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Disclosure in insurance law: a comparative analysis

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Abstract

Disclosure or non-disclosure is one of the key issues in insurance contract. This paper compares laws on remedy for no-disclosures in European and other major jurisdictions. It concludes there are generally two different approaches on remedy for non-disclosure—(1) the strict disproportionate approach; and (2) the proportionate approach. The paper introduces an asymmetric information model to elaborate on the ongoing debates over the various normative issues of fairness with respect to the two different approaches. It confirms that the proportionate approach serves better the goal of fairness, in particular for the insured who acts honestly but carelessly provides bad information to the insurer. The model provides a statistical tool for a correct range of remedy on non-disclosure.

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Notes

  1. The 1906 British Marine Insurance Act [hereinafter called the 1906 Act], 6 Edw. 7, ch. 41, requires the policyholder to provide the material facts correctly. The test of materiality is set out in section 20(2): A representation is material when it would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.

  2. 1906 Act, § 18(1). Although, strictly speaking, the 1906 Act is concerned only with marine insurance, many of its provisions are presumed to be equally applicable to other types of insurance.

  3. In the landmark English case of Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd ([1995] AC 501), the House of Lords decided that: If a policyholder makes a statement which is deemed to be a warranty and that statement is not correct, the law states that the insurer is entitled to be discharged from liability. This is the case even if the statement does not influence the judgment of a prudent insurer in fixing the premium or in determining whether or not he will take the risk. The effect is that the law will allow a policy to be avoided for the smallest inaccuracy, if that statement is deemed to be a warranty.

  4. Under the UK legal principle of restitution, where a contract is avoided, it would normally require the parties to restore their positions to the time prior to the contract being made. In other words, if the general restitution law applies, the policyholder may demand the return of the premium paid.

  5. [1997] AC 254.

  6. Id at 280.

  7. The UK Law Commission published its Consultation Paper No 182 on Insurance Contract Law: Misrepresentation, Non-disclosure and Breach of Warranty by the Insured. The overall objective of the law reform is to find a fairer balance between the rights of insurers and of those insured.

  8. Norway, Insurance Contracts Act 1989, s 4-2; Sweden, Insurance Contracts Act 2005 Chapter 4 s 2 para 2. The French Code des Assurances, Art L 113-9 allows a proportionate remedy for non-negligent and negligent misrepresentation. Under the current approach of the European Restatement Group, in cases of negligent misrepresentation, the outcome would depend on what the insurer would have done if it had been given the correct information.

  9. Norway, Insurance Contracts 1989 Act § 4-2 (no remedy unless blame “more than merely slight”); Sweden, Insurance Contracts Act 2005, Chapter 4 s 2; and under the proposed scheme of the European Restatement Group, the insurer will be permitted to terminate for the future if it would not have concluded the contract had it known of the information concerned.

  10. Financial Ombudsman Service, Ombudsman News, (April 2003), Issue 27.

  11. Norwegian Marine Insurance Plan 2007 (http://www.norwegianplan.no/eng/index.htm) arts 4.4 and 4.7.

  12. Swedish Marine Insurance Plan 2006 (http://www.sjoass.se/orgvillpdf/SPL/SPLeng.ver.pdf) art 4.6; Swedish Insurance Contracts Act 2005.

  13. Code des assurances, art 113-9.

  14. Swedish Insurance Contracts Act 2005, ch 8 s 9. In Germany, the proportionate approach is mandatory in business insurance.

  15. Townsend (1979).

  16. Crocker and Morgan (1998).

  17. The familiar concept that the courts should strive for the “rule of law” rather than the “rule of man” is attributed to Aristotle. Aristotle, Politics, in Great Books of the Western World vol. 9, 485–486 (Robert Maynard Hutchins ed., Benjamin Jowet trans., William Benton 1952).

  18. Aristotle, Nicomachean Ethic (H. Tredennick ed. & J.A.K. Thomson, trans., Penguin Classics 2003) (circa 350 B.C.E.).

  19. John Stuart Mill, On Liberty 97 (C. Shields ed., 1956).

  20. Jeremy Bentham, Principles of Morals and Legislation (Prometheus Books 1988) (1843).

  21. Rawls (1971, 136).

  22. Id.

  23. Id.

  24. [1966] 2 Lloyd’s Rep 113, at p 132.

  25. See Birds and Hind (2004).

  26. [1978] 2 Lloyd’s Rep 440, at p 460.

  27. Lambert-Faivre, Droit des Assurances (11th ed), Dalloz, at p. 197.

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Appendix: Proofs

Appendix: Proofs

Proof of Proposition 1

Calculating the first-order derivative of I(γ) with respect to γ yields

$$ \frac{dI}{d\gamma} = \left[{U\left({- \gamma \cdot E\left({L\left| {S_{j,d}^{b}} \right.} \right)} \right) - U\left({- \alpha \cdot \gamma \cdot E\left({L\left| {S_{j,d}^{b}} \right.} \right) - C} \right)} \right] \cdot f^{b} \left({\gamma \cdot E\left({L\left| {S_{j,d}^{b}} \right.} \right)} \right) \cdot E\left({L\left| {S_{j,d}^{b}} \right.} \right) $$

Let \( \frac{dI}{d\gamma} = 0 \), then Eq. (4) is obtained. □

Proof of Proposition 2

From constraint (3), we can derive that

$$ \alpha = 1 - \frac{{\Updelta Q\left({S_{j,d}^{a},S_{j,d}^{b},d,D} \right)}}{{\int_{{\gamma \cdot E\left({L\left| {S_{j,d}^{b}} \right.} \right)}}^{\infty} {\ell dF^{a} \left(\ell \right)}}} = 1 - \frac{{\left({1 + \eta} \right) \cdot \left({D - d} \right) \cdot \left[{\lambda \left({S_{j,d}^{a}} \right) \cdot E\left({L\left| {S_{j,d}^{a}} \right.} \right) - \lambda \left({S_{j,d}^{b}} \right) \cdot E\left({L\left| {S_{j,d}^{b}} \right.} \right)} \right]}}{{\int_{{\gamma \cdot E\left({L\left| {S_{j,d}^{b}} \right.} \right)}}^{\infty} {\ell dF^{a} \left(\ell \right)}}}. $$

Substituting \( \gamma = \frac{C}{{\left({1 - \alpha} \right) \cdot E\left({L\left| {S_{j,d}^{b}} \right.} \right)}} \) into the above equation, we obtain that for \( S_{j,d}^{a} \in S_{u} \),

$$ \alpha = 1 - \frac{{\left({1 + \eta} \right) \cdot \left({D - d} \right) \cdot \left[{\lambda \left({S_{j,d}^{a}} \right) \cdot E\left({L\left| {S_{j,d}^{a}} \right.} \right) - \lambda \left({S_{j,d}^{b}} \right) \cdot E\left({L\left| {S_{j,d}^{b}} \right.} \right)} \right]}}{{\int_{{\frac{C}{{\left({1 - \alpha} \right)}}}}^{\infty} {\ell dF^{a} \left(\ell \right)}}}. $$

Proof of Proposition 3

Let \( y = \frac{1}{1 - \alpha} \). Then the Eq. (5) can be rewritten as

$$ \int\limits_{C \cdot y}^{\infty} {\ell dF^{a} \left(\ell \right) = \left({1 + \eta} \right) \cdot \left({D - d} \right) \cdot \left[{\lambda \left({S_{j,d}^{a}} \right) \cdot E\left({L\left| {S_{j,d}^{a}} \right.} \right) - \lambda \left({S_{j,d}^{b}} \right) \cdot E\left({L\left| {S_{j,d}^{b}} \right.} \right)} \right] \cdot y} $$

Define \( H(y) = (1 + \eta) \cdot (D - d) \cdot \left[{\lambda \left({S_{j,d}^{a}} \right) \cdot E\left({L\left| {S_{j,d}^{a}} \right.} \right) - \lambda \left({S_{j,d}^{b}} \right) \cdot E\left({L\left| {S_{j,d}^{b}} \right.} \right)} \right] \cdot y \) and \( G(y) = \int_{C \cdot y}^{\infty} {\ell dF^{a} \left(\ell \right)} \). Then G(y) decreases in y and \( G(0) = E\left({L\left| {S_{j,d}^{a}} \right.} \right) \); G(∞) = 0. As \( \lambda \left({S_{j,d}^{a}} \right) \cdot E\left({L\left| {S_{j,d}^{a}} \right.} \right) > \lambda \left({S_{j,d}^{b}} \right) \cdot E\left({L\left| {S_{j,d}^{b}} \right.} \right) \) for any \( S_{j,d}^{a} \in S_{u} \), H(y) is greater than zero and increases in y. Thus, there must exist a solution of α (see Fig. 5).

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Li, K.X., Wang, Y., Tang, O. et al. Disclosure in insurance law: a comparative analysis. Eur J Law Econ 41, 349–369 (2016). https://doi.org/10.1007/s10657-012-9355-y

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