Written by Adrian Bingham
The Insurance Act 2015, coming into force August 2016, will significantly alter the relationship between the insurer and the commercial insured.
Its provisions include the replacement of the insured’s duty of utmost good faith with a duty to make a fair presentation of the risk, and the all-or-nothing remedy of avoidance with a graduated series of insurer’s rights, depending upon the severity of the breach.
The unknown question at the moment, whilst we await new case law, is how the practical outcomes of coverage claims will differ from those decided under current legislation.
We consider below a couple of illustrative recent cases under the existing legislation, and consider the result would likely be the same or different under the 2015 Act.
In Involnert Management Inc. v Aprilgrange Ltd (2015), the insured claimant was an SPV owner of a €35m yacht, acquired new in 2007 for €13m. In 2009 it was professionally valued at €7m. The owner decided to sell in March 2011, for € 8m.
The yacht had been insured annually since purchase for €13m and when renewal arose in April 2011 the broker obtained cover for that amount. The 2009 valuation was inadvertently never disclosed to the insurers.
The yacht caught fire in harbour in December 2011 and was declared a constructive total loss. Expert evidence concluded that the fire was not suspicious.
The insurers avoided the policy, asserting that requesting cover for €13m when the resale value was €7m – €8m amounted to misrepresentation and material non-disclosure. The insured contested this.
The court decided that not disclosing the yacht was for sale was not itself a material circumstance. However, seeking insurance cover for € 13m when the sale price was €8m was material.
The court accepted the underwriter’s evidence that he would probably have continued insuring the yacht for €13m if no valuation had been obtained, but that if he had known about the 2009 valuation, he would have offered only €8m. It concluded the insurers had been misled, albeit inadvertently, and were entitled to avoid the policy ab initio.
The judge indicated some reluctance about this decision:
“The just result in these circumstances would be to treat the insurance as valid in a reduced amount of €8m. Such a result will be achieved in cases to which the new Insurance Act 2015 applies when the Act comes into force. Until then, however, it remains a blot on English insurance law that in a case of the present kind the insurer is permitted to avoid liability altogether”.
Had the 2015 Act been in force, the judge could have applied section 8(1), which provides that if a commercial insured breaches the duty of fair presentation, a menu of remedies are available in stark contrast to all-or-nothing avoidance.
The remedies under Schedule 1 are:
If the breach is deliberate or reckless, the insurer can avoid the policy, refuse to pay any claims, and need not return the premiums.
If the breach is non-culpable, the remedy depends on what the insurer would have done if it had known the facts. If the insurer would not have given cover on any terms, the remedies are the same as for deliberate or reckless conduct, except the premium must be returned. If the insurer would have given cover, but on different terms, e.g. higher premium and/or more onerous provisions, those terms will apply in place of the actual contract.
Determining what the underwriter might have done in different circumstances could in practice become a challenging exercise evidentially. Busy underwriters may not find it easy to hypothesise about what cover might have been offered on different facts, nor welcome being called as a witness to speculate about this, particularly where high-volume business is concerned.
Another recent but contrasting case is Brit UW Ltd. v F&B Trenchless Solutions Ltd. (2015). The insurer issued a liability policy to a tunnelling subcontractor, who was working under a railway line. Works finished on the same day that the subcontractor commenced discussions with its broker about policy renewal. During these discussions, the ground above the tunnel was progressively subsiding; something that was known to the insured. However the insured did not believe it was responsible for the ground movement, and did not mention it to the brokers.
By the time the policy was issued, there were serious subsidence problems. About eight days after inception, the subsidence derailed a freight train, causing extensive loss. The government investigator’s report subsequently blamed the subcontractor for the incident.
The insurers avoided the policy, arguing that the insured had failed to disclose knowledge that settlement had taken place at the tunnelling site before the policy incepted and had misrepresented that it was not undertaking any tunnelling activities beneath active railway lines.
At trial, the judge concluded that by the time the insurance was placed, the subsidence was far greater than expected at tendering, and this would have been material to a prudent underwriter. Accordingly, material non-disclosure had taken place, and the insurers had been entitled to avoid.
The judge also held that although the subcontractor subjectively believed its tunnelling had not caused the subsidence, this made no difference to materiality. Otherwise, the insured could effectively self-assess the risk it was asking the insurer to underwrite.
Here, it is more difficult to assess how far the 2015 Act would have availed the insured. Whether the insured’s ignoring the subsidence implications would have been perceived by a judge as reckless or not would depend on numerous factors, not least the performance of the witnesses. The evidence of the underwriter as to whether he would have offered cover, and on what terms, would also be crucial. The end result at trial under the new legislation, in a case like this, could range from upholding avoidance without return of premium, to coverage being deemed to exist on alternative terms, which might have included an indemnity, or not.
The 2015 Act has been widely praised for bringing certainty to the insurance industry. Time will tell.
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