The Technology and Construction Court (the “TCC”) has recently considered the interpretation of an exclusion clause contained in a contract of insurance. Specifically, the TCC considered the interpretation behind the phrase “deliberate or fraudulent non-disclosure” in relation to insurers’ right to avoid a policy.

The Claim

The claim concerned a contract of insurance entered into in December 2009, whereby the defendant insurers (the “Defendants”) and three additional insurers agreed to insure an international electricity systems link operated by Mutual Energy Ltd (“MEL”).

The electricity link failed in September 2010, with two further failures on separate occasions in 2011. MEL submitted claims to the five insurers for these failures, in the sum of £41million. Three insurers agreed to compromise the claim; however, the Defendants did not agree to do so. A claim was commenced in March 2015, to the value of £17million.

The Defendants raised an allegation of deliberate non-disclosure, which they said entitled them to avoid the policy. They alleged that at least one individual employed by MEL (or their agents) was aware of issues with the construction of the electricity link back in 2000/2001, which may have affected the functionality of the electricity link and led to the system failures. There was no implication that MEL had acted in bad faith in not disclosing the issues at construction stage. The Defendants acknowledged that MEL had held the honest belief that the information need not be disclosed.

The TCC ordered a trial of a preliminary issue. The question to be assessed was whether the interpretation of the relevant clause in the policy covered a situation where something had been deliberately not disclosed; in the honest belief that it need not be disclosed. The clause stated inter alia:

“The Insurers agree not to…avoid this insurance…on the grounds that the risk or claim was not adequately disclosed, or…misrepresented…unless deliberate or fraudulent non-disclosure or misrepresentation or breach by [MEL] is established in relation thereto”.

The Insurers sought to argue that the use of both words, ‘deliberate’ and ‘fraudulent’, separated by the word, ‘or’, effectively widened the scope of the exclusion for non-disclosure. They argued that the two words had to be given a separate and distinct meaning. They further asserted that as the word “fraudulent” implies an element of dishonesty then “deliberate … non-disclosure” must encompass an honest but mistaken decision not to disclose.

The Judgment

The TCC looked at the principles of interpretation as contained in Wood v Sureterm Direct Ltd & Capita Insurance Services Ltd [2015] EWCA Civ. 839 (“Wood v Sureterm”). Wood v Sureterm considered that three separate principles of interpretation should apply when determining the meaning of a contractual clause. These three principles were: an assessment of the words used, the context in which the contract was made, and the use of business common sense.

The judge was of the view that, the word “deliberate” reflects a carefully thought out, intentional act which is “done on purpose”. The word was not indicative of an honest mistake.

Further, the contract, when read as whole and in taking account the context in which it was made, did not support the Insurers’ case for a wide interpretation. In applying the third principle, the TCC suggested that, if an alternative ruling were to be given, this would not produce sound business practice. There was a suggestion that businesses may elect to keep things from insurers if there was a risk that they would be penalised for their honest (albeit perhaps mistaken) beliefs.

In applying each of the three principles of interpretation, the Court determined that “deliberate or fraudulent non-disclosure” must involve an element of dishonesty. The TCC concluded that MEL’s decision not to disclose something which was the result of an honest but mistaken belief that the information need not be disclosed was not enough to allow the Defendants to avoid the policy.

Commentary

This case is a clear indication that the courts are prepared to take a purposive rather than literal interpretation when considering the concept of deliberate non-disclosure, to the advantage of insureds. Ultimately thought should be given at the time of contracting to ensure that the document is drafted as per the parties’ intentions but if issues of interpretation do arise the Court has shown it is prepared to allow the totality of the circumstances to be considered.