REFORMING INSURANCE LAW: - Law Commission

3.8 As regards misrepresentation, the assured remains under a duty to avoid making false
statements. The duty is, however modified in that: (a) ambiguous questions are to be construed
as they would be understood by a reasonable person (s 23); (b) a false statement by the life
insured under a life policy is to be treated as having been made by the policyholder himself if a
different person (s 25); (c) a statement of belief reasonably held is not a misrepresentation (s
26(1)); (d) a statement is not to be regarded as a misrepresentation unless it satisfies the prudent
assured test as adopted for non-disclosure (s 26(2)); and (e) failure to answer a question is not to
be taken as a misrepresentation (s 27). The insurers are given remedies in respect of
misrepresentation under s 28, but only where the insurers have been induced to enter into the
contract as a result of it. In addition to these rules, s 24 provides that any statement made by the
assured is to be treated as a representation and not a warranty, so that any representation is to be
treated as such and the test for whether any remedy flows from the misrepresentation is the same
as for any other misrepresentation. Warranties are considered separately later in this paper.
3.9 Non-disclosure and misrepresentation are self-contained concepts and appear not to overlap,
other than possibly in the situation in which the assured has made a statement which is false
because it is misleadingly incomplete. 48
3.10 Remedies for non-disclosure and misrepresentation are governed by s 28. The basic rule is
that even if the insurers can prove relevance and inducement (which now forms a part of the law
relating to remedies rather than implied into the definition of the duty to disclose) sufficient to
give rise to a breach of duty, their rights depend upon the assured’s state of mind. In the absence
of fraud, the insurers’ liability is reduced to the amount so as to place them in the position which
they would have been in but for the breach of duty. If there is fraud, the insurers have the right to
avoid but subject to the discretion of the court to disallow avoidance as regards the claim in
question if it would be harsh and unfair for avoidance to be permitted.
3.11 The rules are varied by ss 29 and 30 in respect of life insurance. A distinction is drawn
between cases in which the facts withheld or misstated relate to age and those in which age is not
at stake. As far as age is concerned, the right to avoid is lost and replaced by a proportionality
rule. As regards other breaches of duty, the insurers retain their right to avoid for fraud (subject
to the court’s discretion to disallow avoidance under s 31), but in the case of non-fraudulent
breach the policy becomes incontestable after three years.
Comparisons
3.12 It will be seen that the Australian reforms adopt an approach completely different to that of
English law. The latter regulates the rights of the parties purely by a duty of utmost good faith,
which encompasses pre-contract misrepresentation and disclosure (primarily imposed on the
assured but in exceptional cases capable of applying to the insurers) and post-contractual
obligations (primarily imposed on the insurers but in exceptional cases capable of applying to the
48 Permanent Trustee Australia Ltd v FAI General Insurance Company Ltd (2001) 50 NSWLR 679; Schaffer v
Royal & Sun Alliance Life Assurance Australia Ltd [2003] QCA 182.
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