2.2 Good Faith and Pre-Contractual Disclosure
Key Takeaways
Insurance disclosure is governed by the applicable consumer or non-consumer duty.
Consumer applicants must take reasonable care and disclose other relevant matters they know.
A misrepresentation remedy depends on its classification and the insurer’s underwriting response.
Study Focus
Insurance disclosure is governed by the applicable consumer or non-consumer duty. Consumer applicants must take reasonable care and disclose other relevant matters they know.
Interests Recognised Outside the Statutory List
Other relationships rest on general legal principles and must be shown as a real financial interest rather than presumed:
- Creditor and debtor: a creditor may insure a debtor's life, generally up to the debt plus interest and costs.
- Partners and key persons: business partners and companies may insure lives whose death would cause a measurable financial loss, for example to fund a buy-and-sell agreement.
| Relationship | Legal Basis | Practical Limit |
|---|---|---|
| Own life | Paragraph 3(1) | No legal limit; underwriters still test financial need |
| Spouse or child (any age) | Paragraph 3(3)(a), deemed | No statutory limit |
| Ward | Paragraph 3(3)(b), deemed | Ward must be under 18 when the policy is effected |
| Employee | Paragraph 3(3)(c), deemed | Underwriting limits apply |
| Person on whom you depend | Paragraph 3(3)(d), deemed | Dependency must exist when the policy is effected |
| Creditor, partner, key person | General law | Proven financial loss |
Paragraph 4 of Schedule 8 deals separately with minors who take out policies: from age 10 to below 16 they need a parent's or guardian's written consent; from age 16 they may effect a policy on their own life (or on a life in which they have an insurable interest) without consent, although they still need written consent to assign a policy on their own life.
4. Utmost Good Faith (Uberrima Fides)
Caveat Emptor vs. Uberrima Fides
Ordinary commercial contracts operate under the principle of Caveat Emptor ("let the buyer beware"). Under this rule, neither contracting party is required to disclose information that the other party could independently discover, provided neither commits active misrepresentation or fraud.
In contrast, insurance contracts are contracts of Utmost Good Faith (uberrimae fidei). Because the proposer possesses intimate knowledge regarding the risk (e.g., medical history, manufacturing operations, storage of hazardous materials) which the underwriter cannot easily verify independently, the law imposes a strict, reciprocal duty of honesty and transparency. The insurer also owes this duty to the proposer, requiring fair contract terms, clear policy wordings, and prompt claims handling.
The Malaysian Statutory Paradigm: Schedule 9 of FSA 2013
Historically, Malaysian insurance followed the English common law rule that the proposer had to volunteer every "material fact" (any fact that would influence a prudent underwriter in fixing the premium or deciding whether to accept the risk), whether or not the insurer asked about it.
The FSA 2013 came into force on 30 June 2013, but section 129 and Schedule 9 (Pre-Contractual Disclosure and Representations, and Remedies for Misrepresentations) only came into operation on 1 January 2015 (P.U.(B) 552/2014). Schedule 9 draws a sharp line between consumer and non-consumer contracts.
| Parameter | Consumer Insurance Contract | Non-Consumer Insurance Contract |
|---|---|---|
| Statutory Definition (Paragraph 2) | A contract entered into, varied or renewed by an individual wholly for purposes unrelated to the individual's trade, business or profession. | Any other contract of insurance, such as policies bought by companies or for business purposes. |
| Core Proposer Duty | Take reasonable care not to make a misrepresentation when answering the insurer's specific questions (Paragraph 5(1)–(2)). | Disclose every matter the proposer knows, or a reasonable person could be expected to know, is relevant to the insurer's decision (Paragraph 4(1)). |
| Scope of Disclosure | Driven mainly by the insurer's questions; questions not asked, or incomplete answers not pursued, are treated as waived (Paragraph 5(5)–(6)). The consumer must still take reasonable care to disclose any other matter they know to be relevant (Paragraph 5(8)). | Material facts must be volunteered even if the proposal form is silent, except facts that diminish the risk, are common knowledge, are known to the insurer, or are waived (Paragraph 4(2)). |
| Insurer's Obligation | Ask clear, specific questions and tell the consumer in writing about the duty and that it continues until the contract is made (Paragraph 5(7)). | Tell the proposer in writing about the duty of disclosure (Paragraph 4(4)). |
Utmost good faith does not disappear for consumers: Paragraph 5(9) preserves the duty of utmost good faith between consumer and insurer after the contract is made, including when claims are made and paid.
5. Remedies for Misrepresentation: A Preview
Part 3 of Schedule 9 grades the insurer's remedy for a consumer's misrepresentation by the consumer's state of mind. Section 4.2 works through each remedy in detail; the essentials are:
- Deliberate or reckless (Paragraphs 7(4) and 15): the insurer may avoid the contract and refuse all claims. The insurer must prove this classification on a balance of probability (Paragraph 7(7)).
- Careless or innocent (Paragraph 16): the remedy depends on what the insurer would have done had it known the truth. If it would have refused the risk, it may avoid the contract but must return the premium. If it would have imposed different terms, those terms apply. If it would have charged more, any claim is reduced proportionately:
Worked Malaysian Scenario:
Puan Aminah carelessly failed to disclose on her homeowner's proposal form that her premises were situated adjacent to an open industrial workshop. The insurer charged an annual premium of RM 800. Had the true risk been disclosed, the underwriter would have charged RM 1,000. When a storm causes RM 30,000 in roof damage, the claim is calculated as:
Puan Aminah receives RM 24,000 rather than having her entire policy repudiated, illustrating the consumer protection built into the FSA 2013.
For life policies, Paragraph 13 adds a further safeguard: once a life policy has been in force for more than two years during the insured's lifetime, the insurer cannot avoid it for an inaccurate statement unless the statement was material and fraudulently made (see Section 12.2).
Under Schedule 9 of the Financial Services Act 2013, what is the primary pre-contractual disclosure duty of a consumer purchasing personal motor insurance?
To proactively volunteer all material facts known or that ought to be known, even if not asked by the underwriter
To observe caveat emptor, meaning the applicant has no duty to answer any questions truthfully
To take reasonable care not to make a misrepresentation in answering specific questions asked by the insurer
To commission and submit an independent loss adjuster inspection report prior to cover inception
Sections you finish are checked off in the contents.