Material non-disclosure – what it means and how it is tested

‘Insurers look for reasons not to pay a claim” is a commonly heard complaint when discussing the value of taking out life, disability and illness insurance cover. An additional comment often refers to how difficult it is to argue an unfavourable claims decision as “the man in the street”, given the size and perceived power of insurance companies. The complexity of certain contracts does little to aid the situation.

When a claim is declined the contractual reason provided for declining the claim can sometimes create the impression that the life assured has nowhere else to go, but to accept the decision.

However, not every claims decision emanating from the insurer is necessarily correct and you are entitled to further interrogate the reasons to get a better understanding of what may have transpired. In many instances this has led to a revision of the original decision for a variety of reasons.

One of the most common areas of misunderstanding at claims stage is that of how the materiality of alleged non-disclosure of certain information is assessed. This typically occurs when an insurer discovers during the claims assessment process that certain information was not disclosed fully at the time of underwriting – often irrespective of how far back such information may stretch into the past. As explained below, materiality and risk assessment are intertwined.

Many consumers struggle to understand why a claim for an insured event is declined on the basis of non-disclosed information that has no relation to the claim. For example, the claim event arose from an assault and the non-disclosed information pertains to surgical history of some description.

This misunderstanding arises from the fact that the determination of the “value” of any non-disclosed information is not claims-event related. It is risk related. Put simply, the test of the relevance of non-disclosure lies in the assessment of what was material to how your risk was assessed when you were signing up for the insurance policy – that is, at the time of underwriting.

The questions to consider are:

• Had the insurer known certain facts at underwriting stage, would further information have been requested before offering you cover?


• Would cover have been offered on the same basis and been issued in the same manner that it was when your policy cover commenced?

Since it is your duty as the insured to disclose all material facts at the time of entering into an insurance contract, you would expect to avoid disappointment further down the line by disclosing all upfront. If only it were that simple.

Why you might not have told all

There are perfectly innocent and understandable reasons as to why certain information may not have been disclosed. Setting aside the instances in which non-disclosure was intentional in order to obtain cover under false pretences, there are a number of ways in which non-disclosure may unintentionally have occurred. These include:

1. Forgetting past events or facts: this is a frequently experienced issue, especially for events that occurred long ago. Insurers often expect applicants to disclose all relevant information in spite of the knowledge that human memory is fallible.


2. Inadequate prompting on application forms: insurance forms can be lengthy and complex, and sometimes fail to ask the correct questions in order to elicit necessary information. This can lead to unintentional omissions.


3. Assuming ‘non-issues’ in medical history: applicants might not disclose medical issues they consider resolved or insignificant, but insurers might still view these as being relevant to the assessment of risk.


4. Changes in health status between application and policy commencement: there can be a time gap between the submission of an application and the policy start date. Any changes in health during this period should be reported to the insurer, yet this requirement is often overlooked.

The implications of non-disclosure

Non-disclosure, whether intentional or not, can have significant implications.

For example, *Claire signed an application form on the 1st of the month and submitted it immediately, but on the 25th of the same month, she attended a physiotherapy session for backache after having undergone routine x-rays. She may not have realised that this new event could be considered a material change to her risk assessment. Yet, the failure to mention a change in health-related facts during the underwriting process can turn out to be very costly.

If the policy commences on the 1st of the following month and there is a claim further down the line, the oversight of not sharing the physiotherapy treatment and radiology report will be considered non-disclosure, whether material or not.

In this instance a review of the facts is required, bearing in mind that the materiality test is based on the impact such information would have had on your risk assessment.

This is the point where things are known to sometimes go awry. In some instances, an insurer’s knee-jerk reaction has been to decline a claim or attempt to cancel a contract on the basis of non-disclosure, forgetting that non-disclosure is only relevant if it is actually material.

Take the physiotherapy and backache issue mentioned above. A repudiation of the claim merely on the basis of this information not having been disclosed cannot be deemed reasonable or fair without a full review of the facts and full re-underwriting, as if it had been known at the inception of the policy.

This was an actual case and what happened was that the policy was re-underwritten and included the insertion of a specific musculoskeletal exclusion clause into the policy. This did not, however, alter the validity of the claim, which was for another condition completely – which means the exclusion clause didn’t make any difference to the claim.

The original decision to not pay on the basis of deemed material non-disclosure was reversed and the claim paid. Although it took some months to iron this one out, *Claire ultimately received her benefit.

Clearly, had the claim been for the specific musculoskeletal disorder excluded, the final outcome could well have remained the same. The debate could, however, then centre around how reasonable the insertion of the exclusion clause was.

Consumers need to be mindful that in the event of a claim being denied on the basis of material non-disclosure, you can call for re-underwriting of the risk with the full set of facts in hand. This is known as implementing the Didcott Principle. This principle enables reconstruction of the policy so as to bring the contract in line with what would have been offered if all the facts had been known from the start.

You have the right to question a declined claim on the basis of alleged material non-disclosure by asking for the Didcott Principle to be applied and insisting on a full review.

In some instances, the new facts would have made very little difference to the cover offered, let alone the claim. In other instances, different terms may have been offered or the amount of cover and premium may have been adjusted; still allowing for a claim, albeit a lesser amount. There will also be situations in which cover would not have been granted at all and the policy cancelled.

Just as insurance companies have the right to assess risk and underwrite accordingly, so too you have the right to interrogate the basis on which information is deemed material when a claim is declined on the basis of non-disclosure.

The materiality of information relates directly to the insurer’s exposure to risk. All decisions related to risk exposure need to be reasonable and justifiable on the basis of actuarially sound data and risk-related experience, which – as indicated above – is another question you are entitled to ask if a policy is issued on any basis other than that of normal rates with no exclusion clauses.

While insurance companies may be seen to be “too big to take on”, you should be aware of when it is necessary to do so to ensure that the correction decision has been made.

Not all claims’ decisions stand up to closer scrutiny. DM

Elise Burns-Hoffman is a specialist consultant in life insurance claims matters; an expert witness in medico-legal matters and a certified mediator. 

*Name changed for privacy.