1. Insurance Policy
An insurance policy is a type of contract in which the insurer undertakes the obligation to pay compensation upon the materialization of a risk in return for a certain premium. This contractual relationship can only be built on accurate information and mutual trust. Therefore, the policyholder must inform the insurer fully and accurately about the risk to be covered, which is the foundation for a sound relationship between the two parties.
The duty of disclosure is a key obligation for the policyholder both before and during the term of the policy and plays a critical role in underwriting and maintaining the policy and paying compensation.
2. Legal Framework for the Duty of Disclosure
2.1. Definition
The duty of disclosure refers to the policyholder’s obligation to inform the insurer of any matter that may be material to the risk assessment, which the policyholder knows or is reasonably expected to know. This obligation begins while underwriting a policy and, in certain cases, continues throughout the policy term.
2.2. Legal Basis
Article 1435 of the Turkish Commercial Code (“TCC”) defines the duty of disclosure as follows:
“The policyholder shall inform the insurer of all matters that they know or should know at the issuance date of the policy and that may affect the risk assessment.”
The TCC has additional provisions concerning this obligation in Articles 1446 through 1449, which clarify the rights available to the insurer in the event of a breach of the duty of disclosure.
3. Legal Consequences of Breach of the Duty of Disclosure
If the policyholder breaches the pre-contractual duty of disclosure, the insurer has various rights to exercise, depending on when the breach is discovered. Accordingly, the discovery of the breach before or after the materialization of the risk determines the legal remedies available to the insurer.
3.1. Discovering the Breach Before the Risk Materializes
If the insurer discovers a breach of the pre-contractual duty of disclosure before the risk occurs, it has the right to either withdraw from the policy or demand an additional premium within 15 days from the moment of discovery.
However, if the matter that was not disclosed or was misrepresented is already known to the insurer, the right to withdraw from the policy or to demand a premium difference due to undisclosed information will no longer be available. This is because the legal interest protected in such cases is the insurer’s ability to properly assess the risk and underwrite the policy accordingly. If the insurer has obtained the necessary information by other means, the purpose of the duty of disclosure is considered fulfilled.
If the insurer exercises its right of withdrawal, the policy will be terminated retroactively. In this case, the premiums paid by the policyholder must be refunded. However, in the event of a deliberate breach of the disclosure duty, the insurer reserves the right to collect the premium corresponding to the risk assumed during the validity term of the policy.
In some cases, the insurer’s right of withdrawal is limited. Accordingly, the insurer cannot assert this right if:
- The right of withdrawal has been waived explicitly or implicitly,
- The insurer itself caused the breach that led to the withdrawal, and
- The policy has been underwritten despite some questions left unanswered.
The insurer may choose to charge a premium difference instead of withdrawing from the policy. In this case, the policyholder’s failure to accept the premium difference determined by the insurer within 10 days results in an implied withdrawal from the policy. Thus, the insurer exercises its implied right of withdrawal.
3.2. Discovering the Breach After the Risk Materializes
If the insurer discovers the breach of the duty of disclosure after the risk materializes, the assessment will then depend on the policyholder’s degree of fault.
- In case of negligence, i.e. if the policyholder has failed to provide information but has not done so intentionally and the breach has affected the amount of compensation or the materialization of the risk, the insurer may reduce the compensation accordingly.
- If there is intent and the disclosure duty breached as such is directly related to the materialization of the risk, the insurer will be completely released from the obligation to pay compensation.
- However, if the intentional breach has not affected the materialization of the risk, the insurer will pay compensation based on the ratio between the premium paid and the premium deserved.
These distinctions constitute a system that balances both the behavior of the policyholder and the liability of the insurer. With these regulations, the lawmaker aims to protect good faith and to balance the interests of both parties.
4. Practical Issues
4.1. Lack of Technical Knowledge
Most policyholders do not know the full extent of their disclosure obligations. Indeed, the technical and legal jargon used in insurance forms leads to incomplete or inaccurate disclosures.
4.2. Deliberate Withholding of Information
Policyholders sometimes withhold information or make misleading statements to avoid rejection of the policy or an increase in premium. This situation leads to disputes in the claims process.
4.3. Damage Assessment Reports and Contradictions
When damage occurs, a contradiction may arise between the information obtained from the adjusters appointed by the insurer and the statements of the policyholder.
5. Duty of Disclosure in Comparative Law
The German Insurance Contract Act (“VVG”) regulates the duty of disclosure in detail, taking into account the capacity of the policyholder to obtain information.
In Anglo-American legal systems, the principle of “utmost good faith” is applied more broadly, and disclosure deficiencies can result in more severe sanctions.
6. Conclusion
The policyholder’s duty of disclosure is an indispensable principle to underwrite a policy on a solid foundation, to calculate premiums fairly, and to compensate potential losses accurately. Although the TCC explicitly regulates this duty, issues related to information asymmetry between policyholders and insurers persist in practice.
Therefore, using clearer, simpler, and more instructive forms in insurance policies, informing the policyholder adequately and obtaining legal advice when necessary are crucial in preventing loss of rights.
Dila Yıldırım, Associate
