Whether insurer was estopped from relying on right to avoid

An insured under an After The Event insurance policy brought unsuccessful proceedings against a third party (its insurance broker) and was ordered to pay the third party’s costs. The insured became insolvent and so the third party claimed (pursuant to the Third Parties (Rights against Insurers) Act 1930) against the ATE insurers. It was accepted that the insurers had been entitled to avoid the policy because of a serious fraudulent misrepresentation. However, the third party alleged that insurers were estopped from relying on that right.

It has been established by prior caselaw that, in order to establish a waiver by estoppel, there must be a clear and unequivocal message from the insurer to the insured that it will not exercise its relevant rights and the insured must rely on that message in a manner making it inequitable for the insurer to go back on it.

It is clear that the insurer must know about the relevant facts before it can be said to be estopped. However, there has been some caselaw debate as to whether an insurer must also know that those facts give rise to the relevant rights. Although there is textbook commentary to the contrary (eg see Good Faith and Insurance Contracts, Eggers and Foss, paras 17.71-2), in this case the judge (Richard Seymour QC), said that the “insurer need not necessarily know that those facts give rise to the relevant rights”. However, he added that “nonetheless, to be effective the relevant message must show an awareness of the relevant rights and an intention not to rely upon them” (ie apparent, rather than actual, awareness). In reality, as the judge recognised, it will be difficult for an insurer to give that message without actually being aware of the those rights (as was also recognised by Tuckey LJ in HIH v AXA [2002]).

It was argued in this case that the insurer had given an unequivocal message by: (1) making an interim payment; and (2) agreeing to increase the policy limit. The judge described that argument as “pure Alice in Wonderland”. It was plain that neither “representation” carried with it any “apparent awareness” of the insurer’s right to avoid. Furthermore, the insurer had been unaware of the insured’s fraudulent misrepresentation at the time. It could not be implied, either, that the insurer had not cared about the insured’s truthfulness when completing the proposal form. Accordingly, the insurer had been unaware of the relevant facts and so could not be said to be estopped from relying on its right to avoid.