7.2 Vitiating Factors in Insurance Contracts

7.2 Vitiating Factors in Insurance Contracts

Quick Summary: A contract can have offer, acceptance and consideration and still be defective. Vitiating factors, such as misrepresentation, mistake, duress, undue influence, illegality and lack of capacity, can make it void (no legal effect at all) or voidable (valid until the innocent party chooses to set it aside). Insurance adds its own vitiating factor: breach of the duty of utmost good faith, including non-disclosure.

Why Vitiating Factors Matter

BCP expects you to know the elements of a valid contract and the factors that can undo one. In practice these factors decide whether an insurer can refuse a claim, whether a premium must be returned and whether a policyholder can escape a contract made under pressure. Each factor has a characteristic result:

1. Misrepresentation

A misrepresentation is a false statement of fact, made by one party, that induces the other to enter the contract (Section 4.2 sets out the full requirements).

Insurance twist: general contract law imposes no duty to volunteer information, but insurance contracts are contracts of utmost good faith. Mere non-disclosure of a material fact therefore also makes the policy voidable. For example, a proposer who says "no previous claims" when he has had two has made a misrepresentation. A proposer who says nothing about a previous refusal of cover by another insurer, when it is material, has failed to disclose.

2. Mistake

Mistake makes a contract void only in narrow situations:

• Common mistake: both parties share the same fundamental mistake, for example both believe the subject matter exists when it has already been destroyed. A policy on goods that, unknown to both parties, had already perished before the contract was made may be void. Marine cargo policies avoid this by being written "lost or not lost", which covers an earlier loss provided the assured did not know of it.
• Mutual mistake: the parties are at cross-purposes about the terms, so there is no real agreement.
• Unilateral mistake: one party is mistaken and the other knows it. In Chwee Kin Keong v Digilandmall.com Pte Ltd (2005), the Singapore Court of Appeal held that contracts to buy laser printers listed online at a tiny fraction of their real price were void, because the buyers knew the price was a mistake.

A mistake about the value of a deal, or carelessness in not reading the policy, is normally not enough.

3. Duress

Duress is illegitimate pressure that leaves a party no practical choice: threats to the person, to goods or, in modern law, illegitimate economic pressure. A contract made under duress is voidable. In insurance it can arise in settlements, for example where a claimant signs a discharge for far less than is due because of illegitimate threats.

4. Undue Influence

Undue influence happens when one party abuses a position of trust or influence over another:

• Actual undue influence is proved by evidence of improper pressure.
• Presumed undue influence arises in relationships of trust and confidence, such as solicitor and client or adviser and dependent elderly client, where the transaction calls for an explanation.

A contract procured by undue influence is voidable. This is directly relevant to intermediaries who advise elderly or vulnerable clients. It also explains why nomination forms must be witnessed by independent adults who are not nominees: the witnesses help show that the policy owner was not under undue pressure (Section 2.4).

5. Illegality

Contracts that are prohibited by statute or contrary to public policy will not be enforced:

• insurance of contraband, smuggling or other unlawful ventures;
• policies that would indemnify criminal fines or penalties;
• wagering contracts disguised as insurance, which are void under the Civil Law Act 1909; and
• under the ex turpi causa principle, an insured cannot recover for a loss he deliberately caused, such as arson.

Where a contract is illegal, a premium paid is generally not recoverable, unlike a policy that is void for some other reason.

6. Lack of Capacity

As Section 7.1 explains, minors, persons lacking mental capacity and undischarged bankrupts have limited capacity. Depending on the circumstances, a contract made by someone without capacity may be voidable or unenforceable against that person.

Applying the Factors: A Checklist

1. Was there a false statement (misrepresentation) or a failure to disclose a material fact (utmost good faith)?
2. Were both parties mistaken about something fundamental, such as whether the subject matter existed?
3. Was either party subjected to threats or illegitimate pressure?
4. Was there a relationship of trust that one side abused?
5. Is the purpose or subject matter unlawful?
6. Did each party have capacity?

If the answer to any question is yes, consider whether the contract is void or voidable and what that means for claims and premiums.