Brit UW Limited v F&B Trenchless Solutions Limited  EWHC 2237 (Comm)
The Commercial Court was asked to decide whether an insurer had validly avoided a contractors' combined liability policy, and found in the insurers' favour. This article considers the decision, and the position had the Insurance Act 2015 been in force.
- F&B Trenchless Solutions Limited (F&B), a specialist tunnelling contractor, was sub-contracted to construct a new micro-tunnel (for power cables), which went underneath a railway line and a level crossing at Stoke Lane, Nottingham (the Site). F&B's contract contained an express estimate that the tunnelling works would cause the tracks to settle by 2-4mm.
- The works were carried out between 11 June and 9 July 2013. Subsequently, following a period of monitoring the surface settlement, results confirmed that the tracks had settled by more than the 2-4mm set out in F&B's contract. In fact, the tracks settled by 11-12mm by 9 July 2013, and 15-18mm by 17 July 2013. A void also appeared in the road where the level crossing was situated, under the track.
- On 19 August 2013, F&B's broker placed a contractors' combined liability policy with Brit UW Limited (Brit), for the period 19 August 2013 to 18 August 2014.
- As part of F&B's risk presentation, the increased settlement of the tracks at the Site was not disclosed, and it was incorrectly stated that, at that point in time (ie July 2013), F&B was not carrying out works at any active railway lines.
- On 27 August 2013 a freight train (loaded with a cargo of diesel) derailed when passing over the level crossing at the Site, causing damage to the track and the wagons. Investigations confirmed that the derailment was caused by severe settlement of the railway tracks, as a result of F&B's tunnelling activities.
- The Contractor brought a claim against F&B for losses, and F&B, in turn, sought an indemnity under its policy with Brit.
- Following investigations, Brit avoided the policy ab initio, based on F&B's:
- failure to disclose (a) the increased settlement of the track and the void that appeared under the track, and (b) that the works were carried out under an active railway line; and
- misrepresentation that it did not carry out tunnelling works on active railway lines.
The Judge confirmed that the law on material non-disclosure and misrepresentation is "essentially non-controversial". In that regard, an insurer can avoid a policy if it can establish, on the balance of probabilities, that it was induced to provide cover on the terms agreed, as a result of a material non-disclosure or misrepresentation by the insured.
Prior to entering an insurance contract, the insured has a duty to disclose every material circumstance known or which ought to be known to the insured. The Judge considered the legislation and established principles, and provided some helpful clarification on what information is material. In summary, the Judge confirmed that:
- information is material if it would influence the judgement of a prudent insurer in fixing the premium, or determining whether to take on the risk;
- whether a circumstance is material or not is a question of fact to be determined in each case;
- the decision rests on the court's own appraisal of the relevance of the disputed fact to the subject-matter of insurance;
- the relevant question is simply whether the circumstance would have had an effect on the mind of the insurer in weighing up the risk; and
- the question of whether the circumstance is material is to be determined objectively from the perspective of a hypothetical insurer. It does not depend upon the insured's own appreciation or assessment of its potential importance.
Prior to entering into an insurance contract, every material representation made by the insured must be true. If it is not, the insurer may avoid the contract. The Judge confirmed that materiality has the same meaning as for non-disclosure (see above). Further, there is no requirement for an insurer to prove that the insured's misrepresentation was negligent or fraudulent.
Concerning inducement, the Judge clarified that an insurer is only entitled to avoid a policy if the material non-disclosure or representation was a substantial cause affecting the underwriter's decision to enter into the contract, or to do so on the terms agreed.
The Judge found that there was material non-disclosure and misrepresentation on the part of F&B, which had induced Brit to write the risk on the terms that it did. As such, the Judge confirmed that Brit had validly avoided the policy for material non-disclosure and misrepresentation. In reaching her decision, the Judge considered that:
- the events concerning the increased level of earth settlement were "matters which clearly would influence the judgment of a prudent insurer in determining the terms of any policy or in deciding whether to take the risk on at all.";
- the exposure to a claim for liability to the Contractor for remedial costs and losses in the future "was plain the moment there was a significant deviation from the predicted 2-4mm of settlement". The same was said about the void in the road;
- the words represented to Brit that it did not work under or in close proximity to active railway lines was false (given that the railway line at the Site was active during the tunnelling works); and
- the fact that F&B "had tunnelled in and near an active railway line was also a material matter that ought to have been disclosed to Brit. Both Mr Rudden and Mr Blackburn [the parties' expert witnesses] agreed that that [sic] an underwriter would be likely to consider that tunnelling under active railway lines would attract a higher excess or premium than if the tunnelling was taking place under inactive lines. Tunnelling under active lines clearly creates a more hazardous risk."
According to the Judge the "central flaw" in F&B's defence was that the objective nature of the test for materiality was overlooked. F&B's own opinion of the significance or otherwise of the earth settlement did not determine materiality – to do so would mean that F&B would be the "judge and jury" on the risk in which the underwriter is contemplating.
This decision should serve as a useful reminder to insureds, to ensure that they are fully aware of their duty of disclosure to insurers.
When the Insurance Act 2015 (the Act) comes into effect on 12 August 2016, insurers will only be able to avoid the policy where (a) the insured's breach of the duty of fair presentation was deliberate or reckless (insurer can retain the premium), or (b) the insurer can prove that it would not have written the policy at all (insurer must return the premium).
In the event that the insurers would have accepted the risk but on different terms, the Act provides that the policy is to be treated as if it included those terms (eg higher excess). Further, if the insurer would have entered into the contract but charged a higher premium, the Act provides that the insurer may reduce proportionately the amount to be paid on a claim.
Avoiding an insurance policy is a drastic remedy, and such action is not taken lightly by insurers. The Act will introduce a fair and balanced new regime between insurers and insureds, and, as a result, insurers will only be able to avoid cover completely in limited situations. However, to enjoy the benefit of full cover, the insured still needs to understand the objective nature of what information is material to an insurer for underwriting purposes.