Insurers often get a bad rap from insured parties, who are displeased when insurance contracts are cancelled. However, insured parties often invite cancellation ? and the litigation that can ensue ? because they fail to disclose a material fact or misrepresent their true circumstances when applying for insurance.

Such information is critical to the insurer because it is the basis on which the insurer appraises risk. Misrepresentation is an inaccurate or untrue statement of fact made innocently, negligently or fraudulently by the insured prior to the conclusion of the contract.

An insurer is entitled to cancel a policy if it can show that the non-disclosure influenced the decision to insure the risk or affected the terms upon which it did so.

Consequently, when disclosing information, the applicant should consider whether a reasonably prudent insurer might be influenced by the information.

The insured party's state of mind is irrelevant and therefore a purely innocent or negligent non-disclosure permits the insurer to avoid the contract, provided that the information is material.

For example, courts have held that a person should disclose the fact he had undergone tests for an unknown medical condition if he appreciated the importance of the tests when seeking health insurance.

Pre-contract disclosure is often made by way of a proposal form, which may either enlarge or limit the potential insured's duty of disclosure. As a general rule the fact that particular questions relating to the risk are put to a potential insured does not relieve his obligation to disclose all material facts.

When completing such a form a potential insured should consider whether a "reasonable" man would be justified in thinking that the insurer has restricted its right to receive all material information and consented to the omission of the information in issue.

Unfortunately, it is not always clear what information the insurer requires. Too often at the end of proposal forms there is an empty box that asks for "any other relevant facts".

This is very broad and should not be viewed as a "catch all" by the insurer. Insurers should avoid doubt by making their proposal forms clearer.

An individual seeking insurance should be open and honest with their insurer when seeking coverage. If in doubt about the extent of the information required by the insurer, the potential insured should contact the insurer directly for clarification or contact a competent insurance advisor.

An applicant might also err on the side of caution and put additional information on the proposal form over and above what appears to be required.

Some applicants complain that including too much information on the proposal form will increase the premium, or result in a denial of coverage.

However, the insurance contract is an agreement of "utmost good faith". This means that the insured and insurer agree to act with the utmost good faith in the process of formulating the insurance policy, during the period of cover and in the event of a claim.

The duty to make full disclosure of all material facts ceases upon inception of the policy. An insured need not disclose facts that the insurer knows or is presumed to know, nor is there a duty to disclose facts in respect of which the insurer waives enquiry.

If an insurer cancels a contract for innocent or negligent misrepresentation or non-disclosure, the premium paid must be returned to the insured.

However in the case of fraudulent misrepresentation the insurer can retain the premium. Neither option is attractive to the insured party, as in both cases the insurer will have cancelled the contract.

Of course, those seeking coverage should read carefully all the terms and conditions of the policy, including all the small print that often contains exclusion clauses.

Applicants should also ensure that the sums insured are adequate and understand the precise requirements and conditions of coverage. Most importantly, however, a potential insured should make full disclosure of material facts.