Following a recent amendment of the Law an Insurer may no longer be able to avoid satisfying a Court Judgments concerning third-party motor claim, regardless of whether an Insurance Policy was issued because of material non-disclosure and/or false statements.
A recent study conducted by Lexis Nexis in the United Kingdom has revealed that 48.00% of drivers consider it acceptable to lie in their proposal forms to get a better premium deal and 21.00% of the participants confirmed that they find it perfectly acceptable to lie with regards to any questions asked by the Insurance Company at the proposal stage.
Although the study took place in the UK it reflects recent trends in Motor Insureds’ behavior, and it should raise concerns amongst global Insurance Companies as it poses a significant threat to reserving, and financial security.
In Cyprus, Insurers have the right to consider an insurance contract void ab initio, should they discover that the policyholder has made false and/or fraudulent statements in their proposal forms. This is because Insurance Contracts are considered to be contracts of upmost good faith and it is compatible with the principle that an Insurer has a right know all aspects of a risk before deciding it falls within their appetite and portfolio, as well as it ensures that fair premium is quoted.
Compulsory Third Party Motor Insurance in Cyprus is regulated by the Law on Motor Vehicles (Insurance against Third Party) Laws of 2000 to 2020 Law 96(I)/2000 (the Law) which stipulates that all drivers must have motor insurance in relation to third party injury and damages. Prior to December 2021 Article 15(2) of the Law provided that Insurers could escape liability and could refuse to satisfy Court Judgments with regards to Policies issued as a result of false statements and non-disclosure, as long as prior to the commencement of a civil action or within three months of its’ commencement, the Insurer had secured a Court Declaration that the Insurance Policy was void ab initio due to false statements and/or non-disclosure of material facts. However, subsequent to an amendment in the Law in December 2021 an Insurer may no longer avoid liability to pay a third-party claim as the revised Article 15(2) of the Law now stipulates that regardless of whether an Insurance Policy was issued as a result of material non-disclosure and/or false statements an Insurer, has to satisfy any court judgments in relation to third party claims.
Hence Insurers now face a greater risk with regards to false statements and non-disclosure as they may not be able to rely on these grounds and refuse to pay third-party motor claims. It is greatly important that Insurers review all statements made in proposal forms diligently and asses each proposal carefully before accepting to underwrite a risk, however an extensive review and verification of each single statement on a proposal form and even on renewal proposals may not be practical.
Insurers will need to develop new solutions to combat the increased risk and maintain their integrity as well as to reduce the risk of having to compensate third parties in situations when the Insurance contract itself has been declared void ab initio due to false statements and material non-disclosure. We are yet to see the effect of this new provision on the volume of claims and judgments Insurers will be called to settle as well as the effect this will have on claim reserving and Insurer financial stability.
In conclusion we anticipate that in the absence of new solutions and methods that aim to reduce false statements and non-disclosure combined with the recent culture and trends shown by the abovementioned study regarding an increased appetite for making false statements in order to receive competitive premium quotations, Insurers who are not alarmed by this amendment and who do not take measures to identify false statements and non-disclosure at proposal stage, will likely face a greater number of third party claims and/or court judgments that they will need to satisfy.
By: Mary Christoforou