Judge considers various avoidance and affirmation arguments/brokers' duties
Clyde & Co (Andrew Blair and Richard Edwards) for sub-broker
After fire destroyed the claimant's yacht, it sought to recover under its all risks policy placed with the defendant insurer. The insurer denied liability on the basis that there had been a material non-disclosure and/or misrepresentation regarding the value of the yacht. The yacht had been insured for EURO 13 million, whereas a professional valuation obtained 2 years earlier had valued the yacht at EURO 7 million and 2 months before the policy was placed, the yacht had been put up for sale at EURO 8 million. There was no evidence that the over-valuation had been deliberate – Leggatt J found that it had happened by accident. The judge considered various arguments and held as follows:
1. Non-Disclosure: The judge said that the issue of materiality depends on the facts of the case and past caselaw and expert evidence as to what a prudent insurer would do are helpful only as a "sanity test" and do not replace a judge's view of whether it is rational or not to take a certain matter into account. He held that the market value of a vessel is of particular importance for yacht insurance (where the insured will not generally have additional financial loss such as lost income). Determining the market value of a luxury yacht is, however, an imprecise exercise. Ordinarily, it may be acceptable to use the purchase price for the sum to be insured (especially since, in this case, the yacht was only four years old). However, the situation was different here because the valuation obtained by the insured was significantly lower than the value put forward for the insurance. Similarly, although the fact that the yacht is being sold will not normally be material, the fact that the asking price was EURO 5 million less than the amount it was being insured for was material.
Nor could it be said that the insurer should be presumed to know that the claimant was seeking to insure for significantly more than the market value: "There is, however, a fundamental difference between, on the one hand, knowing in general terms that the market value of a yacht is likely to be less than the value proposed for insurance and, on the other hand, knowing that the insured has had the yacht professionally valued ….[and] again in knowing that the insured has actually decided to put the yacht on the market for sale and has done so at a particular asking price which is significantly lower than the proposed insured value".
Inducement was also established, the judge finding that the insurer would have wanted to know about the valuation/sale, and there was no reason to think that the underwriter "would have abandoned his underwriting principles out of thirst for premium".
2. Waiver: Having found that there had been a material non-disclosure which induced the insurer, the judge went on to consider whether the insurer had waived its right to avoid. He acknowledged that the relevant test is whether the insurer has actual knowledge of the relevant facts and also of its right to avoid. However, he queried the justification for the need for knowledge of the legal right since ignorance of the law is no defence and also it might be hard in practice for the insured to disprove such knowledge (because legal advice will be privileged). However, there is a rebuttable presumption that a party which has a legal adviser has received appropriate advice.
The judge then considered whether reliance on certain policy terms amounted to an election to affirm the policy.
The insurer here had exercised its contractual right to inspect documents after knowledge of its right to avoid the policy. There is conflicting caselaw on whether that can amount to an affirmation. Colman J in The "Grecia Express"  held that the right to inspect is an "ancillary" right to the contract, like an arbitration clause, which is capable of surviving avoidance of the policy. Leggatt J held that that was wrong. Avoidance terminates the whole policy. Although arbitration (and exclusive jurisdiction) clauses are self-contained agreements which have an autonomous existence, there is no justification to extend the principle of separability to clauses such as the inspection clause: "The function of such a clause may support the inference that it is intended to remain binding even after the parties have been discharged from further performance of their substantive obligations by the "termination" of the contract. It would be another and far stronger thing, however, to infer that such a clause was intended to constitute an independent contract between the parties which will remain in existence even if the contract of which it forms part is retroactively avoided".
Reliance on the inspection clause could therefore amount to an affirmation of the policy, but in this case the judge held that it did not because insurers had expressly reserved their rights.
Although service of the insurer's defence had not contained a RoR, that had not involved the invocation of a contractual right and did not amount to an affirmation either. Finally, the policy contained a "Misrepresentation or Fraud" clause making the policy void (and not voidable, and hence no election is necessary) if the insured "concealed" any material fact. The judge held that "concealed" in this clause did not connote a deliberate act and hence the clause also afforded insurers a defence.
Accordingly, the insurer was entitled to avoid for material non-disclosure. The judge commented, though, that under the new Insurance Act 2015, since the non-disclosure was not deliberate or reckless, "The just result in these circumstances would be to treat the insurance as valid in a reduced amount of €8m".
3. Misrepresentation: The proposal form in this case was not completed before the policy started. However, there was a subjectivity in the declaration slip which stated "Subject to satisfactory proposal form…within 7 days inception". The judge held that the insured had therefore been covered for the first seven days, and was still insured thereafter since "satisfactory" meant a proposal form which the insurer accepted as satisfactory, even if it included a misrepresentation. Therefore, the insurer still had to prove materiality and inducement and the valid exercise of an election to avoid. Materiality was established but the judge held that the insurer could not prove inducement.
The textbook MacGillivray proposes two tests for inducement by a misrepresentation: (1) would the insurer have entered into the same policy if he had known the truth; and (2) would the insurer have entered into the policy if the misrepresentation had not been made? Leggatt J said that the only relevant question, though, is the second one (and hence a different test from that for inducement by non-disclosure):
"Plainly, where the claim is based on non-disclosure of a material fact, the relevant question when considering inducement is what the insurer would have done if told that fact. In so far, however, as the claim is based on a misrepresentation, then in the insurance context just as in any other context it is what was actually said to the insurer – rather than what was not said – which is the foundation of the claim, and the relevant test is therefore what the insurer would have done in the absence of that representation".
On the facts, the judge concluded that the insurer could not prove inducement as a result of the misrepresentation, and hence that defence failed.
4. Non-compliance with policy conditions: This was another defence raised by insurers and was based on three policy terms:
- The insured had failed to provide a detailed proof of loss within 90 days of the loss, as required by the policy. The judge found that there had been a breach of this term and it made no difference that the insurer investigated the loss itself. Insurers are entitled to see the evidence on which the insured intends to rely.
- The insured had failed to comply with the "examination under oath" clause in the policy. Reliance on that non-compliance was rejected though, on the ground that the insurer had failed to designate a time and place at which the documents were required to be produced. Furthermore, once litigation was started, the civil procedure rules relating to disclosure would override this clause.
- Although the proof of loss clause was only a condition (and not a condition precedent), the claim was barred because of a "Time for Suit" clause which prevented the insured from starting legal proceedings if it failed to comply with all the requirements of the policy. The judge rejected the insured's argument that non-compliance with policy conditions would result only in a stay of proceedings until there had been full compliance. Furthermore, breach of the requirement to provide the proof of loss could not be remedied after the 90 days' deadline.
5. Notice of abandonment: Under the Marine Insurance Act, if there is a constructive total loss, the insured can treat this as a partial loss or an actual total loss (in which case the vessel must be abandoned to the insurer ie a notice of abandonment must be given). No such notice was given in time here. However, the insured sought to argue that notice was not necessary because insurers couldn't have benefitted from such notice. The judge held that even if insurers would not in practice want to take over the insured's interest in the wreck, nevertheless that is the insurer's decision to make. However, a further clause in the policy did render notice unnecessary. This read as follows: "In the event of Total Loss, the Underwriters waive interest in any proceeds from the sale…of the vessel or wreck".
6. Claims against brokers: The local Greek broker had used an English broker to place the insurance in London. Leggatt therefore considered the duties owed by a sub-broker to the insured.
Did the sub-broker here owe a duty of care to avoid economic loss to the insured? The sub-broker had had no contract with the insured and the judge held there had been no assumption of liability, since there was no evidence that the insured had relied on the sub-broker's expertise (the insured having only ever communicated with the Greek broker). Accordingly, no duty of care was owed. Nor had the sub-broker breached any duty to the Greek broker on the facts.
As for the Greek broker, the judge found that it had breached its duty to the insured by failing to advise the insured about the duty of disclosure (although that duty did not require him to ask if there had been any recent valuations) and by failing to ensure that the proposal form was properly completed. As a result, the insured failed to obtain a valid insurance policy with cover of EURO 8 million. (However, taking into account the insured's subsequent breaches of the policy conditions, the broker was held liable only for the loss of a smaller claim under the Increased Value section of the policy to which those conditions did not apply).
COMMENT: This case raises several interesting points. One noteworthy comment by the judge was that under the Insurance Act 2015, the just remedy in this sort of case would be to treat the policy as if it provided cover for EURO 8 million instead of EURO 13m. Although the Act refers to what the particular insurer would have done, rather than an objective test, this case indicates that a judge might be disinclined to accept evidence from the particular insurer that he/she would not have wanted to cover the risk at all had he/she known the true situation (although in this case the judge had found that insurers of yachts are generally likely to accept that the value of the yacht in the policy could be wrong or out of date, and so there is less chance of an insurer being able to say that he would not have covered the risk at all had he known the true value was lower).