Application of an objective test for materiality to avoid policy for non-disclosure or misrepresentation
Brit UW Ltd v F&B Trenchless Solutions Ltd1
Queen’s Bench Division (Commercial Court), 31 July 2015
The Court confirmed that an insurer had validly avoided a contractor’s public liability policy which had been induced by material non-disclosure and misrepresentation by the insured. Various arguments raised by the insured as to why it considered the non-disclosure and misrepresentation to be immaterial were all rejected by the Court. The relevant test for materiality is objective and the Court makes its own evaluation rather than relying on the subjective views of the parties.
The broad facts were not disputed by the parties. F&B Trenchless Solutions Limited (“F&B”), a specialist tunneling contractor was sub-contracted by Morgan Sindall Plc (“MS”) to construct a concrete micro-tunnel which ran underneath a road and railway level crossing. Network Rail required any under-track crossings to have a track settlement of no more than 5mm. The sub-contract estimated that after the work, the railway track above the tunnel would settle by 2-4mm.
F&B carried out the work between 11 June and 9 July 2013 and by completion, it was confirmed that the tracks had settled by 11-12mm as opposed to the 2-4mm set out in the contract. The settlement subsequently increased to 15-18mm and a void also appeared in the road under the track.
F&B had insurance cover from Novae Syndicates Ltd for the policy period 2012/2013 but then took out a contractors’ combined liability policy with Brit UW Limited (“Brit”) which provided cover from 19 August 2013 to 18 August 2014. F&B included a risk statement to Brit containing the alleged misrepresentation that F&B did not and would not in future carry out tunnelling work on active railway lines. The excessive settlement of the tracks in the project with MS was also not disclosed to Brit.
The railway line had been closed by Network Rail for other resignalling work but was reopened on 26 August 2013. On 27 August 2013, a freight train derailed when passing over the level-crossing. The cause was severe settlement of the railway track caused by a void in the ground underneath the track, which was a result of F&B’s construction of the micro-tunnel and this was not disputed by F&B.
Brit argued that it had validly avoided the policy on the grounds that F&B had:
- failed to disclose material information (i.e. the settlement of the track and the void in the road that had appeared before the policy was taken out); and
- misrepresented that it did not carry out tunnelling works on railway lines that were active.
The law applicable in the case was not controversial and relied on well-established principles. For an insurer to avoid a policy, it had to establish on the balance of probabilities that it was induced to provide cover on the terms agreed as a result of a material non-disclosure or misrepresentation.
An insured must disclose every material circumstance known to him (or which ought to be known to him during the course of its business) prior to conclusion of the insurance contract. Whether information is material is a question of fact which must be determined by the Court in each case. An insurer is not required to prove that any hypothetical prudent insurer would have refused cover for the risk. It is sufficient to prove that the circumstance would have had“an effect on the mind of the insurer in weighing up the risk”. A non-disclosure can be material, and therefore potentially allow for valid avoidance (subject to the issue of inducement), even if in the circumstances a full and accurate disclosure would not have had a decisive effect on the insurer’s decision on whether to underwrite the risk.
F&B had failed to disclose the significant deviation from its predicted 2-4mm of settlement and the possibility that F&B’s tunneling had caused the void. Applying the objective test, both the significant deviation from the predicted 2-4mm of settlement and the void would have exposed F&B to a claim for liability to MS for remedial costs and losses in future. The Court held that these were matters which clearly would influence the judgment of a prudent insurer in fixing the premium or determining the risk. It was further held that non-disclosure had induced Brit to underwrite the risk on different terms than it would have agreed.
The court held that on the facts F&B had misrepresented in the risk statement to Brit that F&B had not conducted (and would not conduct) tunneling works under or close to an active railway line. This was held to be a material misrepresentation as carrying out works under an active railway line would have increased exposure to a claim for liability and attracted a higher premium.
As a result, the material misrepresentation and the material non-disclosure were both found to have induced Brit into entering into the policy and Brit was, therefore, entitled to avoid the policy.
This case is a reminder of the insured’s duty to disclose all material information to an insurer and a reminder of the objective approach taken by the courts to determine whether a circumstance is material. However, the passing of the Insurance Act 2015 is likely to change the position once it comes into effect on 12 August 2016. Insurers will only be able to avoid a policy to which the Insurance Act 2015 is applicable if:
- the insured’s breach of the duty of fair presentation was deliberate or reckless (entitling an insurer to avoid the policy and retain premiums); or
- the insurer can prove that it would not have entered into the policy at all.
In cases such as this where the insurer argues that it may have accepted the risk but imposed different terms or a higher premium, the Insurance Act 2015 provides that the policy must be treated as if it were entered into on those terms and, in respect of any higher premiums the insurer would have charged, it may reduce the amount paid on a claim proportionately.