What Brokers Need to Know About Material Non-Disclosure in Commercial Insurance

A commercial insurance policy can be voided from inception on the basis of non-disclosure. Not reduced. Not adjusted. Voided. That means the insurer is entitled to act as though the policy never existed, decline the claim, and return the premiums.

Most commercial clients do not know this is possible. Many brokers do not discuss it explicitly at inception. And yet non-disclosure remains one of the most common grounds on which commercial insurance claims are repudiated. Understanding exactly what the duty requires, where it applies, and what happens when it is not met is fundamental to placing commercial insurance correctly.

The Principle Behind the Duty

Commercial insurance contracts are built on the principle of uberrimae fidei — utmost good faith. Both the insurer and the insured are required to deal with each other honestly and transparently. For the insured, this translates into a positive duty to disclose all facts that are material to the risk before the policy is concluded.

A material fact is any information that would influence a reasonable underwriter’s decision to accept the risk, or the terms and premium on which they would accept it. The test is not whether the insured thought the information was important. It is whether a reasonable underwriter would have considered it important.

This distinction matters in practice. A commercial client who does not disclose a previous fire claim because they assumed it was old history, or who fails to mention that their premises are used for storage of flammable materials because they did not think it relevant, has failed to meet the duty regardless of their intent. The obligation is objective, not subjective.

What Must Be Disclosed

There is a positive duty on the insured to volunteer material information even when the insurer has not specifically asked for it. The line of questioning in a proposal form does not automatically limit what must be disclosed. If a piece of information is material, the client is expected to disclose it even if no question was asked about it.

In practice, the categories of information most relevant to commercial insurance disclosure include the following.

The nature and use of the insured premises. A commercial property used for light retail and a commercial property used for chemical storage are materially different risks. Any change in how the premises are used during the policy period should be communicated to the insurer.

Previous claims and losses. The claims history of a commercial client is a standard underwriting consideration. Undisclosed prior losses, including losses for which no claim was made, can give an insurer grounds to repudiate a subsequent claim.

Known defects or conditions. A client who knows their property has a specific defect or vulnerability at the time of inception and does not disclose it has withheld material information. This is particularly relevant to commercial property insurance where pre-existing structural issues, known roof problems, or identified security vulnerabilities may not have been mentioned.

Criminal convictions. The moral hazard of an insured is a legitimate underwriting consideration. Relevant criminal convictions of the insured or their key personnel, particularly those related to dishonesty or fraud, are material facts.

Previous declined or cancelled insurance. An insurer who has previously declined to cover or cancelled a risk has made an underwriting judgment that is material to any subsequent insurer considering the same risk.

The Duty Does Not End at Inception

One of the most important and least understood aspects of the disclosure obligation is that it continues beyond inception. The duty to disclose does not cease once the policy is in place.

At renewal, the insured is required to disclose all material events and changes that occurred during the preceding policy period. Where a new policy wording is issued at renewal, the duty is effectively fresh. What was disclosed at inception may need to be revisited in light of what has changed.

During the policy period, material changes to the risk profile must be communicated to the insurer without waiting for renewal. A commercial client who expands into new business activities, acquires additional property, begins operating from a new location, or experiences a significant change in their turnover has a changed risk profile. If those changes are not disclosed, the policy may not respond to a claim that arises from the changed circumstances.

Courts have confirmed this position clearly. In the South African context, it is incumbent upon the insured to disclose all material events that may have occurred during the running of a preceding insurance contract when that contract comes up for renewal. Where there is a broker involved, the broker has a duty to point out to the client that this obligation exists.

The Broker’s Legal Obligations Under FAIS

The FAIS Act and the General Code of Conduct impose specific duties on brokers in relation to disclosure. These are not discretionary best practices. They are legal obligations.

The FAIS General Code of Conduct requires brokers to take reasonable steps to ensure that clients understand the advice being given and are in a position to make an informed decision. Section 8(2) of the Code specifically states that the provider must take reasonable steps to ensure that the client understands the advice and is in a position to make an informed decision.

In the context of commercial insurance, this means the broker must explain the duty of disclosure to their client at inception, make clear what categories of information are material, and actively elicit the relevant information rather than simply processing whatever the client volunteers.

At renewal, the broker is required to satisfy themselves that there are no material changes to the policy or the insurable interest. If there are changes, they must be conveyed to the insurer. A broker who processes a commercial renewal without asking whether the client’s circumstances have changed has not met this obligation.

The practical consequence of failing to meet the FAIS obligation was illustrated in a determination by the FAIS Ombud where a brokerage was ordered to compensate a client after failing to communicate a policy endorsement. The Ombud held that it was incumbent upon the intermediary to draw the client’s attention to changes in policy terms, even where those changes arose after the original quote was accepted. The brokerage was ordered to pay the client R87,300.

What Happens When Non-Disclosure Is Found

When an insurer discovers that a material fact was not disclosed, they have several remedies available depending on the circumstances.

Where the non-disclosure was fraudulent or involved deliberate misrepresentation, the insurer can void the contract from inception, decline the claim, and in some cases pursue damages in addition to those remedies. A policy that is voided from inception is treated as if it never existed. Any claims made during the period of purported cover are declined.

Where the non-disclosure was negligent rather than fraudulent, the insurer can still avoid the contract, though courts have considered whether this outcome is proportionate where the insurer would have accepted the risk on different terms had the full picture been known. The law has been criticised for applying what some academics have described as an all-or-nothing principle — a non-disclosure that might only have resulted in a higher premium can lead to the entire policy being voided. Reform of this aspect of the law has been proposed in legal commentary but has not yet been legislated.

Where the policy is avoided and the insured believes the insurer has acted incorrectly, the matter can be challenged through the formal representation process and escalated to the National Financial Ombud Scheme if not resolved.

The Didcott Principle and Why Legislative Reform Still Matters

The current position in South African insurance law takes what legal academics have described as an all-or-nothing approach. If a non-disclosure is found to be material, the insurer is entitled to void the contract entirely, even where the insurer would have accepted the risk on different terms had the full picture been known.

The practical consequence of this is disproportionate in certain situations. A commercial client who failed to disclose that their turnover had increased materially, which would have resulted in a higher premium, may find their entire policy voided rather than simply adjusted. The insurer escapes all liability not because the undisclosed information caused the loss, but because it affected the assessment of the risk at the time the contract was concluded.

This position was criticised by Didcott J in Pillay v South African National Life Assurance Co Ltd, who argued that the law should prevent an insurer from cancelling a contract entirely in circumstances where the insurer would still have accepted the risk, albeit on different terms. The principle he proposed, now referred to as the Didcott principle, suggests that where the insurer would have concluded the contract but under different terms, the remedy should reflect that rather than voiding the policy altogether.

Some insurers have voluntarily applied the Didcott principle, particularly following the public controversy around the Ganas/Momentum case in 2018, where a life insurance claim was repudiated because the deceased had not disclosed a blood sugar condition, despite the claim arising from a fatal shooting entirely unrelated to that condition. The public response prompted the insurer to change its practice.

The law itself has not yet been amended. The Insurance Act 18 of 2017 consolidated earlier legislation but did not make substantive changes to the materiality provisions. For brokers and their clients, the all-or-nothing principle remains the operating reality.

What this means in practice is important. A non-disclosure does not need to be connected to the event that led to the claim. A commercial client whose policy is voided for a material non-disclosure at inception has no cover for any claim made during that period, including claims entirely unrelated to the undisclosed information. The connection is between the non-disclosure and the conclusion of the contract, not between the non-disclosure and the loss.

For brokers, understanding this point reshapes the disclosure conversation. It is not only about ensuring the information that caused the loss was disclosed. It is about ensuring all material information was disclosed at inception and at every renewal, because any material omission creates a vulnerability that affects the entire policy.

Before and After the Disclosure Conversation

Before the disclosure conversation: A commercial client takes out a multi-site commercial property policy. At inception they disclose the main trading premises but do not mention a separate storage facility that has been operating informally for two years. The storage facility holds significantly higher-value stock than the insured premises. When a fire occurs at the storage facility, the insurer’s investigation reveals the site was never disclosed. The policy is voided on the grounds of material non-disclosure of an insured location. The broker has no documentation showing the question of additional locations was raised at inception.

After the disclosure conversation: At inception, the broker asks the client specifically about all locations from which the business operates, including storage facilities, satellite offices, and properties used by employees or contractors on behalf of the business. The storage facility is disclosed, the underwriter assesses the additional risk, the premium reflects the actual exposure, and the policy schedule lists the facility as an insured location. When the fire claim arises, it is paid in full.

The difference between these outcomes is a more thorough inception conversation and documentation that it happened.

What Brokers Should Do at Every Commercial Renewal

The renewal is where most non-disclosure problems originate. A policy that was accurate at inception can become materially inaccurate within twelve months without anyone having made a deliberate decision to withhold information.

At every commercial renewal, the broker should be asking whether the client has opened, closed, or changed any insured locations. Whether the client’s business activities have changed in any material way. Whether there have been any losses or incidents during the year, whether or not a claim was made. Whether the client has acquired any significant new assets. Whether any material contracts or business relationships have changed in a way that affects the risk. Whether there have been any changes to security arrangements or risk management practices.

These questions are not optional. They are the mechanism through which the disclosure obligation is met in practice. Asking them and documenting the answers protects the client from a non-disclosure finding and protects the broker from professional liability if a claim is subsequently disputed.

If you manage commercial insurance accounts and would like to discuss how specialist administration supports the compliance and documentation requirements that underpin sound commercial placement, we would welcome the conversation. Call us on +27 11 482 9288 or contact us here.