When is it necessary for a prospective insured to disclose allegations of dishonesty or criminal conduct made against them? This issue was considered in Norwich Union Insurance Limited v Meisels.
Clearly insurers will be interested to learn that a professional has been accused of dishonesty before underwriting a professional indemnity policy. But what if the professional has clear and cogent or even overwhelming evidence that the allegation has no foundation, or the allegation itself is fantastical? What if a multitude of allegations that seem unlikely in isolation are made against the same professional? Obviously there will be occasions where this is an issue of common sense but it can still be difficult in practice to draw the dividing line between what is disclosable and what is not.
This issue was dealt with in the recent case of Norwich Union Insurance Limited v Meisels. The law allows insurers to avoid an insurance policy if there has been a material non-disclosure or misrepresentation. In this case, Tugendhat J reaffirmed the wellknown principle that the test of materiality
is decided by reference to what would influence the judgment of a prudent insurer and that the characteristics of that prudent insurer are a matter for the courts to decide. However, the judge indicated that there is a test of proportionality and that regard should be had to the nature of the risk and the particular moral hazard under consideration.
It is possible to have a situation where it is so clear there is nothing in an allegation that the allegation does not need disclosing. Further, whether or not there is any exculpatory material available, allegations may be too old or insufficiently serious to require disclosure. In cases where allegations would be material and disclosable if there were no exculpatory material, the degree of conviction the exculpatory material must carry will depend on all of the circumstances known to the insured. This would equally apply to facts rather than allegations, such as the insolvency of a company, which may become immaterial in light of background information.
The judge highlighted the fact that considerable injustice may be done to an insured if he is required to disclose that he has been accused of an offence or conduct that he knows he did not commit and where he is subsequently acquitted of that offence or conduct after insurers have gone on risk. In these circumstances it is likely that an underwriter will take the view that there is no smoke without fire and will be unwilling to take on the risk, or alternatively the premium will be increased.
The Meisels case
The Meisels case related to polices of buildings insurance. Mr Meisels is a property developer and arranged insurance with Norwich Union for his portfolio of 48 properties. In this case the moral hazard to which the underwriters were looking is the tendency of people with buildings insurance to commit arson if they get into financial difficulties in order to make a fraudulent claim. It is worth noting that the proposal form in this case specifically asked “Have you or any principal in the business or any company in which you or such principal have or have had an interest….ever been declared bankrupt, the subject of bankruptcy proceedings or of any voluntary or mandatory insolvency or winding up procedures?”. The insured answered “no”.
The following facts were found not to be material non-disclosure at first instance (and Tugendhat J declined to interfere):
- At the date of placement one of the insured’s companies had received a notice of estimated assessment of corporation tax in the sum of £52,500 together with penalties and interest for allegedly late payment. This was not material in the light of evidence from the insured’s accountant that this had been sent by the HM Revenue & Customs in order to prompt the company to finalise its accounts. The assessment did not represent the true position and after the placing the HM Revenue & Customs indicated that they were satisfied that nothing was due.
- Various companies of the insured had been dissolved by Companies House. This was considered by the court to be immaterial in the light of evidence from the insured that his business strategy was to set up companies for particular transactions and allow them to be dissolved for want of filing returns once they had served their purpose.
- Four companies of which the insured was an officer had gone into creditors’ voluntary winding up. This was held to be immaterial (despite the insured being specifically questioned about this in the proposal form) because the insured stated that he had been introduced to the family business run by his father some years ago. He lent his name to his father’s companies as a nominee and did not have any knowledge of them. Although the insured had signed affidavits in relation to the winding up stating that the contents were true to the best of his knowledge and belief the insured stated that he had not read the contents.
The judge found that the fact that the claimant was signing documents without reading them was usual within a family business and did not constitute circumstances which in the ordinary course of business ought to be known by him and therefore the insured could not have disclosed what he did not know.
- The insured used an alias in respect of one of his properties at the Land Registry. This was considered to be immaterial due to the insured’s evidence that he used an alias in respect of properties that he frequented as he did not wish to be known as the landlord so that he was not pestered by the tenants.
The case makes it clear that the question of whether a fact or an allegation against the insured is material is subject to a test of proportionality. Accordingly, something which may appear material in isolation, may in fact not be material when regard is had to the surrounding evidence and the particular moral hazard with which the insurers in question are concerned.
The Meisels ruling seems to be another example of the court ruling favourably towards the insured and follows the trend towards refusing to allow insurers to avoid a policy on what it considers to be technical grounds. This trend is likely to continue as the courts reflect the concern emerging from the Law Commission’s review that the law favours insurers