stated that there wasnt yet two years earlier, they had applied to another insurer for a motor vehicle insurance which had been rejected. 26 Slesser LJ held inter alia that the insurer was entitled to avoid liability since the previous refusal of the motor vehicle policy was a material fact which was supposed to be disclosed.27 It is clear that the duty of disclosure is unfair to the insured as they are required to disclose previous refusals which are not linked in any way to the proposed insurance contract.
22 23

1985 (1) SA 419 (A). 1993 (2) ZLR 112. 24 Ibid. 25 Locker and Woolf,Ld v Western Australian Insurance Co 1936 1 KB 408. 26 Ibid. 27 Ibid.

The insured is also under a duty to disclose previous convictions.28 In the case of Woolcott v Sun Alliance and London Insurance ltd where the insured had a fire policy for his house, he failed to disclose previous convictions, when he claimed after the house was destroyed by fire, Caulfield J held inter alia that the insurer could avoid liability since the non-disclosure was material.29 In the case of Kelly v Pickering and Anor Beck J held inter alia that an insurer can avoid liability where the insured has failed to disclose rumours and suspicions.30 This however is unfair on the basis that, how can one be expected to disclose what he or she does not know, it is therefore clear that there is need for reform. In the case of Roberts v Avon Insurance it was held that the insured is under an obligation to disclose previous claims, failure of which the insurer is entitled to avoid liability.31

Categories of facts which should not be disclosed: DM Davis identifies certain facts which need not be disclosed if the insurer does not ask them. Any circumstance which diminishes the risk need not be disclosed by the insured. 32 In Carter v Boehm Lord Mansfield illustrated this point when he held that The underwriter need not be told what lessons the risk agreed and understood to be run by the express terms of the policy . . . if he insures for three years, he need not be told any circumstance to show it may be over in two; or if he insures a voyage with liberty of deviation, he need not be told what tends to show there will be no deviation.33 This is so probably because it would be unfair to compel the insured to disclose what would be to his or her advantage not to disclose. An insurer is not obliged to disclose any circumstance which is known or presumed to be known to the insurer.34 In Leen v Hall a castle in County Kerry in Ireland was insured against damage from riot, civil commotion, war, rebellion and fire.35 It was destroyed in May 1921 by members of the Irish Republican Army during the troubles of that year. In an action on the policy the insurer pleaded that the insured had not disclosed that the castle had been occupied for short periods during that year by Crown Forces and that it had been used by them for the

28 29

Woolcott v Sun Alliance and London Insurance ltd 1978 (1) WLR 473. Ibid. 30 1980 ZLR 61. 31 [1956] 2 Lloyds Rep 240. 32 DM Davis (2002) Gordon and Getz: The South African Law of insurance 4 (ed) page 126. 33 (1766) 3 Bur 1905. 34 DM Davis (2002) Gordon and Getz: The South African Law of insurance 4 (ed) page 126. 35 [1923] 16 LIL Rep 100 KB.

detention of Sinn Fein prisoners. The court found that it was not material to communicate these facts, presumably because they were common knowledge. An insured is also not obliged to disclose any circumstance as to which information is waived by the insurer.36 The insurer may waive certain information and once it has done so, it cannot expect to retain the right to void liability if this information is not disclosed to it. The insured is also not obliged to disclose any circumstance which it is superfluous to disclose by reason of any express or implied warranty.37 The existence of an implied or express warranty will be sufficient for the protection of the insurer so such facts need not be disclosed. Agents and the duty of disclosure: It is the duty of the agent, as representing the proposed assured in the negotiations, to disclose to the insurers all material facts which are within his knowledge, however acquired, or which ought to have come to his knowledge in the ordinary course of business.
38

Where the

insurance is effected for the insured by an agent, the agent must disclose to the insurer every material circumstance which is known to himself.39 An agent to insure is deemed to know every circumstance which in the ordinary course of business, ought to be known by, or to have been communicated to him.40 The agent must disclose also every material circumstance which the insured is bound to disclose, unless it came to his knowledge too late to communicate it to the agent.41 The insured, though ignorant of a fact known to his agent, is answerable for the latters failure to disclose it.42 Recommendations for reform: The approach of preferring the insurers position with regards to the duty of disclosure is firmly entrenched despite the fact that in the past the insurer was an individual underwriter and the insured a powerful merchant.43 Today the insurer is no longer in an unequal position and in need of protection as stated by Reinecke et al.44 The English Law Commission has again suggested that the duty of the insured should remain one of uberrimae fidei namely to disclose all relevant information to the insurer but subject to two qualifications being (i)
36 37 38

DM Davis (2002) Gordon and Getz: The South African Law of insurance 4 (ed) page 126. Ibid. London General Insurance Co v General Marine Underwriters Association [1921] 1 KB 104, 4 LIL Rep 382, CA.

39 40

Ibid page 128. Ibid. 41 Ibid. 42 Proudfoot v Montefiore (1867) LR 2 QB 511. 43 MFB Reinecke, S van der Merwe, JP van Niekerk and P Havenga(2002) General Principles of Insurance Law page 114. 44 Ibid.

firstly that the duty should only cover information that a reasonable policy holder rather than a reasonable insurer would regard as relevant to the risk and (ii) secondly that where a proposal form is issued and filled in by the insured the insurer should in such a case be deemed to have waived his right to any further information not specifically requested save that the insured should not fraudulently withhold relevant facts of which he had knowledge.45 MacKenna J in Lambert v Co-operative Insurance Society Ltd expressed the difficulties associated with reasonable insured test and the advantages of a reasonable insured test by holding that The present case shows unsatisfactory state of the law. Mrs Lambert is unlikely to have thought it necessary to disclose the distressing fact of her husbands recent convictions when she was renewing the policy on her little store of jewellery. She is not an underwriter and presumably has no experience in these matters.46 The Commissions proposal appears to be a step in the right direction for the reasonable insured test which would entail that an insured should only forfeit this insurance cover as a result of factors which are within control of a reasonable man in his position.47 It is therefore clear that Zimbabwe should also adopt the reasonable insured test since the Insurers are using a wait and see strategy where they wait until insured claims in order to avoid liability on the basis of non-disclosure whilst they would have benefitted from the payment of premiums. The insured is in a position of inequality in relation to the bargaining power of the insurer.48 CONCLUSION: In summation, the duty of disclosure is part of the doctrine of utmost good faith required in insurance contracts. This duty imposes an onerous burden upon the insured and there is need to reform especially in Zimbabwe. The test to be adopted for materiality to be fair should be that of a reasonable insured rather than the current one of the reasonable and prudent insurer.

45 46 47

DM Davis (2002) Gordon and Getz: The South African Law of insurance 4 (ed) page 114. (1975) 2 Lloyds Rep 485 at 491. DM Davis (2002) Gordon and Getz: The South African Law of insurance 4 (ed) page 114. 48 DM Davis (2002) Gordon and Getz: The South African Law of insurance 4 (ed) page 114.

BIBLIOGRAPHY: 1. DM Davis (2002) Gordon and Getz: The South African Law of insurance 4 (ed) Juta Law: Cape Town. 2. MFB Reinecke, S van der Merwe, JP van Niekerk and P Havenga(2002) General Principles of Insurance Lexis Nexis: Durban. 3. The Law Commission and the Scottish law Commission Insurance Contract Law Issue Paper 6 Damages for late payment and the insurers duty of good faith. 4. RA Hasson The Modern Law Review: The doctrine of Ubarrima fides in Insurance law: A critical evaluation Vol 32 No 6 November 1969. 5. AA Tarr and J Tarr International and Comparative Law Quarterly: The insureds non-disclosure in formation of Insurance contracts (2001) vol 50 6. RH Christie (2001) The Law of Contract 4 (ed) 7. J Lowry and P Rawlings (2012) Modern law Review:That wicked rule, that evil doctrine...:Reforming the Law on Disclosure in Insurance Contract Vol 75, Issue no 6. vusumuzibhebhe@yahoo.com