One of the issues which arose in the following case was whether an insurance policy was void ab initio on the grounds of a material non-disclosure on the part of the insurer prior to the renewal of the policy.
Laker Vent Enginering Limited v Templeton Insurance Company Limited  EWHC B6 (QB)
A contractor took out a Constructors Protection Service Policy, under which the insurers provided the contractor with legal expenses insurance. The policy was renewed twice. Shortly after the second renewal, the contractor gave notice of a claim under the policy.
The contractor sought an indemnity in respect of legal expenses it incurred in connection with an arbitration it was pursuing against the main contractor for non-payment under a construction contract. Under the construction contract in question, the contractor (as a specialist sub-contractor) agreed to manufacture, supply and install piping for a major engineering project at Cottam Power Station in Nottinghamshire.
The insurers declined the contractor’s claim on the basis that the contractor had failed to:
- disclose an escalating dispute between it and the main contractor, which constituted a material circumstance known to it prior to the final renewal (as a result of which the policy was void ab initio); and
- comply with a contractual notification procedure which constituted a condition precedent to any liability on the part of the insurers.
This report will solely focus on the first issue i.e. whether the policy was void ab initio as a result of a material non-disclosure.
An insured’s legal duty of disclosure
The judge set out the legal principles, as set out in:
- Section 18 of the Marine Insurance Act 1906; and
- The House of Lords’ decision in Pan Atlantic Insurance Co Limited v Pine Top Insurance Co Limited  1 AC 501.
Addressing each in turn:
Section 18 of the Marine Insurance Act 1906
Section 18 of the Marine Insurance Act 1906 codified the common law principles which apply to all types of insurance and provides (amongst other things):
- The insured is required to disclose to an insurer, before the contract is concluded, every material circumstance which is known to the insured.
- Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium or determining whether it will take the risk.
- Whether a particular circumstance, which is not disclosed, is material or not is in each case a question of fact.
- If the insured fails to disclose any material circumstance, the insurer may avoid the contract.
The Pan Atlantic case
In Pan Atlantic the House of Lords held that a "material circumstance" was one that would have an effect on the mind of the prudent insurer in estimating the risk. It was not necessary that it should have a decisive effect on the insurer’s acceptance of the risk or on the amount of premium demanded.
However, the House of Lords also held that the mere fact that there was a material non-disclosure did not necessarily entitle the insurer to avoid the contract. The insurer had to demonstrate that it had been induced by the non-disclosure to enter into the policy on the relevant terms.
What was the insured’s duty of disclosure in this case?
The "real battleground" between the parties was the meaning of the words in the policy:
"It is important to note that on any renewal declaration to the Insurers, the Insured must advise the Insurer of any potential claims, not already advised by the Insured and received by the Insurers."
Did this clause:
- As the contractor argued - limit the extent of any legal duty of disclosure required on the basis that the contractor only had to disclose potential claims which were likely to give rise to the type of claim for which the contractor was indemnified under the policy (and which it had not already advised)?
- As the insurers argued - impose a duty of disclosure which was quite separate from the duty of disclosure imposed by the general law, covering any circumstances which might give rise to a claim?
The court’s findings
The court found, as a matter of construction, (amongst other things) that the above provision neither limited the duty of disclosure at the time of renewal nor imposed upon the contractor any more stringent duty than that required by the general law. The clause simply reminded the insured of his legal duty of disclosure - i.e. of any potential claim provided it was material in the sense that it would influence the judgment of a prudent insurer in fixing the premium or determining whether it would take the risk.
Was the potential claim a material circumstance which was required to be disclosed to insurers prior to renewal?
The insurers argued that the potential claim was material. There had been an increasing dispute between the contractor and the main contractor, with the contractor claiming payment for acceleration, site establishment, time extension costs etc., and the main contractor claiming that the contractor had failed to carry out the works in a timely manner, informing the contractor that unless it significantly improved its performance it would be replaced.
The judge considered that:
- Insurers providing legal expense insurance under policies of this kind must be presumed to know that construction contracts, particularly complex ones, almost inevitably gave rise to disputes and differences of various kinds as to progress of the works, sums due to the contractor, the quality of work etc. and; that disputes of this kind might result in adjudication, arbitration or litigation.
- If any such difference was treated as material, virtually every aspect of a major construction contract would have to be subject of disclosure. There had to be something more: features of the relationship which, viewed objectively, showed a real risk of escalation to the point of formal dispute resolution procedures.
- On the evidence, the dealings between the contractor and the main contractor were "absolutely par for the course" - communications being in a reasonably amicable and constructive manner (the apparent threat to replace the contractor not having been taken seriously by either of the parties). Furthermore, the contractor was receiving most of what it had claimed by way of interim payments.
Given the court’s finding that there was no material non-disclosure, there was no need for the court to consider whether the insurers had been induced by the non-disclosure to enter into the policy on the relevant terms.
The case is a useful reminder that, unless provided otherwise in the policy:
- an insured has a duty of disclosure in relation to any insurance policy, which arises at inception and each renewal;
- insurers can only avoid a policy if a non-disclosure is material and the insurers were induced by the non-disclosure to enter into the policy on the relevant terms.
However, insurers can avoid both the materiality test and the need to prove inducement by providing unambiguously in the policy for a wider disclosure obligation on the insured and stipulating this wider disclosure as a condition precedent to the insurers’ liability under the policy.
View: Laker Vent Engineering Ltd v Templeton Insurance Company Ltd  EWHC B6 (QB)