Last year the Court of Appeal in North Star Shipping Limited v Sphere Drake Insurance Plc1 (following its earlier decision in Brotherton v Aseguradora Colseguros2) confirmed that an insured has a duty to disclose allegations of dishonesty extant at the time of placing, even if those allegations subsequently prove to be false. The limits of that decision recently came under close scrutiny in Norwich Union Insurance Limited v M Meisels & anr3.
There Mr Meisels, as a director of Simon Tov Properties Limited (STPL) signed two Norwich Union (NU) proposal forms – one aimed at insuring seven commercially tenanted properties (A) and the other aimed at insuring other properties, including his own home (B).
When an escape of water subsequently occurred at Mr Meisels’ home he made a claim. NU purported to avoid the policy alleging non-disclosure of the following material facts:
1. Facts relating to an Inland Revenue assessment and to accounts and returns which had not been filed or made by STPL
2. Facts relating to some 20 other companies which had been dissolved for failing to file accounts
3. Facts relating to Mr Meisels’ incorrect answer in Proposal Form A. Mr Meisels had answered “No” to the question “Have you or any principal in the business or any company in which you or such principal have or have had an interest…(e) ever been declared bankrupt, the subject of bankruptcy proceedings or of any voluntary or mandatory insolvency or winding up procedures?” In fact, four of the companies had been the subject of a creditors’ liquidation
4. The fact that Mr Meisels had registered one property under an alias.
NU tried to argue that, following North Star, an insured should disclose an allegation of dishonesty or of other criminal conduct, which would, on its face, be material, unless there is exculpatory material proving beyond doubt that the allegation is false.
The High Court rejected this interpretation. In its view, the point of North Star was that there can be situations where it is so clear that there is nothing in an allegation that the allegation does not need disclosing. However, there may be other justifications for non-disclosure. And in cases where the information would be material and disclosable if there were no exculpatory material, the degree of conviction that the exculpatory material must carry will depend on all the circumstances known to the insured.
When considering whether a fact is material, all of the information which existed at the time should be examined in its context, including any statement by the insured of his own innocence. There is room for “a test of proportionality”, which takes into account the nature of the risk and the moral hazard under consideration.
So, for example, where (as here) the information said to be material goes to moral hazard, the moral hazard itself will form part of the context. In a common form insurance of buildings such as that involved in this case, the moral hazard to which underwriters are mainly looking is “the tendency of some people who are insured and in financial difficulties to commit arson in order to make a fraudulent claim on insurers.”
The High Court upheld the lower court’s findings that in this context, none of the alleged material facts were material. It is clear from the judgment that the trial judge considered the allegations and evidence from a commercial perspective rather than from a technical stance. He preferred the evidence of the claimant’s expert underwriter which he noted had, throughout, “a far greater degree of commercial realism without in any way departing from the basic legal test; namely, that which would influence the prudent underwriter.” This supports our view that the courts are becoming less inclined to be persuaded by technical points which ignore the commercial realities facing either the insured or the insurers.
Prior to Meisels the courts in Brotherton and North Star had already recognised that the law in this area was potentially unfair to insureds in that if every false allegation of dishonesty must be disclosed insureds would find it difficult to obtain cover at all and would certainly be exposed to having to pay increased premiums. This decision shows that the courts are prepared to prioritise what they see as fairness to insureds. It also suggests that small businesses, like individual policyholders, will be treated more leniently by the courts than large, formal business organisations. This corresponds with the brave new world of insurance law currently envisaged by the Law Commission (discussed in greater detail elsewhere in this update). In “Issues Paper 1: Non-Disclosure and Misrepresentation” published in September 2006 the Law Commission discusses focussing the test for material nondisclosure on the “reasonable insured”. It also recommends that insurers ask clear questions on the proposal about any matter that is material to them, a point which Meisels reinforces.
The Issues Paper is due to be followed by a Consultation Paper in Summer 2007. Change is undoubtedly just around the corner. The Meisels decision suggests, however, that the courts may already be giving effect to those changes seen as likely to materialise in the near future.