If an assured fails to disclose material facts or makes a material misrepresentation when negotiating an insurance policy, the insurer may avoid that policy ab initio. The effect of avoidance is that all unpaid claims on the policy become irrecoverable and all past claims (and, in the absence of fraud, the premium) must be returned.

In looking at the Marine Insurance Act 1906, one could be forgiven for thinking that material non-disclosure or misrepresentation are all that an insurer needs to prove in order to avoid the contract. However, since the landmark House of Lords decision in Pan Atlantic v Pine Top [1994] 2 Lloyd’s Rep 427, it has been clear that the insurer must also show that its actual underwriter was ‘induced’ to write the policy by that non-disclosure or misrepresentation. In this article we consider the key elements of the inducement requirement.  

The test of inducement  

The test of inducement is whether the insurer would have underwritten the risk on precisely the same terms as those which he did, had the assured made full and accurate disclosure of all material matters. The non-disclosure or misrepresentation need not be the sole cause of the inducement but it must be an effective cause of the insurer entering into the contract (Assicurazioni Generali v ARIG [2003] Lloyd’s Rep IR 131).  

A presumption of inducement?  

It is sometimes suggested that inducement may be presumed once the materiality of any non-disclosure or misrepresentation has been proven. In Assicurazioni, however, the Court of Appeal held that “there is no presumption of law that an insurer or reinsurer is induced to enter into the contract by a material non-disclosure or misrepresentation. The facts may, however, be such that it is to be inferred that the particular insurer or reinsurer was so induced even in the absence of evidence from him.” In other words, it is not a universal inference but will depend on the facts.  

Proving inducement

In the absence of any presumption, the question of how inducement may be proved has become increasingly pertinent. The Court of Appeal ruling in Laker Vent v Templeton [2009] Lloyd’s Rep IR 704 indicates that an insurer will not be excused from proving inducement simply because it is in dispute with the individual underwriter who wrote the risk. Here, the former underwriter had not given evidence at trial; he had already left the company and was in dispute with it. The trial judge decided that he was not prepared to speculate, in the absence of any direct evidence, about how that underwriter would have acted if full and accurate disclosure of the risk had been made at placement. The insurer had therefore failed to prove inducement. On appeal, the Court of Appeal was prepared to assume there was a good reason for the former underwriter not to be called but it also found that there was no reason why other members of the underwriting team who had also been engaged on the renewal could not have given evidence. In such circumstances it held that the judge’s conclusion could not be faulted.  

In Crane v Hannover Ruckversicherungs-Aktiengesellschaft [2010] Lloyd’s Rep IR 93, the insurer purported to avoid the contract for breach of the duty of disclosure. However, the actual underwriter had not been consulted about whether he had been induced by the alleged misrepresentations and non-disclosures before court proceedings were commenced. At trial, his evidence was that he could not recall what he had read or thought at placing. His efforts to reconstruct his thought processes did not withstand scrutiny when compared with the facts apparent from the documents. It was not, therefore, difficult for Mr Justice Walker to draw the conclusion that he was not influenced by the representations relied on.  

In Lewis v Norwich Union Healthcare [2010] Lloyd’s Rep IR 198 the insurer had pleaded that its underwriter had been induced. She appeared to give evidence. In cross-examination it turned out that she had not been involved in the underwriting process after mid November 1999. Inconveniently for the insurer, the critical decision to accept the risk had been taken in December 1999 and by someone else entirely. That person, who had still been employed when the insurer had decided to avoid, was not called to give evidence. Unsurprisingly it was held by Recorder West-Knights QC that inducement had not been proved.  

By contrast, the decision in Persimmon Homes Ltd v Great Lakes Reinsurance (UK) [2011] Lloyd’s Rep IR 101 illustrates that the absence of evidence from the actual underwriter is not necessarily fatal to his employer’s prospects of success. The insurer served no evidence from the underwriter who had taken the decision to enter into the contract, who had since left its employ. Mr Justice Steel was nonetheless prepared to find that inducement had been established. The documents showed that the underwriter had approached the underwriting task with diligence and care and both his supervisor, who had reviewed the original proposal, and the underwriter who took over responsibility for the file gave evidence that they would not have written the risk if full disclosure had been given.  

Conclusion

The need to prove inducement will, in most cases, put the underwriter into the witness box where, pre-Pan Atlantic, she or he was not needed. Inducement turns a spotlight on the underwriter’s thought processes; it took less than a year after Pan Atlantic for a judge to describe an underwriter who had given evidence as having “mental processes which left much to be desired”! Whilst this may be unpalatable, an insurer who attempts to avoid without consulting, or failing to serve evidence from, the actual underwriter, may be heading for a fall.