Insurance Act 2015: material circumstance, moral hazard and the duty of fair presentation

England and Wales

In one of the first reported decisions under the Insurance Act in the High Court, an insurer has successfully defended an action for avoiding a BI policy from inception and a CAR policy from renewal.  The court had to determine whether criminal charges brought against one of the insured’s directors relating to an unconnected company and jurisdiction were a material circumstance for the purposes of the insured’s duty of fair presentation, and if it was, whether the insurer would have declined to offer insurance to the insured. The court was convinced on both issues.

Background

The insured developer was a joint venture vehicle, incorporated to develop a large project in Brentford. The main driver of the venture, Mr “X”, was appointed a director of the insured and he dealt with the day-to-day management of the project and insurance arrangements.  The other two directors were the largest shareholders who had provided the majority of the investment.  They provided little input other than being participants to informal telephone meetings concerning financial matters.  

Contractors’ All Risks (CAR) cover was arranged on behalf of the developer and the contractor for the project in November 2018. The quotation stated that it was provided on the basis that the insured confirmed that the information in the quote summary was correct, including a statement that neither the proposer, its partners nor directors had “either personally or in any business capacity, been convicted of a criminal offence or charged (but not yet tried) with a criminal offence”.  Mr X accepted the quote on behalf of the insured. In late summer 2019, the cover was amended to include Business Interruption (BI) insurance.

On renewal of the cover in November 2019, the policy documentation stated: “You must make a fair presentation of the risk and if you do not tell us about any changes or fail to advise us of any inaccuracies or omissions, the policy may not protect you in the event of a claim”. Mr X did not ask his co-directors if they had been charged or convicted with a criminal offence in the interim period and went ahead with the renewal without providing any updated information. 

In January 2020, the insured made claims against both insurance policies following an escape of water that had caused substantial damage to a number of completed or partially completed apartments and communal areas that formed part of the development. 

A material circumstance?

When considering the claim, the insurer was advised that in August 2019 criminal charges had been filed against one of the co-directors in Malaysia. The charges were connected to the co-director’s directorship of an unrelated company and were later dropped (in October 2020) following a settlement agreement between the Malaysian Government and the companies involved.  

The insurer argued that the charges were material and should have been disclosed when the BI policy incepted in August 2019, and both policies were renewed in November 2019. Had they known about the criminal charges relating to a significant fraud, the insurer would not have provided CAR cover for the developer and would not have written the BI policy at all. 

The co-director’s case was that he had not been involved in the transactions that had given rise to the charges, nor did he face allegations of any personal involvement in fraud or other wrongdoing, and therefore there had been no failure to disclose any material circumstance. 

The court’s approach

Lionel Persey QC (sitting as a High Court Judge) said that principles established by pre-Insurance Act authorities remain relevant when considering the duty of fair presentation under the Act. This, the judge noted, is consistent with the approach advocated by the Law Commissions in their July 2014 report on Insurance Contract Law and the use in the Insurance Act of the concepts of “material circumstance” and “prudent insurer” which were taken from the Marine Insurance Act 1906.

The case law sets out that a material fact is one that may be subject to special consideration by an underwriter or suggests that the integrity of the proposer is open to doubt or constitutes a moral hazard (which would include an insured being under investigation, even if they are subsequently acquitted). In this case the insurer successfully established that by not disclosing the criminal charges, which were a material fact, the insured had not made a fair presentation of the risk. 

Much of the court’s decision relating to inducement was based upon the insurer’s witness evidence, who were all underwriters or underwriting managers.  The witnesses adequately evidenced the usual underwriting processes in place at the time and provided a contemporaneous practice note relating to non-standard proposals, that clearly stated the risk (had it been properly disclosed at the time) would not have been acceptable and should be declined in the first instance.    The court was convinced and found in favour of the insurer.

Comment

This is a useful case relating to the court’s interpretation of material circumstance, inducement, and fair presentation of risk under Insurance Act 2015.

This case serves as a salient reminder to insureds of the importance of discharging the duty of fair presentation at the proposal stage. From a broker’s perspective their role is best surmised as taking reasonable steps to ensure that the proposed policy is suitable for the client’s needs. By definition, a policy which is voidable for non-disclosure is not suitable. The courts have held that it is not sufficient to rely upon written standard form explanations and warnings annexed to proposals or policy documents. A broker, therefore, must be satisfied that the position is in fact understood by his client.

It also highlights to all parties involved with processing risk and the assessment of claims (insureds, brokers, insurers and practitioners alike) the importance of convincing witness evidence and having sound, consistent underwriting and claims handling processes in place.

Further reading: Berkshire Assets (West London) Ltd v AXA Insurance UK PLC [2021] EWHC 2689 (Comm)