The real cost of keeping quiet

Need to know basis

Liam, an engineer, had to appear before the Professional Engineers’ disciplinary committee.  Liam’s former client had complained that Liam’s advice did not meet professional standards. After investigating, the Professional Engineers’ Institution had decided to hold a disciplinary committee to review Liam’s case.

Liam notified his professional indemnity insurer, Liberty Liabilities (‘Liberty’) and filed a claim for his legal costs in defending the action. Liam was successful at the disciplinary committee hearing and the complaint was not upheld.

 

Non-disclosure

However, while investigating Liam’s claim, Liberty found that Liam’s former client had complained about a different issue 3 years earlier and the Law Society had also investigated. At the earlier hearing, the Professional Engineers’ Institution found Liam had breached his professional obligations and Liam was formally admonished, directed to make changes to his practice and pay the costs of the disciplinary committee investigation and hearing.

Because Liam had not disclosed to Liberty that he had appeared before the Professional Engineers Institution’s disciplinary committee before, Liberty declined Liam’s later claim on the basis of the non-disclosure. Liberty also cancelled Liam’s insurance cover and said it was avoiding cover for the 3 previous years that it had provided Liam with professional indemnity insurance.

Liam was shocked and very concerned. If Liberty avoided cover, then he would be uninsured if a client were to sue him for any work he had done during this 3 year period. Liam asked Liberty to review and reverse its decision to avoid cover.

Liberty reviewed Liam’s case but upheld its decision to cancel his policy and avoid cover for the previous 3 years. Liam complained to FSCL that Liberty was acting unreasonably.

 

FSCL’s investigation and the duty to disclose

We asked for the full circumstances of Liam’s prior appearance before the Professional Engineers Institution’s disciplinary committee including the committee’s findings. We also looked at Liam’s full file from Liberty including the forms he completed at application and renewal times.

Liberty’s forms and the insurance policy itself supported the common law position that Liam had an obligation to disclose to Liberty all information that Liberty may reasonably need to decide whether it wanted to take Liam on risk, and offer professional indemnity cover to him.

Liam argued that any non-disclosure was unintentional and that Liberty had only asked about whether he had made any previous claims. Liam said he did not think his previous appearance before the disciplinary committee was relevant because he had not filed a claim with his insurer for it.

 

The result

We found that Liam had a duty to disclose to Liberty any circumstances that may give rise to a claim such as his earlier appearance before the disciplinary committee. We also found that Liam’s duty of disclosure extended beyond just answering the direct questions put to him by Liberty.

We found that Liam had failed to disclose to Liberty relevant circumstances when he applied for insurance and at subsequent renewals. We considered that the non-disclosed information was material to Liberty accepting the risk of insuring Liam under a professional indemnity insurance policy. We also accepted Liberty’s evidence that it would not have provided professional indemnity insurance for Liam until he had effected the changes recommended by the disciplinary committee.

We found that Liberty had advised Liam about the consequences of non-disclosure and that under the contract Liberty was entitled to decline Liam’s claim and avoid cover for the previous 3 years.

 

The lesson

You are obliged to disclose to your insurer any matters that might impact on its decision to provide you with insurance and the terms of that insurance. This disclosure duty goes beyond just answering direct questions put to you by your insurer.

Remember that there are serious consequences for non-disclosure of relevant information, such as cancellation of your policy and avoidance of cover, and it is a big risk if you do not disclose. If you are confused about whether a matter or circumstance may be important to your insurer, you can ask your insurance broker or insurer.