Withholding Information from the Insurer to Obtain a Better Premium?
This real-life case is based on an investigation conducted by the Syndic’s Office that led to the filing of a formal complaint before the Discipline Committee. Its purpose is to help you reflect on best practices as they relate to your ethical obligations.
The Case
The owner of an apartment building receives a panicked call from one of his tenants: there has been an explosion in his apartment. The owner immediately heads over to the apartment where he observes both property damage and physical injuries. The tenant nervously explains to his landlord that he had been trying to make cannabis resin; he promises to repair everything. The landlord feels that neither the police nor the insurer should be notified of the incident.
A few weeks later, the landlord receives a renewal notice for the insurance contract on his apartment building. His premium has increased. He calls his broker to inquire into the increase, and asks whether it is related to the recent explosion in his tenant’s apartment, despite his not having declared anything to the insurer.
The owner asks his broker to find quotes from other insurers. The broker responds that in the current tight market he has fewer options, but that he will try and find a better premium elsewhere.
As renewal time approaches, the broker calls the insured back to confirm that no claim was made related to the explosion. He also proposes a better premium from a new insurer. However, since he knows the explosion will be a factor in accepting the risk, the broker suggests that the client not disclose this event. Furthermore, if the insurer wishes to do a site inspection, the broker recommends that he quickly repair the damages in order to erase any possible trace of what occurred.
The insured agrees. In the insurance proposal, the broker then falsely declares that the client confirmed that he had not had any losses in the past five years.
A few months later, the building goes up in flames. Damages total over $500,000. During its investigation, the insurer discovers the fraudulent misrepresentation and decides to void the insurance contract ab initio. The insured is thus deemed to never have had a contract and has no coverage. The building owner files a civil suit as well as a complaint against his broker with the ChAD.
The Duty to Inform the Insurer
The broker must always “give insurers the information that it is common practice for him to provide,”[1] , in other words, collect the information they require to evaluate the risk, determine the amount of coverage available, and the cost of the premium, and even decide whether to accept or refuse the risk. It is not up to the broker to sort through the information and send the insurer what he deems relevant, since each insurer has its own specific underwriting rules.
The insurance proposal is of utmost importance in that it contains vital information on the property requiring coverage. By falsely stating in this document that his client had not suffered any losses in the last five years, and by failing to disclose the explosion, the criminal activities that caused it, and the property damage and bodily injuries that resulted, the broker unduly influenced the insurer’s decision. This behaviour violated his code of ethics:
A damage insurance representative must not abuse the good faith of an insurer or use unfair practices in dealing with it.[2]
However, the broker not only concealed important facts, he also gave the insurer inaccurate and incomplete information. Indeed, he failed to act with loyalty, honesty, and rectitude towards the insurer by making “representations which are false, misleading or liable to be misleading.”[3] Moreover, even though the client chose not make a claim for the damages incurred, this did not relieve the broker of his obligation to disclose required information to the insurer.
The Duty to Inform the Client
In addition to encouraging the insured to make a false statement, the broker did not explain to his client the potential consequences he could face for having done so. The broker’s negligence in not fulfilling his advisory role seriously harmed the insured, who ended up with no insurance and an estimated loss of $500,000. The broker committed a breach of ethics, in particular by:[4]
(6) failing to act as a conscientious advisor by not informing his clients of their rights and obligations and not giving them all necessary or useful informations;
(7) making a statement which is false, misleading or liable to be misleading;
[…]
(11) advising or encouraging a client to do something that the representative knows is illegal or fraudulent;
Lastly, when the building owner first called, the broker should have updated the information in the client’s file before starting his search for new quotes. In other words, he should have analyzed the insured’s needs, validated the coverage in the contract, verified whether previously refused coverage remained so, and offered newly available coverage, the goal being to ensure that the coverage provided continued to best meet the client’s needs[5].
1. Section 29 of the Code of ethics of damage insurance representatives.
2. Section 27 of the Code of ethics of damage insurance representatives.
3. Section 15 of the Code of ethics of damage insurance representatives.
4. Sections 37(6), 37(7) and 37(11) of the Code of ethics of damage insurance representatives.
5. Section 39 of the Act respecting the distribution of financial products and services.
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