The Court of Magistrates (Superior Jurisdiction) presided over by Magistrate Paul Coppini on June 12, 2014, in the case ‘Noel Calleja and others v Middlesea Valletta Life Assurance Company Limited’ held, among other things, that an insurance policy could be rescinded on the basis of incorrect information or for non-disclosure of material facts, whether furnished in bad faith, negligence or lack of attention.

Noel Calleja, George Calleja, Michelle Calleja and Michelangelo Calleja were the heirs of Mario Calleja, who died at the age of 30 years on December 21, 2001. The deceased had taken two loans from Bank of Valletta to finance the acquisition of his residence in Nadur and had purchased two life insurance policies from Middlesea Valletta Life Assurance Co. Ltd whereby the insurance company undertook to pay the bank the loan balance in case of death.

The insurance company, however, refused to pay on the grounds that the policyholder had failed to disclose material facts in respect of his medical condition at the time of taking each policy, and that the policies were therefore null and void.

The heirs disagreed with the issuance company. They said that Calleja was in good health and had suffered no serious illness until a few days before his death.

Faced with this situation, the heirs filed legal proceedings against the insur-ance company. They asked the court to declare that the insurance company was obliged to pay the balance due to BOV with interests, and to condemn it to pay such outstanding balance.

On proposal form No. 021-00123, completed by Calleja and signed on November 11, 1997, in the section relating to his medical details, Calleja declared that he smoked 20 cigarettes every day and drank three glasses of wine or four glasses of beer each day.

On proposal form No. 021-00169, he said that he smoked 20 cigarettes every day and drank two to three bottles of beer in the weekend.

In the declaration annexed to the two proposal forms, it was stated:

“Having read the contents of this completed application (whether in my handwriting or not), I declare that the information given is true and that I have not withheld any material facts and I understand that this information together with any further statements which may be made shall be the basis of the contract of life assurance between the Bank of Valletta Ltd as may be issued.

“I undertake to inform the Bank of Valletta Limited of any changes in my health (or other circumstances which may affect my eligibility for life assurance) which may occur before the commencement date of any life assurance cover as may be issued on the basis of this health declaration.

“I consent to the Middlesea Valletta Life Assurance Company Limited seeking information from any doctor, insurance company or other organisation or person that had records or knowledge of my health or assurances in order that my health declaration may be underwritten and that the validity of any claim by the Bank of Valletta Limited may be established.”

From searches carried out by the insurance company after Calleja passed away, the insurance company was of the opinion that he had not given all information in relation to his health. From hospital records, at the time the proposal forms were completed, Calleja had the following medical history:

• In 1984 he checked into hospital, suffering shortness of breath,

• He had to go to hospital for alcohol and drug abuse.

The heirs, on the other hand, argued that the non-disclosure of details did not invalid-ate the life insurance policy. They said that Calleja died because of an illness which was totally unconnected with his medical condition.

The heirs claimed that the policyholder was under no obligation to declare additional details: that he had removed his tonsils or that he had been taken to hospital drunk or intoxicated after smoking cannabis, as this did not amount to a ‘long illness’, ‘impaired health’ or ‘medical treatment’ which had to be declared.

They said that Calleja remained active right to the end of his life. He worked both full- and part-time, practised sports and played football. He did not appear to be ill until falling ill before his death.

The court noted that there was established case law that an insurance policy could be rescinded on the basis of incorrect inform-ation or for non-disclosure of material facts, whether furnished in bad faith, negligence or lack of attention.

In ‘Charles Degiorgio noe v Austin Agius’ it was held that “the contract of insurance was a contract requiring utmost good faith and an applicant had to give a clear reply on the questions in the proposal form. An applicant was duty-bound to mention any fact which he reasonably felt was relevant to the insurance company, and this even if not asked and, if the applicant did not give the insurance company the full picture, it had the right to request the dissolution of the contract of insurance if the missing inform-ation was such as to influence its decision to issue the policy.”

In the case ‘Briffa v Camilleri’, it was likewise held that an applicant had a duty to mention all facts which he reasonably felt were relevant to the insurance company, even if not asked.

“It is clear that the fact that many questions are expressly asked does not relieve the proposer of his duty to disclose facts outside the scope of the question,” said the court. Reference was made to Glicksman v Lancashire & General Ass. Co. (1927) A.C 139; Schoolman v Hall (1951), Modern Insurance Law by John Birds, 3rd edition page 98, under ‘Non-disclosure of material facts’.

The rule was that “an insurer has the right to void the contract of insurance in its entirety if the insured was guilty of fraud, non-disclosure or misrepresentation before the contract was entered into”.

In the leading case which established the duty of disclosure in insurance contracts – Carter v Boehm – Lord Mansfield said: “Insurance is a contract upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only; the underwriter trusts to his representation, and proceeds upon the confidence that he does not keep back any circumstance in his knowledge to mislead the underwriter into a belief that the circumstance does not exist, and to induce him to estimate the risk as if it did not exist.”

“A fact is material for the purposes of both non-disclosure and misrepresentation if it is one which would influence the judgement of a reasonable and prudent insurer in deciding whether or not to accept the risk or what premium to charge,” the court said.

The insurance company had a right to request the dissolution of the contract of insurance, as the missing details were such as to influence the decision of the insurance to issue the policy. Re: Degiorgio v Agius.

The Court of Appeal explained that “the contract of insurance is the primary illustration of a class of contracts described as uberrimae fidae, that is, of utmost good faith. As a result, the potential parties to it are bound to volunteer to each other before the contract is concluded information which is material” (John Bird’s Modern Insurance Law 1977 p100).

An insurer has the right to void the contract of insurance in its entirety if the insured was guilty of fraud, non-disclosure or misrepresentation before the contract was entered into

In ‘Carter v Boehm’ Lord Mansfield declared that “good faith forbids either party, by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact and his belief in the contrary … The reason of the rule which obliged parties to disclose is to prevent fraud and to encourage good faith. It is adapted to such facts as may vary the nature of the contract which one privately knows and the other is ignorant of and has no reason to suspect”.

It was the obligation of the assured to provide all relative information that was mater­ial which could influence the willingness and consent of the insurance company to issue the policy.

As regards what was material, it was held that “the doctrine of duty of disclosure in insurance contracts has been regarded as rigid, inflexible and out of date. The expression ‘contracts uberimmae fidae’ has been too frequently and almost indiscriminately used by insurers and judges as an excuse for ignoring insurance claims. Consequently, the insured’s duty of disclosure of material facts becomes one of the most onerous burdens on the insured in insurance contracts” (Semin Park – The Duty of Disclosure in Insurance Contract Law, 1996, p68).

This principle was restated in ‘Angelo Spiteri v Citadel Insurance plc’. Once the proposal form was accepted by the insurance company, the contract of insurance was concluded. The proposal indicated the basis upon which the insurance company decided whether to provide cover and, if in the affirmative, at what premium. Re: Ivamy – General Principles of Insurance, 4th edition, 1979, p107.

The proposal and its acceptance created the consensus ad idem and this was why the contract of insurance was deemed to be one of uberrimae fidae and the parties had to act with the utmost good faith when they signed it. As a consequence of these principles, it was now well established in case law that the applicant had to give a clear reply on the question expressly asked on the proposal form (Kol. Vol. VLVI P11 p656).

The proposal form was considered to be an integral part of the policy of insurance. A false declaration on the proposal form was tantamount to a false declaration on the policy (Vol. XXXVI – p111- p310). This meant that if it resulted that the inform-ation contained on the proposal form was lacking in its most material elements, such omission entitled the insurance company to apply to annul the policy. Re: ‘Salvu Briffa v Walter Camilleri noe’ Appeal, dated February 9, 2001.

In this case, Calleja had failed to disclose two important illnesses – the condition of his kidneys and his high blood pressure (as well his drug problem). The court said that, as rightly pointed out by the insurance company, if it had been aware of these facts Middlesea would either have not issued the policy or would have charged a higher premium. It would have made a big difference if it had known that Calleja already suffered from certain serious diseases. This was why the declaration annexed to the proposal form required the assured to provide all relevant information relating to his health. He was even obliged to inform the insurance company on any change to his health after the policy had been issued.

The court said that the conditions in a policy of insurance had to be strictly observed (pacta sunt servanda) and, if one of the parties did not observe these conditions, the other party had the right to rescind the contract.

For these reasons, on June 12, 2014, the Court of Magistrates (Gozo) held that the insurance company had a right not to pay the bank under the life insurance policy.

It did not make a difference whether Calleja died from other complications. The court concluded that, once the proposal form had to be completed by the assured, and once the assured was obliged to disclose all material information in relation to his health, as in this case Calleja had failed to do so, this court could not accept the requests of the heirs to order the insurance company to pay the amount to the bank.

The court dismissed their claims against the insurance company.

Dr Grech Orr is a partner at Ganado Advocates.