An insurance policy is a contract of "uberrimae fidei" (utmost good faith), which means you and your insurer must deal fully and honestly with each other.
If you’re a consumer, you must tell your insurer any "material facts" that could influence its decision to insure you or the terms and conditions of your cover. For instance, if you want health insurance you should disclose your medical history in all its gory details.
This duty of disclosure doesn't stop once your application has been accepted. You’re expected to keep your insurer informed about new material facts on a regular basis.
If you fail to disclose a material fact, your insurer is legally entitled to “avoid” (cancel) your policy. You may be refunded your premiums if your non-disclosure was an honest mistake but you won’t receive any cover for your claim.
To avoid your policy, all your insurer needs to prove is the undisclosed fact would've influenced its decision to insure you. The fact itself doesn't have to have any bearing on your claim.
But unless you’ve got a fetish for insurance, there’s a good chance you won’t know every material fact that’s important to your insurer. Other countries have legislated to protect consumers from insurers declining claims on the basis of accidental non-disclosure.
In the UK, the consumer’s duty of disclosure has been replaced with a duty of reasonable care not to misrepresent information. Over there, you’re still covered if you fail to disclose a material fact – and the omission was honest and reasonable. However, you may receive a smaller pay-out – or no pay-out at all – if your non-disclosure was careless.
We’ve been calling for legislation here to restrict an insurer’s ability to cancel a policy on the grounds of non-disclosure. Until the law is strengthened, consumers who believe they’ve acted in good faith may still be left out in the cold.