In April 2019, we reported on Young v Royal and Sun Alliance Plc, in which the Scottish court found that an insurer had not waived its right to disclosure of information under the Insurance Act 2015 and was consequently entitled to avoid an insurance policy. That decision was, to the best of our knowledge, the first case to be decided under the 2015 Act, which introduced a new duty of fair presentation for commercial insurance.
The Scottish appeal court has now upheld the first instance decision.
Duty of fair presentation
Under the 2015 Act, an insured entering into a commercial insurance policy must make a fair presentation of the risk. That requires the insured:
- to make disclosure of every material circumstance which the insured knows or ought to know;
- failing that, to make disclosure of sufficient information to put a prudent insurer on notice that it needs to make further enquiries;
- to make such disclosure in a reasonably clear and accessible manner; and
- to ensure that every material representation of fact is substantially correct and every material representation of expectation or belief is made in good faith.
The 2015 Act also provides that an insured is not required to disclose a circumstance if it is something as to which the insurer waives information.
An insurer has various remedies in response to a breach of the duty of fair presentation. If the breach is deliberate or reckless, the insurer can avoid the policy. If it is not, it is necessary to consider what the insurer would have done without the breach.
If the insurer can show that it would not have entered into the policy at all, the policy can be avoided. But if the insurer would still have entered into the policy, either on different terms or for a higher premium, the policy will be treated as if it had those different terms and/or the higher premium was payable.
Mr Young was the insured under an insurance policy for commercial premises. The premises were extensively damaged by fire and Mr Young made a claim for indemnification under the policy, seeking payment of £7.2 million. The insurer declined indemnity and avoided the policy from its inception. That was on the basis that Mr Young had failed to disclose material information.
The insurance policy had been arranged by a firm of brokers. The proposal took the form of a “market presentation” prepared using the brokers’ software.
The market presentation included what the first instance 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. The response given was “None”. That was despite the fact that Mr Young had previously been a director of four companies which had become insolvent.
The insurer responded to the market presentation by email to the brokers. The email provided a quote for cover and included a list of conditions, one of which was: “Insured has never … Been declared bankrupt or insolvent”.
In the case, Mr Young argued that the undisclosed information about his prior experience of insolvency was something as to which the insurer waived information by reason of its email response.
The first instance decision
At first instance, the judge rejected Mr Young’s argument that the insurer’s email response to the broker had amounted to waiver of its entitlement to be provided with the undisclosed information. She found that, in considering whether the email 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. The market presentation submitted by the brokers had been intended to be the totality of the information being provided to the insurer in fulfilment of the duty to make a fair presentation.
Mr Young appealed. Prior to the appeal, he accepted that the undisclosed information was material and that, had it been disclosed to the insurer, the insurer would not have entered into the policy.
The appeal court’s decision
The appeal court refused the appeal, taking the opportunity to analyse an insured’s duty of fair presentation and the issue of waiver by an insurer. It did so by reference to case law that pre-dated the 2015 Act and which it described as uncontroversial.
The appeal court noted that a proposer seeking the insurance of a risk must assume that any prospective insurer will wish to know every relevant circumstance which would influence the judgment of the notional prudent insurer. If the proposer is to discharge his duty to make a fair presentation, he must therefore disclose everything that the notional prudent insurer would want to know. A failure to discharge this duty will allow the insurer to avoid the policy for material non-disclosure.
Mr Young did not argue that the insurer had expressly communicated that it was not concerned to know the undisclosed information. Rather, he argued that it did so by implication. By showing that it was interested in one aspect of Mr Young’s experience of insolvency, the insurer had impliedly showed that it was not interested in others and therefore restricted Mr Young’s duty of disclosure.
The appeal court noted that an insurer can impliedly waive an insured’s duty to disclose certain information by the questions it asks, for example by using a proposal form. The significance of a proposal form is that, by directing the insured to provide material information by answering specific questions, the insurer takes control of the process of communicating information between it and the proposer. It chooses the matters about which it wishes information, by asking questions directed at that information and, by implication, the matters about which it does not wish information where it does not ask questions.
But in order to show that an insurer impliedly waived its entitlement to disclosure of material information, the expectation is that there will be some sort of enquiry by the insurer directing the insured to provide certain information but no other information.
The case therefore turned on the meaning of the insurer’s email response. The appeal court found that there was nothing in the email that amounted to an enquiry. Instead, the email indicated that the insurer had got beyond the stage of enquiry and that it was not looking for a more complete presentation of the risk. It showed that the insurer considered that the presentation of the risk had been sufficient and that the insurer had assessed and priced it, because the risk was further defined by the stated terms, conditions and limitations.
The brokers had made a presentation of the risk by means of the market presentation. They had requested that the insurer provide a quotation based on the information provided in the market presentation. The insurer responded with an offer to insure on a variety of terms and conditions. That offer was capable of immediate acceptance. It was not an enquiry and did not amount to limited concern about Mr Young’s past experience of insolvency that excluded the undisclosed information from what he was required to disclose for fair presentation of the risk. The insurer was accordingly entitled to avoid the policy.
The appeal court’s judgment serves as a clear and timely reminder of the duty of fair presentation in commercial insurance policies.
The practical consequence is that insurers would be well-advised to maintain full and clear records of the decisions they take to enter into policies, including their risk assessments. They should also ensure that their communications to brokers and insureds are not to be construed as enquiries that might limit the duty of fair presentation, where that is not intended. Those steps should help insurers defend claims either on the basis that they did not waive their entitlement to fair presentation, or that they would not have entered into a contract at all, or only on materially different terms.
Further reading: Young v Royal and Sun Alliance Insurance Plc  CSIH 25