Duty Of Disclosure

Duty of disclosure refers to the moral and legal obligation of parties involved in a transaction to divulge all facts, documents, or information relating to or that can impact the transaction. As a result, all parties involved have a complete picture before the transaction is executed. It is expected to find the duty of disclosure insurance, real estate, and legal matters. 

Declaring information where withholding it can lead to dire consequences is vital because it not only gives all parties access to critical information but also ensures that the transaction is fair. However, it can significantly increase the administrative burden and considerable legal consequences for parties not holding their end of the bargain.

The duty of disclosure refers to the mutual responsibility of all parties involved in a transaction or an agreement to disclose all relevant information to ensure transparency. Insurance, under common law, is based on the fundamental principle of utmost good faith. 

This means that the parties are required to represent all the information and precise material fairly, which shall prevent the risk they are covering in the insurance. However, the flow of information is give and take. Therefore, it is crucial to understand the concept from both the consumer and non-consumer perspective. Below is a brief account of the same. 

For Consumer

When consumers purchase real estate or insurance, they must clearly provide information about the existing exclusions or coverages to ensure that the other party is aware of critical information that can lead to legal consequences at a later juncture. At the same time, consumers also hold the right to be delivered all information relating to the agreement or a transaction that might lead to the consumer taking or not taking the decision. 

As a result, they understand the risks and benefits of the transaction and make their decision based on the complete picture, which is facilitated through the exchange of relevant information. 

For Non-Consumer 

Disclosure is also an integral part of maintaining ethical and moral standards and avoiding legal liabilities for non-consumers such as insurers, other service providers, or businesses. Companies must provide essential information about their contracts, services, or products to ensure that clients and potential clients are not fed with misinformation or misleading information.

Failure to comply or adhere to these disclosure rules can lead to fines, reputational damage, and lawsuits.

However, it is also crucial to note that businesses need to balance between providing relevant information and confusing customers with unnecessary information or disclosing confidential information.

A duty of disclosure brochure covers vital information. However, not all information is meant to be shared. Below is an account of matters that must and must not be disclosed both from the perspective of consumers and non-consumers. 

#1 - Consumers

Must Be Disclosed

• Accurate personal information such as occupation, family health history, and age.
• Information that can affect decision-making significantly, such as coverages and non-coverages of insurance, must be disclosed.
• Any pre-existing illnesses or comorbidities that might lead to policy cancellation if found later.
• Lifestyle factors that might add risk, such as smoking habits, must be declared.
• Honest and accurate financial information if the consumer is applying for income or life insurance.

Need Not Be Disclosed

• Any information that does not affect the coverage or risk of the insurance directly. 
• The information that the insurer already knows or is available in the public domain need not be declared again.
• Information not explicitly requested by the insurer need not be declared.

#2 - Non-Consumers

Must Be Disclosed

• A detailed account of the policy’s exclusions, coverages, and limitations.
• Information relating to fees, premiums, and changes in policy terms must be clearly stated.
• Conditions that might lead to the cancellation of policy or denial of claims. 
• Claim process, including requirements and timelines.

Need Not Be Disclosed

• Non-material information that does not have any weightage over the consumer’s policy.
• Internal underwriting or other processes that are irrelevant to the consumer.
• Confidential or competitive business strategies. 
• Information is protected by confidentiality or privacy laws. 

Now that the theoretical aspects of the duty of disclosure insurance are well-established, it is equally important to discuss the concept's practical application through the examples below. 

Example #1

Michael applied for health insurance with one of the leading insurance companies in his state. He provided all relevant information on the application form. Since he was planning to quit smoking, he chose not to mention that he was a regular smoker on the application. 

However, he could not quit smoking. Subsequently, when he got ill and multiple tests were conducted, it was determined that there were significant traces of nicotine and signs of smoking in his lungs and esophagus. Since this information directly affects the insurance risk, Michael’s coverage was canceled per the company’s insurance policy. 

Example #2

Insurance is one of the most important investments an individual makes in their lifetime. It is critical to ensure that all relevant information is provided accurately. About 25% of health insurance claims are rejected by insurance companies because the insured does not declare a pre-existing illness. Another 25% of claims are rejected as insured individuals need to be informed about coverage terms. 

Another primary reason 16% of claims are rejected is that policyholders have yet to respond to inquiries raised by the insurance company. In the first two quarters of the financial year 2023-2024, PolicyBazaar, a prominent insurance company in India, rejected about 30,000 claims on the grounds mentioned above.

The implications or consequences of not declaring vital information largely depend on the type of contract or agreement and who has lapsed in their duty to declare the same (Consumer or Non-Consumer). The implications in both cases are discussed below. 

For Consumer 

• Insurers might cancel the policy if the information concealed is critical, such as pre-existing health conditions or risky lifestyle or habit. 
• Intentional non-disclosure can lead to legal and financial liability and, therefore, affect an individual's prospects of getting insurance.
• It may result in the claim being rejected or denied. As a result, they might not receive financial coverage and assistance when they need it most. 
• In a few cases, insurers may disburse only partial payments if they learn of the non-disclosure after a claim is filed.

For Non-Consumer 

• Consumers might opt for legal action if they feel like the insurer has not provided them with crucial information about exclusions, terms, or coverage.
• They may be subject to significant fines by regulatory bodies for non-disclosure. 
• Disputes arising due to insufficient disclosure can significantly affect customer satisfaction and long-term growth.
• Non-disclosure of relevant and essential information may lead to distrust among consumers, which can result in the company losing market share.

This article has multiple instances of the vitality of the duty of disclosure insurance. However, the section below concentrates on specific points. 

• It ensures that all relevant and necessary information is known to all parties involved. Therefore, there is mutual trust and transparency between consumers and service providers. 
• It provides parties with all information that is necessary to make a decision.
• When relevant information is disclosed, the risks of regulatory penalties, contract voidance, and lawsuits are significantly reduced. 
• It acts as a safety net for both consumers and businesses. Consumers are safeguarded from exploitation, and businesses can avoid paying for fraudulent claims. 
• These disclosures are often required by regulatory authorities. Therefore, complying with these requirements helps them stay aligned with industry standards.