Insurance offers a way for individuals or companies to mitigate risk, but only if they keep their side of the contract.
When you take out insurance, you are essentially transferring a certain risk to the insurance company for a fee. This is a contractual relationship and it is based on the ability of the insurance company to assess accurately the risk it is taking on. The better the information it has on the risk, the better able it is to understand it – and the fairer the premium it charges will be.
That is the reason why an insurer asks a lot of questions before it takes anyone on as a client.
It is not possible for an insurer to check whether these answers are accurate at the time of signing the contract – it would add huge costs and cause premiums to balloon, and would also mean that contracts would take weeks to finalise if all the information is verified during this stage. So the accuracy of the risk information provided by the client is only scrutinised in the event that a claim is made.
Because the insurer is totally dependent on the insured to provide an accurate picture of the risk, it is an established legal principle that the parties in an insurance contract have a higher duty than they do in an ordinary contract. This principle is called uberrima fides, or utmost good faith, rather than the more usual good faith, or bona fides.
It is thus very important that anybody taking out insurance is absolutely accurate when they answer these questions because they form the basis of the insurer’s risk assessment.
Sometimes, of course, people lie about the risk in order to reduce the premium, but if these lies are discovered when a claim is made, there will be negative consequences.
Dishonesty aside, many people are careless about the accuracy of their answers or do not realise just how wide the concept of “loss” is in insurance. The insurer is entitled to be informed of any loss that was suffered, whether it was your fault or not, and whether it resulted in a claim or not. It is better to err on the side of providing too much information than too little.
Details like who the regular driver of a vehicle is or where it is parked at night, can have a material impact on the risk and thus the premium charged.
If full disclosure is not made, then the insurance company has several options. If there was no dishonesty, only a proportion of the claim might be paid, or the contract might be voided. Voiding would mean that because the contract was made without full disclosure, it will be treated as though it was never entered into. All premiums less costs would be refunded and, clearly, the claim would also not be paid.
If, however, the insurer establishes that dishonesty took place after the contract was signed; for example, by claiming against a non-existent robbery or hijacking, then the contract would be cancelled. In this case, premiums would not be refunded and the fact that a policy had been cancelled would have to be disclosed when any further insurance is sought.
In other words, your record with the insurance community would be tainted by this breach of the uberrima fides relationship, and you would be seen as a higher risk.
To conclude: any insurance contract hinges on the proper assessment of a risk. If full disclosure of all pertinent information requested by the insurer is not made, then at the very least a claim will not be paid in full.
Nthabiseng Moloi is Head of Marketing & Brand, MiWay