The doctrine of concealment is the final legal defense of the insurance company in its efforts to avoid liability under a contract that was obtained through the misrepresentation or concealment of material facts. Of the three basic grounds for avoidance (breach of warranty, misrepresentation, and concealment) concealment is the narrowest in scope and the most difficult to prove.

In general law concealment connotes an affirmative act to hide the existence of a material fact. In insurance law, however, a concealment is essentially a nondisclosure; it is the failure of the applicant for insurance to communicate to the insurer his or her knowledge of a material fact that the insurer does not possess.

It is general law of long standing that one party to a contract is under no legal obligation during the period of negotiation to disclose to the other party information that the first party knows is not known to the second party and, if known, would be deemed material to the contract. The rationale of this rule is that prices in the marketplace should be set by the best-informed buyers and sellers, and as a reward for performing this economic function, they should be permitted to profit by their special knowledge of affairs. For some years, however, there has been a marked trend in the other direction. Among the numerous exceptions to the general rule are the requirements that one party not actively try to prevent the second party from discovering facts known only to the first party or give deliberately misleading answers to questions designed to elicit information material to the contract.

In insurance, the law of concealment, like the other two doctrines discussed earlier in this chapter, developed during the 18th century out of cases involving marine insurance. The relative inaccessibility of the property to be insured and the poor communication facilities, combined with the aleatory nature of the contract, caused Lord Mansfield, the father of English commercial and insurance law, to hold that the applicant for insurance was required by good faith to disclose to the insurer all known facts that would materially affect the insurer�s decision about acceptance of the risk, the amount of the premium, or other essential terms of the contract, whether or not the applicant was aware of the materiality of the facts. Even though conditions affecting marine insurance have changed, the law has not. The person seeking marine insurance today, whether the shipowner or shipper, must disclose all known material facts in his or her possession to the insurer. Failure to do so, even though innocent, will permit the insurer to void the contract.

In English law, the doctrine of innocent concealment is strictly applied to all branches of insurance. In the United States, it is applied only to marine insurance. American courts have felt that the circumstances surrounding fire and life insurance are so different from those in marine insurance�particularly true in 1766 when the marine rule originated�that a different rule is justified. Under American law, except for marine insurance, a concealment will permit the insurer to void the contract only if the applicant, in refraining from disclosure, had a fraudulent intent. In other words, except for marine insurance, a concealment must be both material and fraudulent. In marine insurance, it need only be material.

The doctrine of concealment may be regarded as a special manifestation of the doctrine of misrepresentation. The relationship between a misrepresentation and a concealment has been compared with that existing between the heads and tails of a coin. If a misrepresentation is the heads of a coin, a concealment is the tails. One is affirmative; the other is negative.

A concealment is misrepresentation by silence. It has legal consequences for the same reason that a misrepresentation does�namely, that the insurer was misled into making a contract that it would not have made had it known the facts. Hence, the general concept of materiality applied to a concealment is the same as that applicable to a misrepresentation: the effect on the underwriting decision of the insurer. "Fraudulent intent" is a subjective concept that is difficult to prove; many courts take the attitude that if the fact not disclosed by the applicant was palpably material, this is sufficient proof of fraud.

The degree of relevance to a risk required of a fact to be palpably material has never been judicially defined. An illustration was provided in a famous 1896 decision by William Howard Taft, then a judge of the 8th Circuit Court of Appeals, who indicated that an applicant for life insurance who failed to reveal to the insurer that he was on his way to fight a duel would be guilty of concealing a palpably material fact. This illustration was almost contradicted by a 1938 decision that an applicant�s failure to disclose that he was carrying a revolver because of his fear of being killed by his former partner, whom he had accused of committing adultery with his wife, was not a palpably material concealment, even though the applicant was murdered a few months later by a person unknown. Experts are occasionally called upon to testify as to the materiality of a concealed fact, but in cases settled in favor of the insurer, the judge has usually decided from his or her own knowledge that the fact concealed was palpably material.

The palpable materiality test is applied to the applicant�s knowledge of materiality, while both the prudent-insurer and individual-insurer tests of materiality apply only to the effect on the insurer. In concealment cases, which are governed by statutes only in California and states that have adopted its laws, the prudent-insurer test seems to be the prevailing one.

The test of fraud is whether the applicant believed the fact that he or she did not disclose to be material to the risk. This test was approved long ago by the highest court of New York in a case involving the applicant�s failure to disclose that he had once been insane. The concealment was held not to be fraudulent. The insurer therefore must prove that an undisclosed fact is, in the applicant�s own mind, material to the risk. As a general proposition, the insured�s awareness of the materiality of the fact concealed can be proved by establishing that the fact was palpably material, a characteristic that would be apparent to any person of normal intelligence.

However, in concealment cases, as with warranties and representations, the law takes into account the powers of understanding and state of knowledge of the particular applicant involved. Thus the failure of an applicant who was the state agent for the company to notify the insurer of a cancerous condition of the spleen, discovered after submission of the application but before issue of the policy, was held to be fraudulent in view of the applicant�s exceptional knowledge of the materiality of such a condition. On the other hand, the failure of a less sophisticated applicant to disclose a toxic condition of the heart muscle, likewise discovered in the interim between submission of the application and issue of the policy, was held not to be fraudulent when evidence revealed that the applicant had refused to take additional insurance offered to him and had changed the basis of premium payments from monthly to semiannually.

The requirement that a concealment be proved by the insurer to have been fraudulent has narrowed the scope of the doctrine in all forms of nonmarine insurance. Its scope has been further narrowed in life insurance through the use of a detailed written application and, in larger cases, a medical examination. There is a presumption that the application elicits information about every matter that the insurer deems material to the risk, and if the applicant answers all questions asked in the application fully and truthfully, he or she is under no duty to volunteer additional information. This presumption can be overcome by evidence that the applicant willfully concealed other information that was material to the risk and that the applicant knew to be material. In practice, however, the doctrine is seldom invoked except for nondisclosure of a material fact discovered by the applicant between the time he or she signed the application and the time the contract was consummated.

The general (but not unanimous) view of the courts is that the applicant under the doctrine of continuing representations must communicate promptly to the insurer his or her discovery of such interim facts if they are so obviously material that the applicant could not fail to recognize their materiality. In one of the early cases on the subject, the insurance company was permitted to deny liability under a policy issued in ignorance of the fact that the applicant had undergone an operation for appendicitis during the period the application was being considered by the home office, even though the applicant was in the hospital at the time the disclosure should have been made. In a later case involving the interim discovery of a duodenal ulcer, the Supreme Court of the United States had the following to say:

But the reason for the rule still obtains, and with added force, as to changes materially affecting the risk that come to the insured�s knowledge after the application and before delivery of the policy. Even the most unsophisticated person must know that, in answering the questionnaire and submitting it to the insurer, the applicant is furnishing the data on the basis of which the company will decide whether, by issuing a policy, it wishes to accept the risk. If, while the company deliberates, the applicant discovers facts that make portions of the application no longer true, the most elementary spirit of fair dealing would seem to require him or her to make a full disclosure.

Since not all courts impose the duty of disclosure of interim changes and, in any event, violation of the duty must be proved fraudulent, many companies rely on the delivery-in-good-health and medical treatment clauses to protect themselves against interim changes in the applicant�s physical condition. These clauses create conditions or warranties that must be fully satisfied before the company can be held liable under the contract.

The applicant is under no obligation to disclose interim developments, however material on their face, when the first premium is paid with the application and a binding receipt, conditioned on insurability at the date of application, is issued. Under such circumstances, the coverage becomes effective as of the date of application�or medical examination, if later�and changes in the applicant�s insurability after that date are supposed to be immaterial to the insurer�s deliberations. Of course, interim changes in the insured�s physical condition can be used as evidence to support the company�s contention that the insured concealed or misrepresented facts known to him or her when the application was made.