Clyde & Co (Victor Rae-Reeves, Helena Coates, Isobel Butland and Monique Brostek) for the claimant
The claimant insurer sought a declaration that it had validly avoided a contractors' combined liability policy on the ground of non-disclosure of material information. Much of the case turns on the particular facts but a few points mentioned by the judge are of more general interest.
The judge said that she was able to reach conclusions on materiality based on common sense, rather than having to resort to expert evidence (which, in any event, supported her conclusions). She pointed out that the "central flaw" in the insured's argument was that it overlooked the objective nature of the test for materiality: "[The insured's] own opinion of the significance or otherwise of the earth settlement and the road void does not determine materiality, though any subjective concern on its part would be relevant. An absence of subjective concern because, for example, [the insured] (and others) had formed the (preliminary) view that [the insured's] tunnelling was not the cause of the void does not relieve the appearance of the void of materiality for underwriting purposes. The question is whether, on an objective assessment, the facts known to the insured were material. Otherwise, … [the insured] (or others) become "judge and jury" on the risk which the underwriter is contemplating".
The judge found that there had been a material non-disclosure, and inducement, on the facts. The insured had alleged, though, that the insurer had affirmed the policy because all of the matters relied upon for the avoidance were known by the end of August, whereas the insurer had not avoided the policy until the following January. That argument was rejected by the judge. Citing Rix LJ's decision in Kosmar Villa v Trustees of Syndicate 1243 (see Weekly Update 10/08), to the effect that insurers should not rush to avoid or "even to destabilise their relationship with their insured by immediately reserving their position", it was held that the insurer had been entitled to await loss adjusters' advice and to verify the information given to it in August. The judge concluded that: "A period of 4 to 5 months to carry out investigations, take legal advice and the decision to avoid cannot be said to have been unreasonable".
Furthermore, the issuing of policy documentation (a cover note and an endorsement to change the name of the insured) in September came "nowhere close to the unequivocal conduct or representation by [the insurer] necessary for an affirmation". It was not clear that the insurer had known the documentation had been issued and, even if it had, there was no suggestion that the insurer knew, at this very early stage, that it had a legal right to avoid. Furthermore, at a meeting in October, although the express words "reservation of rights" had not been used, the insurer's loss adjuster had made it clear that the insurer might not be providing cover because of a material non-disclosure.
Accordingly, it was held that the policy had been validly avoided.
COMMENT: The amount of time to which an insurer is entitled before it can be said to have affirmed a policy which it was otherwise entitled to avoid is fact-specific and no hard and fast rules can be given. Here, the judge cited a period of 4-5 months as being a reasonable timeframe to allow both investigation of a complex claim and a decision on whether to avoid, but it was also important that no contradictory representations had been made by the insurer during that time. As Rix LJ put it in Kosmar Villa (albeit in relation to the breach of a condition precedent, rather than an avoidance): "Legal doctrine should not push insurers into over-hasty reliance on their procedural rights…..That said, I would certainly not like to give the impression that insurers can equivocate for long while giving the plain impression that they are treating a claim as covered by their policy, especially at a time when a decision might be required, without running at least the risk that they will be treated as having waived some requirement of their contract or their right to avoid it".
On a separate note, the reference to a 4-5 month period for investigation might also be useful should the government re-introduce the proposal for late payment damages (something which the Law Commissions are currently looking at again).