The Law on Misrepresentation - Case Study Example

Commercial Law “Student’s Name” “Institution Affiliation” Part I Facts Evan has a comprehensive building insurance policy on his Victorian cottage. The comprehensive building insurance covers any endorsement against damage, loss, or legal liability that might occur during any period for which the insurance is accepted. A standard insurance policy should cover the full cost of rebuild or repair in case of loss, damage, or legal liability (Great Britain, & Scottish Law Commission, 2012). However, according to international law on risk management, buildings that have been damaged to an extent of 50 per cent ought to be demolished and rebuilt instead of renovating them. When filing for the comprehensive insurance coverage, Evan argued that the building had no structural issues but later assessment reveals the building destruction is partly attributable to weakness in structural integrity. The comprehensive building policy holds that, in any proceedings, where the insurer claims the loss resulting from the damage is not included in general cover policy, then the burden of attesting that such loss is covered shall be upon the insured (Murray, 2013). In the event that the insured proves, the insurer will pay the insured for consequential loss and damages to the property. The insurer is exempted from compensating the insured for loss or damage to property caused by faulty workmanship, use of defective materials, and defective design (Lagoni, 2007). Further, the comprehensive insurance policy does not cover loss or damage arising from diminution in value following replacement, repair, or reinstatement. When filing for comprehensive insurance coverage, Evan does not mention the unsafe and questionable workmanship for repairs undertaken in the building. He also does not mention the complaints he has made to the building authorities. The storm, which is covered by the comprehensive insurance, destroys the house. Analysis of the situation Generally, a comprehensive insurance policy should cover Evan’s cottage for any damage or loss arising from fire, storm, or any disaster that is contained within the comprehensive insurance. Unfortunately, an investigation by the insurer reveals damage to Evan’s cottage is caused partly by the storm and partly by weak structural integrity. Destruction or damage resulting from storm is covered for by the comprehensive insurance policy. According to Australian law on insurance, the insured has the right to claim for compensation amounting to total sum insured, if the damage arises from causes contained in the explicit insurance policy (Great Britain, & Scottish Law Commission, 2012). In this case, Evan has the right to seek compensation for destruction and damage resulting from the storm. However, during the time he was filing for comprehensive insurance, he hid from the insurer the fact that structural repairs on the building were faulty. This is despite the insurer asking questions regarding the integrity of structural repairs on the building. According to Evan, the structural renovations on the buildings were undertaken by qualified tradesperson. The insurer was made to believe that the structural renovations were safe while in the real sense, they were unsafe and questionable. Generally, before offering cover, the insurer assesses the risk before giving the person seeking insurance a quote. Also, rather than visiting the property, the insurer relies on information provided by the consumer (Commonwealth Consolidated Acts). In this case, the insurer provides a clear description to help the consumer provide accurate information. However, despite the insurer giving Evan clear descriptions seeking to clarify the condition and safety of the renovations, it can be argued that Evan chose to falsify the information. Who bears liability when information provided is false? Under contract law (the insurer enters a contract with the insured to provide insurance coverage), if a person gives recklessly false information knowingly, the person is held liable to the recipient of this information. Thus, the insurer must prove that the insured acted willingly despite being guided through the insurance process. In this case, the insurer is not obligated to pay insurance claims for falsified information. Furthermore, the falsified information prevented the insurer from understanding the nature and extent of faultiness of the renovations. The general insurance policy and legal framework for insurance coverage does not cover for damages and losses resulting from poor workmanship. Even if Evans is covered for damages caused by storm, if damage is attributable to faulty workmanship, then Evan may not be able to recover anything on his claim. Assessment by the insurer reveals damages are partly caused by storm and partly by poor structural renovation. So in this case, would Evan be compensated? The insurance law is very clear on compensation on insurance claims: any loss or damage resulting from details omitted in the insurance agreement, including faulty workmanship shall not be compensated. Under the given scenario, the damage is attributable to workmanship and storm. Therefore, the insurer should assess how much damage is caused by the storm and the extent of damage caused by poor quality renovations. This will help determine the amount that the insurer will compensate Evan. Thus, Evan will not receive full claim for damages and losses. Part II Professor Ivamy defined an insurance contract as a contract in which an individual, known as the insurer, undertakes to compensate another person, known as the insured, a certain amount of money on the occurrence of a specified event, in return for an agreed consideration (premium) (Hodgin, 2002). In the 21st century, there has been a growing awareness by the public of the benefits of undertaking an insurance policy. For an insurance contract to be enforceable, it must contain the following key elements: (i) offer and acceptance, (ii) legal purpose (iii) consideration (iv) legal form, and (vi) competent parties. In common law, the contract of insurance modifies the principle of caveat emptor. Both the insurer and the insured are bound to disclose material facts. Thus, the contract of insurance is one of the utmost good faith. In Carter Vs Boehm, it was held that both parties are required to disclose any material facts known to them. Thus, one can be sued in a court of law for misrepresentation. Evidence of misrepresentation, therefore, entitles a party to remedy for damages incurred (Stone, 2005). The concept of ‘misrepresentation’ in an insurance contact occurs when the insured provides untrue statement that: (i) would change the rate at which the insurance would have been provided, (ii) material to acceptance of the risk, and (iii) would have altered insurer’s verdict to issue the contract1. Upon realization of material misinterpretation, the insurer’s remedy can be tailored around rescission of the policy (Scottish Law Commission, 2006). Generally, the state law requires that parties in an insurance contract operate under the duty of utmost good faith. Parties to a policy of insurance are under obligation not to misrepresent facts that are material to insurer’s decision on whether to accept or reject the risk. Every material representation is held to be true; else the insurer may avoid the contract. A violation of this condition is subject to punitive damages that can be decided upon by a jury (Gatzlaff, Avila, & Fitzgerald, 2015). Any inaccuracy regardless of its materiality, according to the Australian common law, can be used as a pretext by the insurer to rescind the insurance policy. However, the insurer must show materiality before invoking the rescission remedy. In particular, the insurer can argue that the policy could have been avoided if it was not induced to enter into it by misrepresentation (Gatzlaff, Avila, & Fitzgerald, 2015). Referring to the landmark case of Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd, before an insurer avoids a contract for misinterpretation, it must show it was induced to enter into the contract on the relevant terms2. This Pan Atlantic test to materiality applies to Australian law. Therefore, the insurer must show that Evans appreciated the fact in question could have led the insurer to decline to provide insurance. The insurer needs to argue that Evans deliberately hid the fact that the renovations on his cottage were faulty. Nonetheless, the burden of proof is upon the insured. He is required to prove that the loss or damage on the property was covered in the insurance contract. Failure to prove so, the insurer can refute the insured claim citing misrepresentation of material which induced the insurer to enter into the contract. Policy rescission is permitted to reduce insurance fraud whereby the insurer bears the burden of proving intent to deceive on the part of the insured. The state law allows the insurer to invoke policy rescission as remedy if: 1) there is existence of any material misrepresentation, 2) there is intent to deceive, 3) there is an increase in risk of loss, and 4) materiality (Ables, 2007). A rightful jurisdiction into Evan’s case can be drawn from the case of Bowens v. Nationwide Insurance Company3. In the case, misrepresentation of information during contract resulted to the courts judgement to uphold the insurer’s decision to invoke rescission (Queen, 1998). In this case, fire loss was not compensated because information relating to homeowners was not consistent with what home Bowens had given the insurance company. Applying the same ruling on Evan’s case, despite the damages on his property having resulted from storm and partly from faulty renovations, the insurer can invoke rescission on the insurance policy arguing the material provided was misrepresented at the time of contract. In this case, faulty renovation were represented as non-faulty, therefore, they can be termed as misrepresentation. The insurer can argue that it presented direct questions to the insured regarding the state and quality of renovations. Representation of these materials was however falsified. Under the Scottish law, the victim of a fraudulent misrepresentation is entitled to claim damages. In particular, the misrepresentor (Evans) has committed the tort of deceit. Clause 2.35 (the right to damages) holds the party that creates misrepresentation liable to damages created by statute for negligent misrepresentation (Gatzlaff, Avila, & Fitzgerald, 2015). England law further cites that the party that makes non-fraudulent misrepresentation will be liable to damages as if they were fraudulent unless the party proves that they had reasonable grounds to believe that the facts represented at the time the contract was made were true. The insurer, therefore, can negate the claim on insured on the premise of misrepresentation of material. In principle, the insurer will argue to have suffered a loss as a result of misrepresentation (Gatzlaff, Avila, & Fitzgerald, 2015). However, there are no known cases in which the insurer has claimed damages from the insured. The main potential loss to an insurer will, thus, be prevented by avoiding the policy. This is supported by England’s Misrepresentation Act of 1967, which holds that the insurer has the right to retain the premium to avoid and cancel out any further losses. In line with the law, in the event that the insured makes insurance claims, the insurer is protected by the law citing misrepresentation of material, and giving the insurer the right to rescind the contract policy. In conclusion, having considered the law on misrepresentation of material, it is evident that the insurer has an upper hand to revoke the insurance claim made by the insured. The insurer may argue that the insured failed to disclose the proper state of renovations on the house because accurate information would have persuaded the insurer to decline providing insurance or would at least provided insight into exact terms of renovations, therefore, helping the insurer change terms of the insurance. From this perspective, non-quality and faulty renovations that were revealed at the time of assessment were hidden from the insurer at the time of the contract. The insurer was extremely particular with the quality of renovations made on the house, but upon asking the insured to specify the condition, the insured provided fraudulent information. The fraudulent information was held by the insurer at the time of contract, as true. As a prudent insurer, the material represented was deemed to be true. Since this misrepresentation is material to the case in question, the insurer has a strong basis of negating the insurance claim. References Ables, A., (2007). Misrepresentation and Rescission of Insurance Contracts,Federation of Regulatory Counsel, Inc., 18(3) Commonwealth consolidated acts. Retrieved on September 16, 2015 from http://www5.austlii.edu.au/au/legis/cth/consol_act/ica1984220/ Gatzlaff, K., Avila, S., & Fitzgerald, J., (2015). Material misrepresentations in insurance and litigation: an analysis of insureds’ arguments and court decisions. Journal of insurance regulation 34(3). Great Britain& Scottish Law Commission. (2012). Insurance contract law: The business insured's duty of disclosure and the law of warranties : a joint consultation paper. London: The Stationery Office. Hodgin, R. (2002). Insurance Law: Text and Materials.London: Routledge. Lagoni, N. (2007). The liability of classification societies. Berlin: Springer. Murray, C., (2013). Australia: Insurance contracts amendment Act 2013 and privacy amendment (enhancing privacy protection) Act 2012. Lloyd’s Market Queen, R.M., (1998). An examination of Australian corporate law and regulation 1901-1961. Vol. 15 Renswick, J.C., (1966). Misrepresentation in application for liability insurance. Cleveland State University. Cleveland State Law Review. Scottish Law Commission, (2006). Insurance Contract Law Issues Paper 1: Misrepresentation and non-disclosure. Law Commision. Stone, R. (2005). Modern Law of Contract. New York (NY): Psychological Press. Read More