Understand the difference between voidance and cancellation of an insurance policy

Nthabiseng Moloi, Head of Marketing & Brand at MiWay.

Insurance is a contract and consumers must understand their obligations when they enter into it – and what the consequences of dishonesty are.

The law sees insurance as a special type of contract that demands a higher duty of both parties; the legal principle is uberrima fides, or utmost good faith. Uberrima fides, which is more demanding than the usual good faith (bona fides), is necessary because the insurer is wholly reliant on the insured to provide accurate information about the nature of the risk. For this reason, the insurer will ask a vast amount of questions before the contract is entered into, and the insured is obliged to inform the insurer of any changes in his or her circumstances once the policy is in place.

Clearly, any breach of the good faith implicit in the relationship between insurer and insured will place their contract at risk.

It is very important that consumers are aware of the consequences of such a breach of good faith, both in respect of a specific claim and of their general standing with all insurers. In particular, the difference between the voidance and cancellation of a policy should be well understood.

Voidance

If, when a claim is made, the insurer discovers that the insured did not make a full disclosure, either by omission or untruth, at the time – for example, of previous losses suffered or something else that would affect his or her risk rating – then it might decide to void the policy. If a contract is voided, it is as if had never been entered into. In this case, the insurer would refund the premiums paid (less any costs) and, of course, the claim would not be met.

Voidance is invoked when the contract was based on incomplete or incorrect information, whether because of dishonesty or just carelessness.

Cancellation

Much more serious is cancellation. An insurer will cancel a policy if it becomes convinced that dishonesty occurred after a valid contract was entered into. A good example would be a client who stages a vehicle hi-jacking in order to get a full pay-out on a damaged car, or who conceals the fact that the accident occurred on his or her way back from a pub.

In such cases, the insurer could decline the claim or, at worst, cancel the policy. In the case of cancellation, the premiums are not refunded. Even worse, the cancellation becomes part of the insured’s insurance history, and will have to be disclosed every time he or she seeks insurance.

Cancellation will have the effect of making an individual a higher risk and insurance premiums will be raised accordingly. It may even become difficult to obtain insurance at all.

Insurance is an industry that relies totally on trust. It should come as no surprise that when the trust is broken, the consequences are quite severe.