Definition of Material Circumstances
A material circumstance is any piece of information that would influence the judgment of a prudent insurer in deciding whether to accept the insurance risk and, if so, on what terms.
Material circumstances, also known as material facts or information are pivotal in insurance law. Governed under the Insurance Act 2015, the law details how risk information is disclosed between policyholders and insurers. Understanding what constitutes a material circumstance is essential for both the insured and the insurer to ensure fair presentation of risk, a key principle of the Act.
Criteria for Material Circumstances
The significance of material circumstances lies in their impact on the underwriting process, affecting an insurer's assessment of the risk profile of a proposed insured entity or individual.
Relevance to Risk: The information must be relevant to the risk being insured against. It should have a direct impact on the insurer's decision-making process regarding the risk's acceptability and the pricing of the insurance policy.
Influence on Terms: If the knowledge of a particular circumstance would lead an insurer to change the terms of the insurance contract, such as increasing the premium or altering the coverage, it is considered material.
Impact on Coverage Decision: Information that could affect an insurer's decision to offer coverage at all is material. This includes circumstances that significantly increase the risk or make it uninsurable under standard terms.
Impact of Material Circumstances
Understanding and accurately disclosing material circumstances are crucial for the integrity of the insurance contract. Failure to disclose, whether intentional or unintentional, can lead to disputes, adjustments in coverage, or even denial of claims under the Insurance Act 2015.
The Act's emphasis on fair presentation aims to ensure that all relevant risks are disclosed upfront, allowing insurers to accurately price and provide coverage, thereby fostering a transparent and equitable insurance marketplace.
Examples of Material Circumstances
Past Claims History: A history of claims made by the policyholder is a critical material circumstance. An insurer would use this information to assess the risk level and determine the premium and terms of coverage. For instance, a business seeking property insurance must disclose previous fire incidents or water damage claims.
Change in Use of Property: For property insurance, a change in the use of the insured property, such as converting a residential building into commercial use or vice versa, is material. This change affects the risk profile due to different occupancy risks and usage patterns.
Cybersecurity Measures: For a company seeking cyber insurance, the adequacy of its cybersecurity measures, including firewalls, anti-virus software, and employee training programs on data protection, are material. A recent breach or known vulnerabilities would also be material circumstances.
Merger and Acquisition Activity: For directors’ and officers’ insurance, any ongoing or planned merger and acquisition (M&A) activities are material because they can significantly alter the risk profile of the business through changes in operations, liabilities, or asset values.
Safety Measures and Compliance: In industries where safety measures are critical, such as manufacturing or construction, compliance with safety regulations and the existence of safety protocols are material circumstances. A construction company must disclose whether it adheres to industry-standard safety practices, as non-compliance could elevate risk levels.
Criminal Convictions: In certain types of insurance, such as motor insurance, criminal convictions, especially those related to driving offenses, are material. They can significantly affect the insurer's view of the risk presented by the insured.
Environmental Risks: For properties located in areas prone to natural disasters (e.g., flood zones, earthquake-prone areas), the environmental risk is a material circumstance. Property owners need to disclose such risks, as they greatly affect the likelihood and potential severity of claims.
Understanding and accurately disclosing material circumstances are crucial for the integrity of the insurance contract. Failure to disclose, whether intentional or unintentional, can lead to disputes, adjustments in coverage, or even denial of claims under the Insurance Act 2015. The Act's emphasis on fair presentation aims to ensure that all relevant risks are disclosed upfront, allowing insurers to accurately price and provide coverage, thereby fostering a transparent and equitable insurance marketplace.
Guidelines to Determine Non-material Circumstances
Lack of Relevance to the Risk: If the fact has no bearing on the likelihood of a claim being made under the policy or on the insurer's ability to assess the risk accurately, it may not be material. For example, the colour of a car is generally not material to the assessment of risk for auto insurance purposes, except in rare cases where colour might be statistically correlated with higher risk.
Common Knowledge: Facts that are considered common knowledge or that are already reflected in the public domain and accessible to the insurer may not be material. For instance, general economic conditions or widely reported environmental factors affecting an entire region might not need to be disclosed by an individual policyholder.
Not Specifically Requested by the Insurer: If an insurer does not ask for specific information either through the application process or during negotiations, and if that information is not inherently obvious as material to the risk being insured, it might not be considered a material circumstance. However, this is nuanced, as the duty of fair presentation under the Insurance Act 2015 encourages disclosure of material facts even if not directly asked.
Legally Prohibited Discrimination Factors: Information that insurers are legally prohibited from considering in their underwriting process, such as certain types of personal data under data protection or anti-discrimination laws, would not be material. For example, in many jurisdictions, insurers cannot base their decisions on factors like race, religion, or sexual orientation.
How to Know if a Fact is Not Material?
Determining materiality requires assessing whether the information could affect the insurer's decision-making process regarding the risk. Discussing with your insurance broker can help clarify which facts are likely to be material in specific contexts.
If unsure, it is often better to err on the side of disclosure, which advocates for a fair presentation of risk. Ultimately, the determination of materiality is guided by the principle of whether the fact would influence a prudent insurer's decision on coverage and terms. If a fact does not affect the risk from the insurer's perspective, it is generally not considered a material circumstance.
About the author
Simon Taylor is a respected senior industry professional and a Chartered Insurance Broker with over 20 years’ of experience in the commercial insurance sector as an underwriter, broker and director.