Under what condition can an insurer refuse to pay a claim and avoid the policy from the beginning?

An insurer can refuse to pay a claim and avoid the policy from the beginning if it is discovered that the insured failed to disclose a material fact. This principle is based on the concept of "utmost good faith" (uberrima fides), which underlies insurance contracts. When a policyholder applies for insurance, they are required to provide all relevant information that might affect the insurer's decision to issue the policy or the terms of that policy. A material fact is any information that would influence an insurer's assessment of risk.

If an insured withholds or misrepresents such a fact, and the insurer later discovers this omission, it can lead to the avoidance of the policy from inception, meaning the insurer treats the contract as if it never existed. This protects the insurer from assuming risks that they were not made fully aware of at the time of underwriting the policy.

In contrast, while other circumstances such as a claim made during a grace period or a loss resulting from an uncovered peril are significant, they do not typically grant the insurer the same level of authority to void the entire policy. The discovery of substantial under-insurance, although it could affect the settlement payout, does not provide grounds for the insurer to decline the validity of the policy