Proposal forms – risk of waiver of material information

The High Court has set out the principles that apply to the construction of questions in an insurer’s automated online underwriting system and the circumstances in which an insurer’s questions may lead to waiver of the right to be told about certain information. In this case, the Court considered the construction and scope of the insurer’s standard question concerning previous insolvencies, and held that the wording used waived the insurer’s right to be told about other insolvency events not caught by the question.

Background

The claimant operated a bar and restaurant at a property in Glasgow. The defendant was the insurer of the claimant’s property. In October 2015, the risk was presented to the insurer by the claimant’s broker via an automated underwriting system which evaluated applications via algorithm and without underwriter input.

The policy renewed on 12 October 2016 and again on 12 October 2017. When the policy was originally taken out and at each renewal, the insurer’s automated system required the claimant to respond to various statements of fact, each of which began “no owner, director, business partner or family member involved with the business…”. The second part of the key statement of fact was “…has ever been the subject of a winding-up order or company/individual voluntary arrangement with creditors, or been placed into administration, administrative receivership or liquidation” (the Insolvency Question). On each occasion, the claimant agreed to this statement (the Representation).

On 3 January 2018, the property was damaged by a fire and the claimant notified a claim to the insurer. The insurer sought to avoid the policy from its inception, alleging misrepresentation and/or non-disclosure of material circumstances on the basis that the claimant had not disclosed that three directors involved with the insured business had formerly been directors of other companies which had entered liquidation between 2009 and 2014.

The claimant argued:

1. That the way the Insolvency Question was worded meant that the answer was correct and there had not been a misrepresentation;
2. That by asking the Insolvency Question, the insurer had waived its right to information about other insolvency events.

Construction of the wording

Mr Justice Snowden referenced key principles on the interpretation of contracts, including the Supreme Court’s summary in Wood v Capita Insurance Services Ltd - the Court must consider the objective meaning of the language chosen by the parties to express their agreement. It was not disputed by the parties that insurance policies should be interpreted in accordance with general principles of contract interpretation. Where an ambiguity arises, the Court is entitled to prefer the meaning that makes the most ‘business common sense’. If that ambiguity arises in a question posed by an insurer to a potential insured, then an insurer cannot rely on the answer to that question as a misrepresentation, if the answer given could be considered true on a reasonable interpretation of the ambiguous question.

The claimant submitted that the Insolvency Question had no ambiguity and that the claimant gave a true answer. The Insolvency Question did not specifically ask about insolvency events of any company with which the directors might have previously been connected. The insurer argued that the claimant’s interpretation of the Insolvency Question was overly literal, lacked commercial sense and ignored the obvious intention of insurers to ascertain whether other corporate entities, with which the directors had been involved, had failed.

Snowden J considered the Insolvency Question in the context of the other questions asked by the automated platform and agreed that, on a literal meaning, the words supported the claimant’s argument. The judge commented that the insurer’s case would require the words “no owner, director, business partner or family member involved with the business…” to have a different meaning when applied to each of the four statements of fact which followed, which was not an obvious intention to impute to the parties. Snowden J did not accept the insurer’s argument that an individual could be said to be the ‘subject’ of a winding up order or a corporate voluntary arrangement by virtue of their change in status. Even on the broadest meaning of words, it is not correct to say that directors are “placed into” administration. That the insurer was unable to submit a clear meaning intended by the Insolvency Question (particularly in relation to the extent it applied to companies with which family members were involved) supported the judge’s views that the insurer’s interpretation was not reasonable.

Finally, Snowden J indicated that he would have expected a reasonable insurer at the relevant time (2015) to be aware of two important decisions on construction of insolvency type questions in insurance contracts (Doheny v New India Assurance Co (2004) and R& R Developments v Axa Insurance UK plc (2009)) and for the insurer to have used words in the Insolvency Question to refer specifically to other companies if it had wanted to be told about insolvency events relating to them.

The claimant’s interpretation of the Insolvency Question was determined to be the clear meaning of it. The judge commented that, if the Insolvency Question had been ambiguous (which he determined it was not) he would have found for the claimant in any event because the claimant’s interpretation of the Insolvency Question was reasonable so that insurers would not be able to rely on it to argue misrepresentation.

Waiver

The claimant submitted that by asking the Insolvency Question in the way that it did, the insurer waived any requirement for the claimant to disclose the insolvency events of the other companies. The claimant accepted that the other insolvencies were material and that the insurer was induced to enter into the policy by the Representation. Therefore, if the insurer had not waived its entitlement to the information by its own drafting, there had been a misrepresentation and the insurer was entitled to avoid. The judge accepted the claimant’s arguments and determined that the insurer had restricted its right to receive all material information by virtue of the specific words used. The other insolvency events were precisely the type of matter which was the subject of the Insolvency Question, however they related to a different set of persons than those identified in the question.

Finally, the judge rejected the insurer’s alternative argument that the claimant’s broker ought to have informed the claimant that the other insolvency events were material facts, notwithstanding the specific terms of the Insolvency Question.

Comment

This case reiterates the importance of not only using clear wording in proposal forms, policy and renewal documents, but also ensuring that the clear wording covers the full intended scope of information sought. Courts appear reluctant to interpret clauses/questions to include inferences if not expressly stated. If clear wording is used, courts will expect the clarity to extend to the full scope of information required and will not allow insurers to infer ambiguity into their own clauses in order to make misrepresentation arguments. The judgment does not distinguish between pre and post-Insurance Act 2015 in terms of the insured’s duty to make a ‘fair presentation of the risk’ to insurers when taking out insurance (including renewals). It does make clear that, even though the ‘other insolvency events’ were accepted by all parties to be ‘material’, by its own specific wording, insurers had waived the requirement for the insured to disclose that information.

The decision also shows that the courts will expect insurers to be aware of, and learn from, relevant case law on policy interpretation and to refine their renewal and policy materials accordingly.

Further reading:

Ristorante Ltd T/A Bar Massimo v Zurich Insurance Plc [2021] EWHC 2538 (Ch)

Wood v Capita Insurance Services Ltd [2017] AC 1173

Doheny v New India Assurance Co [2004] EWCA Civ 1705

R & R Developments v Axa Insurance UK plc [2009] EWHC 2429 (Ch)