As the insurance industry braces for the Insurance Act 2015 coming into force, the English Commercial Court has seen a cluster of decisions on the existing law on misrepresentation and non-disclosure.
This article considers how law and strategy in this area will change when the new ‘duty of fair presentation’ applies to commercial insurance written from 12 August 2016 onwards and looks at how recent case law may be relevant.
The current law
Section 18 of the Marine Insurance Act 1906, which also applies to non-marine insurance under English common law, sets out the current law on misrepresentation and non-disclosure.
Policyholders have to disclose to insurers all ‘material circumstances’ about a risk. A circumstance is ‘material’ if it would influence the judgement of a prudent underwriter in fixing the terms on which he or she will accept that risk.
If a policyholder fails to disclose all material circumstances then insurers have a single remedy: ‘avoiding’ the contract. This means returning the premium and treating the contract as if it never existed.
For an insurer to avoid a policy successfully, it must show that the misrepresentation or non-disclosure was material. This normally involves calling expert evidence from an underwriter.
In addition, but in practice typically as a secondary consideration, an insurer must show that the non-disclosure or representation induced the underwriter to enter into the contract in question (Pan Atlantic Insurance Co Ltd -v- Pine Top Insurance Co Ltd  2 Lloyd’s Rep 427). This is proved via witness evidence from the underwriter who wrote the risk.
Although the second test, inducement, can sometimes raise difficult issues, the emphasis is usually on the expert evidence about what is material to a prudent underwriter. As Carr J remarked in the recent case of Brit UW -v- F&B Trenchless Solutions  EWHC 2237 (Comm), inducement can sometimes be inferred from materiality. If the misrepresentation would have led to an increase in premium (even if the amount of premium increase is uncertain) that is enough to establish inducement.
In practice, this means coverage negotiations – and, in some cases, disputes – often proceed on the (sometimes mistaken) assumption that most underwriters are prudent and would, therefore, treat a risk much as the expert would have done.
The new law
The new law changes the emphasis for commercial contracts which do not ‘contract out’.
For contracts agreed from 12 August 2016 onwards, instead of a single, draconian remedy – i.e. avoidance of the entire policy for failure to present a risk fairly (if this is not deliberate or reckless) - insurers’ remedy will depend on what the underwriter would have done if there had been no misrepresentation or non-disclosure.
- If the insurer would have charged more premium the claim is reduced proportionately; for example if the premium would have been double, the claim is halved.
- If the insurer would have written the risk on different terms, the risk is treated as if it was written on those different terms.
The underwriter in the spotlight
This puts the evidence of the actual underwriter front and centre. At the outset of a claim the underwriter will need to give his/her claims handler the specific terms he or she would have wanted to include or delete had he or she known the true position. If the premium would have been increased, he or she will need to say by how much. If he or she would have altered the terms, he/she will need to write those terms out for the claims department so they can adjust the claim.
Furthermore, the underwriter’s underwriting guidelines, training and experience may feature in the dispute at an early stage. His or her past underwriting practice may also form part of the battleground.
Expert underwriting evidence will still be required under the new law – but the actual underwriter’s evidence, currently dealt with under the inducement test, will be under the spotlight from a much earlier stage. Experience from other jurisdictions with similar regimes suggests this may itself discourage insurers from pursuing points on breach of the duty of fair presentation. Whether that will be the case under English law remains to be seen.
Inducement on steroids?
A ‘heads up’ on the issues we can expect to be under closer scrutiny can be found in the recent case of Axa Versicherung AG -v- Arab Insurance Group (BSC)  EWHC 1939 (Comm) which looked carefully at inducement.
In this case the claimant reinsurer, AXA, sought to avoid two reinsurance treaties on the basis of material non-disclosure by the reinsured of its historic loss records for energy construction risks and/or misrepresentation by the reinsured, to the effect that there were no such statistics.
AXA said the level of past losses was such that, had they been disclosed, it would not have written the treaties. The court confirmed that (1) the reinsured's past loss records in respect of energy construction risks were material; (2) AXA had not waived its right to proper disclosure; but, unusually, (3) the case failed on inducement.
One of the reasons the court came to this conclusion was that AXA’s existing relationship with the defendant showed a willingness to follow the fortunes of the defendant's energy underwriting. It held inducement had not been established.
These are the type of issues that may increase in importance once the Insurance Act is in force. If insurers run misrepresentation/non-disclosure arguments, their underwriting practices as a whole may be under greater scrutiny. Strategically, underwriters with a transparent and well-documented approach to underwriting will be much better placed to take these sorts of points in the future.
More or fewer disputes?
The proportionate remedies for misrepresentation/non-disclosure (or breach of the duty of fair presentation as it will be known) significantly restrict the scope for an insurer to avoid a policy in its entirety. One view is that the sheer range of possible remedies will over-complicate the position, something perhaps supported by the introduction of clauses substituting the new remedies with a right to charge additional premium. Another view is that the changes will give judges more latitude when presented with breach of duty of fair presentation disputes.
The recent case of Involnert Management Inc -v- Aprilgrange Ltd & Others  EWHC 2225 (Comm) suggests that at least some judges will welcome this development. In that case, insurers were entitled to avoid a policy insuring a yacht for €13 million because the owner negligently (not deliberately) did not disclose (a) a €7 million professional valuation of the yacht or (b) the fact the yacht was on sale for €8 million when the insurance was placed. Leggatt J was plainly unhappy with the current law on this issue, saying:
‘The just result… would be to treat the insurance as valid in a reduced amount of €8 million. Such a result will be achieved in cases to which the new Insurance Act 2015 applies when the Act comes into force. Until then, however, it remains a blot on English insurance law that in a case of the present kind the insurer is permitted to avoid liability altogether…. even though it puts the insurer in a better position as a result of the insured’s innocent failure to make full disclosure than the insurer would have been in if full disclosure had been given.’
So it seems the new law finds favour with at least one judge in one respect.
Opinion is divided as to whether the new law will make misrepresentation/non-disclosure disputes less common than they are today or whether, on the contrary, insurers will be more willing to raise issues when the consequences are less devastating than the current ‘all or nothing’ regime. What the recent flurry of case law shows, however, is that these issues will always be contentious – even after 110 years without a statutory change. We wait with interest to see what statutory change itself will bring.