Judge considers arguments relating to material non-disclosure/breach of warranty (pre-Insurance Act)

Clyde & Co acted for the defendants in this case.

The insured sought an indemnity under its property policy following a fire at its premises in 2009. The insurers avoided the policy on the basis of material non-disclosure/misrepresentation and breach of warranty (the proposal form contained a basis of contract clause). Much of the case turns on its particular facts, but the judge usefully restated various principles relating to the duty of utmost good faith (the Insurance Act 2015 did not apply in this case). These included the following:

(1) The duty to disclose arises only before the contract of insurance is formed or varied. Each renewal is a new contract, so the duty to disclose arises again, but there is no duty to disclose facts which should have been disclosed at inception but which are no longer relevant. There is no duty to disclose a prior failure to disclose a fact once material to the expiring risk (but no longer material) unless the prior non-disclosure was dishonest (and so raised a real question of moral hazard).

On the facts of the case, the policy in force at the date of the fire was that embodied in a certificate issued with effect from 1 August 2008. Although 2 later certificates bore the words "cancel and replace" (and had different starting dates for the periods of insurance), it was held that they only represented amendments to the policy.

(2) Before the Insurance Act came into force, an insured did not have to undertake any special enquiry and was deemed to know only what he would be expected to know in the ordinary course of his business, making allowance for its imperfect organisation.

(3) The question of what is material is "not...something that is settled automatically by the current practice or opinion of insurers. Rather the decision rests on the judge's own appraisal of the relevance of the disputed fact to the subject-matter of the insurance".

(3) If a statement is one of "expectation or belief", it need only be made in good faith. However, if the statement is one of fact, the law imposes strict liability and it doesn't matter that the insured believed it to be true or had no reason to think it was untrue.

A statement that property is in a good state of repair is a representation of fact, not just a statement of opinion. Here, insurers had been told that refurbishment works were to be carried out, and so the confirmation that the property was in a good state of repair did not relate to the parts of the property which were to be refurbished. On the facts, the statement had been untrue. The insured had also incorrectly confirmed in the proposal form that there had been no "malicious acts or vandalism". Where intruders had ripped out tanks and piping in order to steal them, that amounted to both a malicious act and an act of vandalism.

(4) If, on the true construction of the policy, the risks covered by the insurance are clearly separable into distinct parts, the policy will be voidable in respect only of those risks which are affected by the misrepresentation or non-disclosure. There were no grounds for dividing the risk here. Although certain policy conditions broken by the insured related specifically to the commercial parts of the property, they were directed at risks (including fire) which jeopardise the entire property. There were therefore no grounds for confining the effect of the insured's breaches of warranty to the commercial parts only.

The judge concluded that insurers were not obliged to indemnify the insured and that the same result would have been reached had the Insurance Act 2015 been in force at the time the policy incepted.