In Young v Royal and Sun Alliance plc  CSOH 32 the Scottish court found that an insurer had not waived its right to disclosure of information under the Insurance Act 2015. The decision is, to the best of our knowledge, the first case to be decided under the Act, which introduced the new duty of fair presentation for commercial insurance.
Duty of fair presentation
The duty applies to commercial insurance contracts and requires the insured to:
- Make disclosure of every material circumstance which the insured knows or ought to know;
- Failing that, make disclosure of sufficient information to put a prudent insurer on notice that it needs to make further enquiries;
- Make such disclosure in a reasonably clear and accessible manner; and
- Ensure that every material representation of fact is substantially correct and every material representation of expectation or belief is made in good faith
Mr Young raised a £7.2 million claim for extensive fire damage to commercial premises. The co-insureds were Mr Young and a company of which he was a director, Kaim Park Investments Ltd (“Kaim”). The insurer refused the claim on grounds that the insured had failed to disclose material information, thus breaching its duty under the 2015 Act.
The policy under which the claim was brought had been arranged by a firm of insurance brokers. The proposal took the form of a “market presentation” prepared using the brokers’ software, rather than the insurer’s own proposal form.
Part of the market presentation contained what the judge referred to as the “Moral Hazard” declaration. This part of the presentation required the proposer to select from various options in a drop-down menu. The instruction read: “Select any of the following that apply to any proposer, director or partner of the Trade or Business or its Subsidiary Companies if they have ever, either personally or in any business capacity: …” The drop-down menu of options that followed this instruction included an option that any of the persons identified had been declared bankrupt or insolvent.
Whilst neither Mr Young nor Kaim had been declared bankrupt or insolvent, Mr Young had previously been a director of four other companies which had entered insolvency. Despite this, the option which was selected was “None”. It would not have been immediately apparent to the insurer what the other options available to the proposer were. The presentation sent to the insurer only showed the option selected (“None”) and the list of persons to which the declaration related.
The insurer sent an email to the brokers in response to the presentation. This provided a quote for cover and a list of conditions. The conditions included: “Insured has never been declared bankrupt or insolvent.”
The insured argued that since “the Insured” was Mr Young and Kaim, this email response amounted to a waiver by the insurer of its right to receive the undisclosed information regarding the four insolvent companies.
Proceeding on the basis that the 2015 Act has not altered the prior law on waiver, the court rejected the insured’s argument. It noted that, under the pre-2015 Act case law, waiver typically arose in one of two ways:
- Where the insured had submitted information that would prompt a reasonably careful insurer to make further enquiries but the insurer had failed to do so; and
- Where the insurer had asked a “limiting question” such that the insured could reasonably infer that the insurer had no interest in knowing information falling outwith the scope of the question.
It was noted by the court that only the second of these forms of waiver could apply in the present case, and that this second form of waiver had developed to deal with the potential unfairness that might flow from the control insurers enjoyed over the content of their proposal forms. In the present case, however, the insurer’s proposal form had not been used. The scope of information provided had been controlled by the proposer.
In considering whether the insurer’s email response amounted to waiver, the key question was whether a reasonable person would be justified in thinking that the insurer had restricted its right to receive all material information. In this case, the presentation submitted by the brokers had been intended to be the totality of the information being provided to the insurers in fulfilment of the duty to make a fair presentation. There were various ways an insurer might respond to such a proposal and it would not be appropriate to uncritically characterise all of these as “enquiries”.
In considering the proper construction of the insurer’s email response, the court emphasised that the insurer had only seen the selected option of “None” in the presentation. It had not seen the full list of Moral Hazards that the insured had selected from. In the court’s view, the insurer’s email response had been directed at clarifying that unknown matter. The insurer had done this by listing in the email the various hazards that required to be included. The court further took the view that the reference in the email response to “the Insured” was not intended to limit the scope of the information being provided but had simply been used as shorthand for the group of persons identified in the presentation.
This decision was solely concerned with the preliminary question of waiver. The court therefore expressed no views upon the materiality of the undisclosed information or the extent to which the insurer was induced to enter the contract by the non-disclosure. Those issues will, however, be critical in determining the ultimate outcome of the claim.
Where there is breach of the duty of fair presentation, the insurer has various potential remedies. If the breach is characterised as deliberate or reckless, the insurer can avoid the contract altogether, however, if the breach is not deliberate or reckless, consideration requires to be given to what the insurer would have done had the duty not been breached.
If the insurer can show that it would not have entered into the contract at all, again the contract may be avoided. However, if it is found that the insurer would have still entered into the contract, either on different terms (e.g. incorporating an exclusion clause) or for a higher premium, the court requires to treat the contract as though such modified terms and/or the higher premium applied.
From a practical perspective, insurers would be well advised to maintain clear records of the risk assessment and decision processes they follow in relation to such contracts. This will greatly assist when seeking to defend a claim on grounds that the insurer would either have not entered a contract at all, or only entered it upon materially different terms, had the duty of fair presentation not been breached.