4.4 Misrepresentation Remedies and Proportional Claims

Study Focus

Deliberate or reckless misrepresentation can justify avoidance and refusal of claims. For careless misrepresentation, the remedy reflects what the insurer would have done.

Statutory Classification of Misrepresentations and Remedies

Paragraph 7 classifies a consumer's misrepresentation as deliberate or reckless, careless, or innocent. The remedies in Division 2 of Part 3 apply to consumer general insurance contracts and to consumer life contracts that have been in force for two years or less (Paragraph 14).

Category 1: Deliberate or Reckless Misrepresentation

Under Paragraph 7(4), a misrepresentation is deliberate or reckless if the consumer:

• knew it was untrue or misleading, or did not care whether it was; and
• knew the matter was relevant to the insurer, or did not care whether it was relevant.

A dishonest misrepresentation is treated as deliberate or reckless (Paragraph 7(5)). The insurer bears the burden of proving this on a balance of probability (Paragraph 7(7)), although a consumer is presumed to know that a matter covered by a clear and specific question was relevant (Paragraph 7(8)).

Insurer's remedy (Paragraph 15): The insurer may avoid the consumer insurance contract and refuse all claims. Unlike the careless or innocent case, Schedule 9 does not require the insurer to return the premium.

Category 2: Careless or Innocent Misrepresentation

A misrepresentation that is not deliberate or reckless is careless or innocent (Paragraph 7(6)), for example an honest mistake or a lapse of memory. Under Paragraph 16, the remedy depends on what the insurer would have done had the consumer answered accurately:

+--------------------------------------------------------------------------+
|     REMEDIES FOR CARELESS / INNOCENT MISREPRESENTATION (PARAGRAPH 16)    |
+--------------------------------------------------------------------------+
| Underwriting Reaction If Truth Was Known  --> Statutory Remedy           |
+--------------------------------------------------------------------------+
| 1. Insurer would have DECLINED the risk   --> Avoid contract, refuse     |
|    (Paragraph 16(2))                          claims, RETURN premium     |
|                                                                          |
| 2. Insurer would have used DIFFERENT      --> Contract treated as made   |
|    TERMS, e.g. an exclusion (16(3))           on those terms, if the     |
|                                               insurer so requires        |
|                                                                          |
| 3. Insurer would have charged a HIGHER    --> Claim reduced              |
|    PREMIUM (Paragraph 16(4))                  PROPORTIONATELY            |
+--------------------------------------------------------------------------+

1. If the insurer would have declined the risk entirely (Paragraph 16(2)):
   • The insurer may avoid the contract and refuse all claims.
   • Crucial difference: unlike a deliberate or reckless case, the insurer must return the premium paid by the consumer.
2. If the insurer would have accepted the risk on different terms other than the premium (Paragraph 16(3)):
   • The contract is treated as if it had been entered into on those different terms, if the insurer so requires.
   • Example: If the insurer would have excluded pre-existing lumbar spine conditions, a claim for a lumbar disc herniation is declined, but the policy remains valid for unrelated health events.
   • Example: If the insurer would have imposed an excess of RM 2,000 instead of RM 500, the claim is paid subject to the RM 2,000 excess.
3. If the insurer would have charged a higher premium (Paragraph 16(4)):
   • The insurer may not avoid the contract or refuse the claim on this ground.
   • It may reduce the amount paid on a claim proportionately, in the manner specified by BNM.

Future Treatment of the Contract (Paragraph 17)

Where the insurer discovers a careless or innocent misrepresentation before any claim arises, it may tell the consumer that the contract will continue on different terms or at a higher premium, or end the contract on reasonable notice. The consumer may accept the amended terms or terminate, and the insurer must refund the premium for the unexpired period of any terminated cover.

Other Consumer Protections in Part 2

• No "basis of contract" warranties (Paragraph 10): A consumer's pre-contractual representation cannot be converted into a warranty by declaring it to form the basis of the contract.
• Agent's knowledge (Paragraph 12): An insurer's agent is treated as the insurer's agent when the contract is formed, so what the agent knows is treated as known by the insurer (Section 5.1 explains the exceptions).

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The Proportional Claim Reduction Formula & Worked RM Examples

Under Paragraph 16(4) of Schedule 9, where an insurer would have charged a higher premium, it may reduce the claim proportionately in the manner specified by BNM. The proportionate reduction works as follows:

$$\text{Claim Paid} = \text{Assessed Loss} \times \left( \frac{\text{Premium Actually Charged}}{\text{Premium That Would Have Been Charged}} \right)$$

Worked Example 1: Motor Vehicle Repair Claim

• Background: Encik Razak insured his private vehicle, paying an annual comprehensive premium of RM 1,200. In his proposal form, he carelessly stated that the vehicle had not been modified. In reality, the vehicle had been fitted with aftermarket performance alloy wheels and suspension modifications.
• Underwriting Finding: If disclosed, the insurer's underwriting guidelines would have accepted the vehicle, but would have charged a loaded premium of RM 1,600.
• The Loss: Encik Razak is involved in an accident, incurring assessed repair costs of RM 8,000.
• Statutory Calculation:

$$\text{Premium Ratio} = \frac{\text{RM 1,200}}{\text{RM 1,600}} = 0.75 \text{ (or } 75\% \text{)}$$ $$\text{Claim Paid} = \text{RM 8,000} \times 0.75 = \mathbf{\text{RM 6,000}}$$

• Outcome: The insurer pays RM 6,000. Encik Razak must bear the remaining RM 2,000 of the repair bill himself due to his careless pre-contractual misrepresentation.

Worked Example 2: Residential Property Fire Claim

• Background: Puan Salmah insured her single-storey terrace home for RM 300,000, paying an annual houseowner premium of RM 450. She carelessly answered "No" to whether any portion of the premises was used for commercial storage, forgetting that she stored cartons of textiles for an online home retail business in the back room.
• Underwriting Finding: Had the textile storage been declared, the underwriter would have accepted the risk at a commercial occupancy tariff rate of RM 600.
• The Loss: An accidental electrical short-circuit in the living room causes property fire damage assessed at RM 50,000.
• Statutory Calculation:

$$\text{Premium Ratio} = \frac{\text{RM 450}}{\text{RM 600}} = 0.75$$ $$\text{Claim Paid} = \text{RM 50,000} \times 0.75 = \mathbf{\text{RM 37,500}}$$

• Outcome: The insurer pays RM 37,500. Puan Salmah absorbs the RM 12,500 shortfall.

Worked Example 3: Personal Accident Disability Claim

• Background: Tan Sri's nephew, Kevin, purchased a personal accident policy paying an annual premium of RM 300 based on a sedentary Class 1 administrative clerk occupation. He carelessly failed to update his occupation to site supervisor (Class 2 risk) upon starting work with a construction firm.
• Underwriting Finding: The insurer's standard rate for Class 2 occupational risk is RM 500.
• The Loss: Kevin suffers a fracture while off duty, with assessed medical compensation of RM 15,000.
• Statutory Calculation:

$$\text{Premium Ratio} = \frac{\text{RM 300}}{\text{RM 500}} = 0.60 \text{ (or } 60\% \text{)}$$ $$\text{Claim Paid} = \text{RM 15,000} \times 0.60 = \mathbf{\text{RM 9,000}}$$

• Outcome: The insurer pays RM 9,000, with Kevin absorbing the RM 6,000 shortfall.