In Persimmon Homes Ltd v Great Lakes Reinsurance (UK) Plc  EWHC 1705 (Comm), the High Court ruled that dishonesty on the part of a claimant which has taken out after the event (ATE) insurance can amount to a material non-disclosure such that the insurer may avoid the policy.
Persimmon Homes Ltd (Persimmon) was the defendant in litigation with another property development company, CPH. CPH had taken out ATE insurance with Great Lakes Reinsurance (UK) Plc (Great Lakes). Persimmon was successful in the underlying action, in which the judge found that CPH, through its directors, had been dishonest regarding a number issues and had fabricated evidence. Persimmon was awarded its costs on the indemnity basis. CPH was subsequently wound up, and Persimmon therefore sought to recover under CPH's insurance policy with Great Lakes under the Third Parties (Rights Against Insurers) Act 1930. Great Lakes then avoided the policy for non-disclosure, on the basis that, inter alia, CPH had failed to disclose its dishonest conduct and fabrication of evidence when the risk was presented. Persimmon argued that in the context of ATE, the factual account of the underlying events was not material to the risk. It also argued that Great Lakes had not been induced by the non-disclosures and misrepresentations, that it had waived any right to avoid the contract and/or that it had negligently underwritten the risk.
The expert witnesses for both Persimmon and Great Lakes agreed that the alleged non-disclosures and misrepresentations, if established, were material to the risk. Persimmon's argument regarding the special context of ATE insurance therefore failed. As regards inducement, Mr Justice David Steel held that Great Lakes had plainly been induced by the non-disclosures and misrepresentations; Great Lakes would not have entered into the policy had it been aware of CPH's fraudulent behaviour. Similarly, since it had no knowledge of the systemic dishonesty of CPH, there could be no question of the right to avoid being waived. Finally, as regards negligent underwriting, it was held that although some underwriters may have rejected the risk, there was no evidence that all underwriters would have certainly rejected it. There was therefore no basis for finding that the underwriter in question had been negligent. As such, Great Lakes had validly avoided the policy and Persimmon's claim was therefore dismissed.
This case will give comfort to insurers that ATE insurance does not fall outside the normal rules of non-disclosure and misrepresentation and their right to avoid will be upheld where their policyholder has been dishonest. The case may also serve as a warning to those defendants who face claims brought by claimants with ATE insurance: should the claim be fabricated and based on dishonesty, the ATE insurance may be avoided and so be of no value, and the best course of action may be to apply for security for costs at an early stage.