Material misrepresentation

A material misrepresentation is a statement made by the insured in connection with an insurance contract which is false in a material respect, was relied on by the insurer in entering the contract, and entitles the insurer to a proportionate remedy under the Insurance Act 2015 or the Consumer Insurance (Disclosure and Representations) Act 2012.

Definition §

A misrepresentation is a statement of fact or of expectation or belief made by, or on behalf of, the insured during the placement of an insurance contract which is incorrect. It becomes a "material" misrepresentation — and so capable of grounding a remedy — when, under the test in section 7(3) of the Insurance Act 2015, the statement is one that would influence the judgement of a prudent insurer in determining whether to take the risk and on what terms, and the actual insurer was induced by it.^[1]

Under section 3(3)(c), every material representation as to a matter of fact must be substantially correct, and every material representation as to a matter of expectation or belief must be made in good faith. The requirement that statements of fact be "substantially" correct (rather than perfectly correct) reflects the practical reality that minor inaccuracies should not undermine an otherwise good faith presentation.^[2]

For consumer insurance, the Consumer Insurance (Disclosure and Representations) Act 2012 contains a parallel but lower regime: consumers owe only a duty to take reasonable care not to make a misrepresentation, and a "qualifying misrepresentation" under section 4 entitles the insurer to a remedy only where it would not have entered into the contract or would have done so on different terms.^[3]

Legal / Regulatory basis §

Section 3 of the Insurance Act 2015 places the requirement of substantial correctness within the duty of fair presentation; section 7 contains the supplementary definitions; section 8 introduces Schedule 1, which sets out the remedies for breach. The Marine Insurance Act 1906 section 20 contained the original statutory rules on representations but is now largely repealed for non-consumer contracts by Schedule 2 to the 2015 Act.^[4]

The leading authority on the modern law of misrepresentation in insurance is Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd, in which the House of Lords held that to ground a remedy the insurer must establish both (a) that the misrepresentation was objectively material in the sense that it would influence a prudent insurer, and (b) that it actually induced the insurer to enter into the contract on the terms it did. The same two-stage test applies under the 2015 Act through the combination of section 7(3) (materiality) and Schedule 1 paragraph 1 (inducement).^[5]

A misrepresentation is "deliberate or reckless" within paragraph 2 of Schedule 1 if the insured knew it was untrue or misleading, or did not care whether or not it was untrue or misleading. The burden of proving deliberate or reckless conduct lies on the insurer.^[6]

The treatment of statements of expectation or belief follows section 3(3)(c)(ii): such statements need only be made in good faith. This is a lower threshold than substantial correctness and protects insureds whose forecasts, valuations or opinions prove to be wrong, provided they were honestly held.

How it works in practice §

In practice, misrepresentation issues arise most often in connection with answers to specific proposal-form questions, statements in broker presentations and signed declarations by senior individuals. A false answer to a proposal question — for example, an inaccurate statement of claims experience, turnover or sums insured — is a misrepresentation; whether it is material depends on whether it would have influenced a prudent insurer.

When a misrepresentation is alleged at claims stage, the insurer must establish materiality, inducement and (if it seeks the avoidance remedy) deliberate or reckless conduct. Schedule 1 provides a proportionate framework: for deliberate or reckless breaches, the insurer may avoid the contract, refuse all claims and retain the premium. For other breaches, the insurer's remedy depends on what it would have done had the misrepresentation not been made — refused the risk entirely (avoidance with return of premium), written on different terms (the contract is treated as having included those terms), or charged a higher premium (the claim is reduced proportionately).^[7]

The distinction between statements of fact and statements of expectation or belief is important. An estimate of next year's turnover, projected claims frequency or expected occupancy of a new building is properly characterised as a statement of expectation or belief, and is judged by the good-faith standard rather than substantial correctness. This protects insureds against accusations of misrepresentation where the underlying forecast is honest but later proves inaccurate.

Brokers manage misrepresentation risk by adopting structured presentation processes: confirming proposal-form answers with the insured prior to submission, retaining signed declarations, and recording the basis for material statements of expectation. Underwriters likewise document their reliance on specific representations so that, if a claim later arises, inducement can be established.

Common variations §

Different lines of business produce different misrepresentation profiles. In property insurance, common areas include sums insured calculations, claims history and occupancy descriptions. In motor fleet, common areas include declared driver lists, garaging arrangements and use type. In professional indemnity, statements about fee income, services provided and prior claims are typically material.

In directors' and officers' liability and other liability lines, statements about pending litigation, regulatory investigations and the integrity of senior personnel are routinely material; many policy wordings also contain "warranty statements" that the insured has no knowledge of circumstances likely to give rise to a claim. Under section 9 of the Insurance Act 2015, such basis-of-contract clauses are no longer effective as warranties in non-consumer insurance, but a false statement may still be actionable as a misrepresentation.^[8]

For consumer insurance, the CIDRA 2012 regime distinguishes between deliberate or reckless qualifying misrepresentations (which permit avoidance) and careless qualifying misrepresentations (which trigger a proportionate remedy similar in structure to Schedule 1 of the 2015 Act).^[9]

Example §

A logistics company applies for combined liability and property cover. The proposal asks whether the company has had any claims exceeding £25,000 in the last five years. The risk manager answers "No", forgetting a £40,000 employers' liability claim settled three years earlier. The omission is a misrepresentation of fact. It is material — claims history would influence the judgement of a prudent insurer — and induces the insurer, which would have charged a 7 per cent higher premium had the answer been correct.

The mistake was not deliberate or reckless. Under Schedule 1 paragraph 6, the insurer is entitled to a proportionate reduction in the claim payment to reflect the under-payment of premium, rather than avoidance of the policy. If, instead, the risk manager had concealed the claim knowing it would otherwise be discovered, the insurer could avoid the contract, refuse the claim and retain the premium.

See also §

• /wiki/fair-presentation-of-the-risk/ — the parent disclosure duty
• /wiki/material-circumstance/ — what undisclosed information must be
• /wiki/inducement/ — the second limb of the misrepresentation test
• /wiki/insurance-act-2015/ — the parent statute
• /wiki/consumer-insurance-disclosure-and-representations-act-2012/ — consumer regime
• /wiki/marine-insurance-act-1906/ — historic representation rules
• /wiki/known-circumstances-exclusion/ — related coverage concept

References §

1. ↑ Insurance Act 2015, sections 3 and 7, https://www.legislation.gov.uk/ukpga/2015/4
2. ↑ Insurance Act 2015, section 3(3)(c)
3. ↑ Consumer Insurance (Disclosure and Representations) Act 2012, sections 3 and 4, https://www.legislation.gov.uk/ukpga/2012/6
4. ↑ Insurance Act 2015, Schedule 2 (amendments to Marine Insurance Act 1906)
5. ↑ Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501 (HL)
6. ↑ Insurance Act 2015, Schedule 1, paragraphs 2 and 5
7. ↑ Insurance Act 2015, Schedule 1
8. ↑ Insurance Act 2015, section 9
9. ↑ Consumer Insurance (Disclosure and Representations) Act 2012, section 4 and Schedule 1