The Technology and Construction Court decision of Mr Justice Akenhead in Genesis Housing Association Ltd v Liberty Syndicate Management Ltd for and on behalf of Syndicate 4472 at Lloyd’s21 provides a useful reminder of the consequences of providing inaccurate information in a proposal form where that information forms the basis of the contract. It confirms that the basis clause in a proposal form converts statements on a proposal form to warranties. It also considers the impact of a declaration in a proposal form as to the belief of the signatory as to the correctness of the information supplied.
Time and Tide (Bedford) (TTB) owned the freehold to an office block in Bedford that had planning permission for redevelopment for residential use. TTB was part of a group of companies owned or at least run by two brothers, Graham and Perry Gamby. TTB granted leases to Genesis Housing Association (Genesis) to be rented on a social rent basis. TTB was engaged as the builder to carry out the development. Liberty Syndicate underwrote Premier Guarantee insurance for the development, via its underwriting agent MD Insurance Services Ltd (MD), which included insurance against the builder’s insolvency.
The proposal form wrongly identified the builder as Time and Tide Construction Ltd (TT Construction). It contained a declaration that “I/we declare that to the best of my/our knowledge and belief, the information I/we have given is correct and complete in every detail and I/we have not withheld any material fact.” It also contained a basis clause – “...this proposal form and the statements made therein shall form the basis of the contract between me/us and the Insurer”.
The whole of the proposal form was filled out by Mr Johnson of MD, and signed by Mr Graham Gamby for and on behalf of TTB and Genesis. It was common ground that TTB acted as an express or implied agent for Genesis in securing the cover.
TTB became insolvent, generating a claim under the policy. Amongst the issues considered by the court were:
- Were the facts in the proposal form absolutely warranted as to their truth or did they merely have to be true to the best of the proposer’s knowledge and belief?
- Was the misstatement in the proposal as to the identity of the builder a breach of warranty such that Liberty Syndicates was discharged from liability?
Five principles were drawn from the authorities considered by Akenhead J:
- It is well established that in principle ‘basis of the contract’ clauses and warranties are enforceable in law and not contrary to law or public policy.
- When such clauses or warranties are incorporated within the insurance contract or are stand-alone warranties in the proposal form or other document where a ‘basis of contract’ expression or declaration is given, they will generally be enforceable.
- The insurance contract will be void or unenforceable if the insured has innocently signed a document, usually the proposal, as a basis of the insurance contract entered or to be entered into, which confirms (either to the best of the insured’s knowledge or belief or absolutely) as true the contents of that document, and the contents are in fact, untrue.
- A ‘basis of contract’ declaration or warranty may, as a matter of construction under the ordinary principles of contractual interpretation, be modified or amended, or rendered of no or limited effect, by the contract of insurance itself.
- In the case of an individual person, declarations said to be true or correct to the best knowledge or belief of the declarer will often be reviewable by reference to the honesty of that person in making the declaration (in Economides v Commercial Union Assurance Co plc22 a son declared on a proposal form the value of various items to the “best of his knowledge and belief”. The value was double what had been declared by the son. The information he had given was based on what his father had told him. It was held that his basis of belief did not have to be an objectively reasonable one, the information from his father was a sufficient basis for his representation. His duty was that of honesty).
- In the case of a corporate organisation making a wrongful declaration as to various statements being true to the best of its knowledge and belief, the court must look at, corporately, what it is likely to have known when it made the declaration (taking into account the knowledge of the insurance buyers and of the company’s directing minds and enquiries that it would have been reasonable for them to have made). There does not have to be dishonesty as such on the part of the organisation but, if that organisation actually knows something said to be true on the declaration is in fact wrong, then it is making a statement which is not true to the best of its knowledge and belief.
It was accepted that the misstatement was a negligent error that was inserted by MD which then went unnoticed by TTB when it signed the proposal. It was found that both TTB and Genesis must have realised at the date the proposal form was signed that the builder was not to be TT Construction. Consequently, Genesis was, through TTB, saying something that was not true to the best of its belief.
Genesis argued that the two parts ((1) the declaration as to belief, and (2) the basis provision) were linked and that the basis clause was confined to statements made in the absence of belief. In other words, what Genesis was saying in context was “so far as I know, the name of the builder set out in the proposal is correct”.
Akenhead J rejected this, holding that these were separate provisions. The second part – the basis clause – was not limited by the “best of... knowledge and belief” in the first part. The declaration does not say “I declare that in filling out and signing this form I have acted honestly”; it is saying “so far as I know and believe the builder is TT Construction.” As Genesis knew the builder was not TT Construction this could not be true to the best of its knowledge and belief.
There was a breach of warranty and the insurer was discharged from liability.
Insureds must take care when checking and signing proposal forms. The individuals involved in this case would have, if they had thought about it at the time, realised that TTB was to be the builder. Akenhead J concluded that Mr Gamby “was at worst confused or more likely simply did not properly read the form”. Even if the error is entirely innocent, it could give rise to a breach of warranty.
The fact that a statement on a proposal form can be converted into a warranty using ‘obscure words’ that most insureds will not understand has long been subject to criticism and made the ‘basis clause’ a target for reform. Amongst the proposals made by the Law Commissions’ June 2012 Consultation Paper on ‘The Business Insured’s Duty of Disclosure and the Law of Warranties’ is that insurers should be prevented from using basis of the contract clauses to convert statements into warranties.