[2009] EWHC 2429 (Ch)

R&R Developments Limited (R&R), a construction and project management company, appealed against a decision by a Deputy Master to refuse to grant declarations for which R&R sought summary judgement. The appeal was heard before Mr Nicholas Strauss QC (sitting as a deputy judge).

The claim related to a Commercial Combined and Contract Works insurance policy taken out by R&R in June 2006 to insure against theft and damage to two houses being developed on a site near Milton Keynes.

The question at issue in this case was whether R&R’s answers to questions in the proposal form constituted misrepresentations or non-disclosures of material information.

The policy included the following terms:

  • which asked:

“Have you or any Partners or Directors either personally or in connection with any business in which they have been involved:  

(1) Ever been declared bankrupt or are the subject of any bankruptcy proceedings or any voluntary or mandatory insolvency?  

(7) Had within the last five years any losses whether insurance or not or had any claims made against you (in this or any existing or previous business)?”

R&R had answered all the questions in the negative.

R&R had also signed a declaration that it had disclosed all material information and had not withheld anything material from the insurer.

It was alleged by AXA Insurance UK plc (AXA), the insurers in this matter, that R&R had failed to disclose:

  • that one of the directors of R&R had been a director of a company in administrative receivership when the questionnaire had been completed; and
  • that the same director had also been a director of a group of companies which had gone into compulsory liquidation in 2001.

As a result, AXA maintained that R&R had made misrepresentations in its answers to the questionnaire and had failed to disclose material facts required by the more general wording of the policy.

R&R argued that, based on a proper reading of the questionnaire, it had answered the questions correctly.

At issue was whether the questions were so wide as to include not only the insolvency of R&R or its directors, but the insolvency of any other business in which those directors had been involved. Further, could R&R rely on the interpretation being put to the court, regardless of how it had actually understood the question at the time it had completed the questionnaire? Finally, was administrative receivership a form of “voluntary or mandatory insolvency”?

Decision

The court held that the questionnaire was not ambiguous. The grammar and syntax were clear - R&R was not required to disclose information about any other companies. Had the insurers wanted information about other companies with which the directors had been involved, they should have asked for it. The general rules of construction in Investors Compensation Scheme v West Bromwich [1997] UKHL 28 were applied.

The judge decided that a literal interpretation of the question made commercial sense. The policy did not cover the insolvency of parties more remote than those clearly specified.  

In the judge’s view, legal authority established that, where there was ambiguity in the wording of a proposal form for insurance, the proposer’s contemporaneous understanding of the question was irrelevant. This decision is, however, contrary to the opinions expressed in leading textbooks such as those written by Malcolm Clark, John Bird and Robert Merkin - who all state that the insured’s answer to the question should be considered subjectively, ie on the basis of what the actual insured thought.

Further, R&R had not failed to disclose other material facts. In posing the questions in the questionnaire, which were limited to the bankruptcy or insolvency of the claimant and its directors, AXA had waived disclosure of the financial position of other companies.  

Significance for policy drafting

This case should remind insurers of the strict stance which the courts take in relation to ambiguous questions in proposal forms - particularly if the English and Scottish Law Commissions’ proposals for insurance contract law reform lead eventually to the demise of the remedy of avoidance for an innocent or negligent non-disclosure.

The following points are worth noting:

  • Insurers should not rely upon general obligations to disclose all material information, as specific questions may have the effect of limiting the scope of the obligation to disclose.
  • The courts will not interpret contractual ambiguities in favour of the insurer. As the judge stated:
  • “… no court is going to assist insurers with a benevolent construction of questions which … were asked in a muddled and confusing manner”.
  • In addition, the court found obiter that administrative receivership is not a form of “voluntary or mandatory insolvency”. This highlights the need for careful drafting when covering questions concerning insolvency.