Pre-contractual Duty of Disclosure for Insurance Contracts

• In Malaysia, the insurance industry and its equivalent under Islamic law (ie: Takaful) are regulated by Bank Negara Malaysia under the Financial Services Act 2013 (“FSA”) and the Islamic Financial Services Act 2013 (“IFSA”) respectively.

• The rights and obligations of the parties in relation to the pre-contractual disclosure for insurance contracts and takaful contracts are set out in Schedule 9 of the FSA and the Schedule 9 of the IFSA respectively.

Consumer Insurance Contracts

• There is a distinction between pre-contractual duty of disclosure in relation to consumer insurance contracts and other insurance contracts. A “consumer insurance contract” is defined as an insurance contract entered into by an individual for purposes wholly unrelated to his trade, business or profession.

• An insurer has the right to request a consumer to answer specific questions relevant to the insurer’s decision as to whether to accept the risk, rates and terms proposed for the consumer insurance contract. Consumers are under a duty to take reasonable care not to make any misrepresentation when he answers the questions posed by the insurer. The standard of care is that of a reasonable consumer.

• The failure by an insurer to ask questions operates as a waiver to the consumer’s duty of disclosure. Furthermore, an insurer is deemed to have waived the duty of disclosure if the insurer does not follow up incomplete or irrelevant answers provided by the consumer.

Remedies for Misrepresentation

• The insurer’s remedies for misrepresentation in consumer insurance contracts depends on whether the misrepresentation is deliberate or reckless, OR careless or innocent.

• A misrepresentation is deemed “deliberate or reckless” if the consumer knew or simply did not care whether the statement was untrue or misleading, or the misrepresentation was made dishonestly. If a misrepresentation is proven on a balance of probability to be deliberate or reckless, the insurer may avoid the consumer insurance contract and refuse all claims.

• If a misrepresentation is “careless or innocent”, the insurer’s remedies will be determined based on what it would have done if the consumer had complied with the duty. For example, renew the consumer insurance contract on different terms, or reduce the amount to be paid on a claim.

Non-consumer insurance contracts

A person who proposes to enter into a non-consumer insurance contract is under a duty to disclose to the insurer any matter which (i) the proposer knows to be relevant to the decision of the insurer whether to accept the risk, rate and terms to be applied; or (ii) a reasonable person in the circumstances could be expected to know the matter to be relevant. Any misrepresentations in pre-contractual disclosure absolve the insurer’s liability from the contract.

Islamic Insurance (Takaful contracts)

The duties and remedies for pre-contractual disclosure for a consumer takaful contracts and non-consumer takaful contracts (set out in Schedule 9 of the IFSA) are almost identical to the ones discussed above.

Conclusion

When you are negotiating for terms and rates for your insurance or takaful contracts, be mindful not to lie or cover up any important facts or circumstances that may be relevant to your insurer. Otherwise, you run the risk of losing all your protections if deliberate or reckless misrepresentation is found!