Natasha Hawkins comments below on this recent decision by Mrs Justice Carr, which considers the circumstances in which insurers are entitled to avoid an insurance policy for non-disclosure or misrepresentation.
Brit UW Limited (Brit), acting on behalf of Brit Syndicate 2987 at Lloyd’s, sought a declaration that it had validly avoided a contractors’ combined liability policy issued on August 19, 2013 to F&B Trenchless Solutions Limited (F&B), a specialist tunnelling contractor.
The dispute arose out of the derailment of a train which occurred on August 27, 2013 at a site at which F&B had recently constructed a micro-tunnel beneath a railway line and crossing. It was common ground between the parties that the cause of the derailment was settlement of the railway tracks caused by a void in the ground underneath. This void had occurred in July or early August 2013 (during or shortly after F&B’s work at the site), and was known to F&B prior to inception of the Brit policy.
Brit sought to avoid the policy in January 2014, on the basis that F&B had failed to disclose the settlement, and also on the basis that F&B had misrepresented to Brit that it did not carry out tunnelling works on active railway lines. F&B denied that Brit was entitled to avoid the policy and counterclaimed for damages and a declaration for an indemnity in respect of claims for remedial costs arising out of the derailment.
The key issues in the case were as follows:
- Would disclosure of the settlement at the site and/or the fact that F&B had carried out works on an active railway line have influenced the judgment of a hypothetical prudent underwriter in deciding whether and on what terms to offer cover to F&B?
- As a matter of fact, did F&B tell Brit that it did not work on active railway lines?
- Did any non-disclosure or misrepresentation actually induce the Brit underwriter in question to offer cover to F&B on the terms agreed?
- Had Brit affirmed the policy? In this regard, F&B alleged that Brit (via its solicitors and/or the Lloyd’s broker who had placed the risk) had affirmed coverage between October 2013 and January 2014, and that its avoidance of the policy in January 2014 was invalid.
In the judgment, Carr J provided an overview of the well-established test for material non-disclosure, as set out by section 18(1) of the Marine Insurance Act 1906. This provides that the assured must disclose every material circumstance known to him prior to conclusion of the insurance contract. Carr J confirmed that:
- whether a circumstance is material is a question of fact to be determined in each case
- a ‘material’ circumstance is one which would influence the judgment of a prudent insurer in fixing the premium or determining whether to take the risk (though it need not have a decisive effect), i.e. an objective test
- the non-disclosure must have induced the actual underwriter in question to enter into the policy, or to do so on the terms agreed, i.e. a subjective test.
Carr J also dealt with the issue of affirmation, confirming that, for an insurer to affirm coverage, it must have knowledge of both the facts giving rise to a right to avoid the policy and also the legal right to avoid. An affirmation must be unequivocal.
Carr J also pointed out that avoidance is a draconian remedy which should not be granted lightly.
Carr J found that F&B became exposed to claims for liability in respect of potential remedial costs as soon as significant settlement occurred at the site, and this exposure was a material fact which ought to have been disclosed to Brit. Importantly, F&B’s own opinion as to the significance of the earth settlement (it submitted that the settlement was minor and not at a level sufficient to have triggered an intervention by Network Rail) was found to have been irrelevant. On the facts, the settlement was sufficiently in excess of the 2–4mm initially predicted in F&B’s tender to be objectively considered material.
In addition, as a matter of fact, Carr J found that F&B had informed Brit that it had not and would not conduct tunnelling works under or near to active railway lines, and that this representation was false. Again, this was found to be a matter which materially increased the risk and which ought to have been disclosed to Brit.
Carr J held also that Brit had been induced by the non-disclosure in question, finding that the relevant underwriter had given clear evidence that, had he been told of the settlement during the placement of the policy, he would have excluded the site in question from coverage and would have asked F&B what it intended to do to prevent similar issues arising elsewhere in future.
On the issue of affirmation, Carr J found that Brit and its solicitors had properly reserved Brit’s rights while investigating coverage, and had made it clear to F&B that coverage might not be available in the event of material nondisclosure. In addition, Carr J reiterated the well-established principle that the Lloyd’s broker who had placed the risk was acting as agent of the insured throughout, save for the receiving and holding of premium and claims monies, and therefore could not have affirmed coverage on Brit’s behalf.
As a result, Carr J declared that Brit was entitled to avoid the policy and that it had validly done so.
The case provides a useful reminder of the applicable tests for materiality, inducement and affirmation. In particular, the judgment highlights the irrelevance of an insured’s assessment of the materiality of facts to be provided to underwriters; the test is an objective one. Indeed, Carr J found that the insured would otherwise become ‘judge and jury’ on the risk being contemplated by the insurer.
Of course, this decision comes before the coming into effect of the Insurance Act 2015, which will change the landscape in terms of remedies for material non-disclosure and misrepresentation. Once the new Act comes into force, unless the material non-disclosure or misrepresentation is made deliberately or recklessly (which may be difficult to establish), insurers will be entitled to avoid a policy only where they can show that, but for the material non-disclosure or misrepresentation in question, they would not have entered into the policy on any terms. Where a nondisclosure or misrepresentation is made innocently or negligently, and insurers would have entered into the policy but on different terms (other than terms relating to the premium), the appropriate remedy would be to treat the contract as if it had been entered into on those different terms. Where a higher premium would have been charged for the risk, the insurer would be entitled instead to reduce proportionately the amount to be paid on a claim.
While there is insufficient evidence in Carr J’s judgment to say with any certainty what the outcome would have been had this case been decided under the Insurance Act 2015, Brit did give evidence that, had F&B disclosed the fact of the settlement, Brit would still have written the policy, but would have incorporated an exclusion for claims arising out of activities at the site in question. Applying the new Act, therefore, Brit may not have been entitled to avoid the policy for material non-disclosure, but it may nonetheless have sought to have the insurance re-written with an exclusion of the site in question. The difference in outcome under the current law and the new law in this case may thus revolve around Brit’s obligation to return premium and on whether there were any other claims under this particular policy. If there were other claims, they would not be recoverable under the current law. Other claims (at different sites) might still be recoverable under the new law.