In the recent decision in Berkshire Assets (West London) Ltd v AXA Insurance UK Plc  EWHC 2689 (Comm), Lionel Persey QC, sitting as a Judge of the High Court, gave the first English decision on the insured’s duty of fair presentation as set out in the Insurance Act 2015 (the ‘Insurance Act’). The decision addresses two fundamental principles arising from the duty, namely what constitutes a material circumstance and whether the failure to disclose induced AXA to write the risk i.e would AXA in fact have declined the risk had the material circumstance been disclosed? The decision addresses both the statutory principles as set out in the Act as well as important principles relevant to material circumstances established by authorities prior to the Act which remain intact.
The Court considered the duty of fair presentation as set out in Part 2 of the Act, which requires, in Section 3(4)(a) “disclosure of every material circumstance which the insured knows or ought to know”. A ‘material circumstance’ is defined in Section 7 of the Act, as follows:
(3) A circumstance or representation is material if it would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms.
(4) Examples of things which may be material circumstances are –
(a) special or unusual facts relating to the risk, (b) any particular concerns which led the insured to seek insurance cover for the risk, (c) anything which those concerned with the class of insurance and field of activity in question would generally understand as being something that should be dealt with in a fair presentation of risks of the type in question.
The Court also addressed whether AXA had a remedy under Section 8 (and Schedule 1) of the Act as a consequence of the failure to disclose the material circumstance in breach of the duty of fair presentation:
Section 8 Remedies for breach (1) The insurer has a remedy against the insured for a breach of the duty of fair presentation only if the insurer shows that, but for the breach, the insurer – (a) would not have entered into the contract of insurance at all, or (b) would have done so only on different terms…”.
In Berkshire Assets, the claimant policyholder was a joint venture vehicle incorporated in 2017 with the objective to purchase and develop a property in Brentford. In 2020, a faulty sprinkler caused significant water damage to around 40 flats and other communal areas in the property. Accordingly, the claimant presented claims to AXA, the defendant insurer, under its Contractors’ All Risk policy and its Business Interruption policy.
The policy in question had been renewed in November 2019 and included a ‘fair presentation of risk’ clause which specifically stated:
“The proposer for insurance, its partners or directors or any other person who plays a significant role in managing or organising the business activities, have not, either personally or in any business capacity, been convicted of a criminal offence or charged (but not yet tried) with a criminal offence”
AXA denied the claim on the basis that the claimant had failed to disclose to it the fact that one of its directors was the subject of criminal charges in Malaysia filed in August 2019 (therefore prior to the time the policy was renewed). The charges were subsequently dropped in October 2020 following a global settlement.
Before the Court, AXA submitted that, had it been aware of the charges at the time of renewal, it would not have agreed to provide insurance to the claimant. The claimant contended that the charges did not constitute a material circumstance because (i) the charges related to a company which was not connected to the claimant; (ii) the director was not personally involved (iii) the director was not facing allegations of personal involvement in fraud or other wrongdoing; and (iv) the charges were politically and commercially motivated.
There was significant debate and analysis as to whether the charges were a “moral hazard” to be disclosed as a material circumstance. Given that there was no settled decision as to the meaning of moral hazard, the Judge decided that the Court should look to the statutory definition of “material circumstance” in section 7(3) and (4) of the Insurance Act when considering the facts of the case before it.
When making his assessment as to whether the charges did in fact constitute a ‘material circumstance’, the Judge agreed with AXA that relevant the well-established principles had not been changed in light of the Insurance Act. Indeed, it was noted that: “the concepts of “material circumstance” and “prudent insurer” were intentionally taken from the existing statute and [the Law Commission] would expect the existing case law to continue to be used to interpret them”. Five core principles were then articulated by the Judge:
- The materiality of a particular fact is a question of fact and is to be determined by the circumstances of each case.
- Materiality is to be tested at the time of placement and not by reference to subsequent events.
- Facts raising doubts as to the risk are sufficient to be material. It is not necessary for the facts to be shown, with hindsight, to have actually affected the risk.
- The overall effect of the ‘prudent insurer’ test is that whether there has been a fair presentation of the risk remains to be assessed principally from the perspective of an insurer.
- A circumstance does not have to be decisive for the hypothetical prudent insurer in determining whether to take the risk or on what terms.
Recognising that it was well established that a charge of a criminal offence will often constitute a “material circumstance”, and applying the above principles to the facts, including the evidence given by AXA’s underwriters, the Judge found that the charges did indeed constitute a ‘material circumstance’ for the purposes of the Insurance Act and therefore should have been disclosed at the time the policy was renewed. If the charges had been disclosed, AXA would not have written the insurance. The claimant’s claim therefore failed.
This case is a useful reminder of the principles applicable to issues relating to ‘material circumstances’ and a welcome confirmation that the relevant principles found in case law have not been superseded by the Insurance Act. From a commercial and practical perspective, it is a useful prompt for policyholders to recognise their duty of fair presentation and the need for compliance with that duty at the inception of any insurance policy and on each renewal.