1.8m. While she was moored afloat at a shipyard, she sank after an explosion on board. The insurer contended that the vessel’s true value was in fact 100,000 and, in any event, significantly less than value of 1.8m. It was common ground between the parties that value is a matter of opinion and that a statement of value can only amount to a misrepresentation if made in bad faith. In The Game Boy the amount said to have been spent to make the vessel seaworthy and to provide minimal facilities for passengers was 225,000 but after analysing the evidence the judge found the figure not realistic for outfitting the vessel so as to enable her to trade as a specialist casino vessel. Moreover, the invoice submitted to prove payment of 101,197 to a shipyard was bogus and was, at all relevant times, known by the assured to be bogus.
The assured’s and insurer’s experts were heard at the court and both of the expert witnesses agreed that the vessel had a base value of about 100,000, which was in effect a scrap value. They also agreed that, if the vessel was profitably chartered, her value would be increased considerably. The assured submitted evidence to prove the existence of a charterparty and upon hearing the witnesses the judge found that the documents were forged and the witnesses were not credible. Collectively, this created a justifiable suspicion that the charterparty could not have been intended to operate. It followed that the charterparty did not support the contention that the vessel was worth 1,800,000.
In order to establish a breach of the duty of good faith the insurer has to prove two things:18
1 the fact which was not disclosed or misrepresented was material19
2 the information withheld would have induced the actual underwriter to act differently, either by refusing to write the risk at all or by writing it only on different terms. The insurer was induced to enter into the contract by virtue of the material non-disclosure or misrepresentation.
While the first test, materiality is a statutory requirement under section 18 and 20 of the MIA 1906, inducement is a requirement which was implied to the Act by the House of Lords in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd.20
The matter which seems to lie at the heart of the duty of good faith is the test of materiality since upon discovery of a fact which was not disclosed or misrepresented, the first step the insurers must satisfy is that the fact was material. If materiality is not established there is no breach of the duty of good faith and therefore the question of inducement no longer falls to be considered.
Proof or materiality is, in each case, a question of fact.21
In relation to the duty of disclosure section 18(2) provides:
Every circumstance is material, which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.
Section 20(2) defines materiality in the context of misrepresentation:
A representation is material, which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.
The two subsections are worded similarly and therefore they are interpreted in the same way. Materiality does not depend on what the ordinary assured would or would not be expected to disclose to the insurer.22 Materiality is an ‘objective test’, that is, the prudent underwriter’s opinion is taken into account when determining whether particular fact is material or not. Thus, neither the assured’s nor the actual insurer’s view is taken into account to assess whether or not the fact in question is material. The insurer may prove materiality by presenting an expert view from the relevant insurance market to the Court.23
In terms of the meaning of materiality it is necessary to examine the words ‘… which would influence the judgment of a prudent insurer …’ which are seen in both sections 18(2) and 20(2). This matter24 has been discussed in a number of cases and three tests were suggested to define the test of materiality:
1 decisive influence test
2 increased risk test
3 mere influence test.
Decisive influence test
Under this test to prove materiality it must be shown that full and accurate disclosure would have led the prudent insurer either to reject the risk or at least to have accepted it on more onerous terms. The word ‘judgment’ in ‘would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk’ equates with ‘final decision’, as though the wording of these provisions had been ‘would induce a prudent underwriter to fix a different premium or to decline the risk’.25 Consequently, underwriters can prove materiality only if they can satisfy the court by evidence that a prudent insurer, if he had known the fact in question, would have declined the risk altogether or charged a higher premium.26
In Container Transport International Inc v Oceanus Mutual Underwriting Association (Bermuda) Ltd (No.1)27 while Lloyd J adopted the decisive influence test, the Court of Appeal disapproved it. The test of materiality once more came before the House of Lords in Pan Atlantic. While Lord Lloyd28 – Lord Templeman agreed – reiterated the view at first instance in CTI,29 the majority of their Lordships rejected the decisive influence test in favour of the mere influence test.
Increased risk test
This test was adopted by Steyn LJ in the Court of Appeal30 in Pan Atlantic.
The increased risk test relies on Lord Mansfield’s judgment in Carter v Boehm and especially his Lordship’s assessment in adopting the remedy for breach of the duty of good faith that ‘… the risque run is really different from the risque understood and intended to be run, at the time of the agreement.’ The test is whether a prudent underwriter, if he had known the undisclosed facts, would have regarded the risk as increased beyond that which was disclosed on the actual presentation. It is not necessary to prove that the underwriter would have taken a different decision about the acceptance of the risk. The question is whether the prudent insurer would view the undisclosed fact material as probably tending to increase the risk.
The increased risk theory did not find any support by the House of Lords in Pan Atlantic; it was once again rejected in St Paul Fire & Marine Insurance Co (UK) Ltd v McDonnell Dowell Constructors Ltd31 where Evans LJ stated that where inducement of the actual underwriter has to be proved as well as materiality, there is no reason why material should be limited to factors which are seen as increasing the risk. Evans LJ further added that the increased risk theory cannot be the correct test because (1) the risk may be increased in some respects but decreased in others and the assured need not disclose ‘any circumstance which diminishes the risk’ s.18(3). The section does not state whether this circumstance is not material within the definition of s.18(2) but the insurer has no right to avoid the policy on the ground that a circumstance of that sort was not disclosed. (2) The duty of disclosure operates both ways because the duty of good faith is reciprocal, so the definition of ‘material’ is not concerned with the proposer of insurance alone.
Mere influence test
This test is now a settled test in English law to prove materiality.32 Accordingly, everything is material to which a prudent insurer, if he were in the proposed insurer’s place would wish to direct his mind in the course of considering the proposed insurance with a view to deciding whether to take it up and on what terms, including what premium to charge.33 In Pan Atlantic, Lords Mustill and Goff34 found the decisive influence test facing insuperable practical difficulties, because the test ignores the fact that it is the duty of the assured to disclose every material circumstance which is known to him, with the result that the question of materiality has to be considered by the assured before he enters into the contract. In their Lordships’ view, while it is not unreasonable to expect an assured to be able to identify those circumstances, within his knowledge, which would have an impact on the mind of the insurer when considering whether to accept the risk and, if so, on what terms he should do so, it would be unrealistic to expect him to be able to identify a particular circumstance which would have a decisive effect.
The other reasons for the majority of their Lordships to adopt the mere influence test were:
The Act did not qualify the word ‘influence’ ‘decisively influence’; or ‘conclusively influence’; or ‘determine the decision’; or other similar expressions.35
‘Influence the mind’ is not the same as ‘change the mind’.36
The expression ‘… influence the judgment of a prudent insurer in … determining whether he will take the risk’ denotes an effect on the thought processes of the insurer in weighing up the risk, quite different from words which might have been used but were not, such as ‘influencing the insurer to take the risk’.37
The mere influence test is now a settled applicable test to determine materiality in the duty of good faith. In St Paul Fire & Marine Insurance Co (UK) Ltd v McDonnell Dowell Constructors Ltd,38 Evans LJ defined the mere influence test as ‘“material” like “relevant” denotes a relationship with the subject-matter rather than a prediction of its effect’. In one of the recent examples, Sealion Shipping Ltd v Valiant Insurance Co, Blair J39 stated, ‘The term “would influence” is not confined to the case of decisive influence, i.e. where proper disclosure of the non-disclosed or misrepresented fact would result in an actual change of decision (though the position is different where the issue is as to inducement). It is, however, necessary that it would influence the thought processes of the underwriter in assessing the risk.’
The mere influence test is broad and it might be too harsh on the assured. Moreover, with regard to an actionable misrepresentation, general law of contract requires inducement to be established. In the context of insurance, while the Court of Appeal in CTI expressly rejected the inducement test for the reason that in the MIA 1906 there is no such requirement,40 the House of Lords in Pan Atlantic ruled in favour of the inducement requirement.
Inducement concerns the mind of the actual insurer: his mind was so affected by a material misrepresentation or non-disclosure that the policy was thereby obtained.41 It is thus ‘a causal connection between the misrepresentation or non-disclosure and the making of the contract of insurance’.42 The question is whether the insurer would have underwritten the risk on precisely the same terms had disclosure been made of all material circumstances.43
The answer to the question of whether the inducement test should be implied in the MIA 1906 depends on the determination of the test of materiality applicable to the duty of good faith in insurance. If the test is the decisive influence test, inducement is not needed as a separate requirement because the decisive influence test, as adopted by Lloyd J in CTI, embodies inducement since to prove materiality it is necessary that ‘insurers must show that the result would have been affected’.44 However, the problem with having the inducement test in the decisive influence test is the need to then reconcile two inconsistent elements. While materiality is an objective test, that for inducement is subjective. Proof of inducement by virtue of a prudent underwriter was criticised and disapproved by Parker LJ in CTI. The judge found it inappropriate to impose an objective test of materiality and again an objective test of inducement since the test would put the Court to the task, perhaps years after the event, of endeavouring to ascertain what a prudent underwriter would have done, first in the light of the circumstances actually disclosed by the assured, and secondly, on the hypothesis that, in addition to those circumstances, the undisclosed circumstance had been disclosed. In Parker LJ’s view such a task was impractical. By looking into the proof of inducement by evidence from a prudent underwriter, Parker LJ found that different prudent underwriters might have different assessments in light of the disclosure or representation of the fact and the Court cannot choose one prudent underwriter rather than another.45
In Pan Atlantic, however, Lord Goff stated ‘the actual inducement test accurately represents the law.’46 Inducement is proof of actual effect; when the test applicable to determine materiality is the mere influence test, proof of actual effect is not necessarily proof of materiality.47 In Pan Atlantic, by adding the inducement requirement to the proof of materiality, the House of Lords overcame the harshness of the broad mere influence test. Lord Mustill and Lord Goff were in agreement that there is to be implied in the MIA 1906 a qualification that a material misrepresentation will not entitle the underwriter to avoid the policy unless the misrepresentation induced the making of the contract. The word ‘induced’ is used in the sense in which it is used in the general law of contract. Lord Mustill recognised that sections 17–20 of the MIA 1906 do not mention a connection between the wrongful dealing and the writing of the risk. But for this feature his Lordship doubted whether it would occur to anyone that it would be possible for the underwriter to escape liability even if the matter complained of had no effect on his processes of thought.48
The inducement test applies to non-disclosure as well as misrepresentation, as the House of Lords in Pan Atlantic confirmed that in practice the line between misrepresentation and non-disclosure is often imperceptible.49
The test to prove inducement is a ‘but for’ test. In order to show that a misrepresentation or non-disclosure induced the contract it is necessary to show that, but for the misrepresentation or non-disclosure, the particular underwriter would not have made the contract, either at all or on the terms on which it was in fact made.50 In other words, the misrepresentation or non-disclosure must be an effective cause of the particular insurer entering into the contract but need not be the sole cause.51 If inducement is not proved, however material, the misrepresentation or non-disclosure of a fact will not entitle the insurer to seek a remedy for breach of the duty of good faith.
Inducement is a subjective test and focuses on the actual insurer
Being a subjective test inducement requires the actual insurer to prove that he was induced to enter into the contract from his own underwriting practice. If the insurer submits evidence from an insurer other than the actual insurer who wrote the risk it is unlikely that he would persuade the court about inducement.
Lewis v Norwich Union Healthcare Ltd52 illustrates the subjective nature of the test. In Lewis the assured completed a proposal for a Safeguard Income Protection insurance policy. In the proposal form the assured disclosed that he suffered from irritable bowel syndrome and that he had undergone a sphincterotomy. An independent examiner, a GP, confirmed that the assured was an average risk. In July 1999 the assured visited his GP to obtain confirmation for his accountant of the periods when he had been unable to work following his operations. He expressed to this GP that he had pain in his left knee: the GP examined the knee, and detected nothing abnormal. The assured did not disclose this visit to the insurer and the contract was concluded in December 1999 with effect from January 2000. In 2002 the assured gave up work on the grounds of incapacity, namely incontinence and back injury. He submitted a claim to the insurer who then purported to avoid the policy by reason of his failure to disclose the visit to his GP in July 1999. In an action brought by the assured the court found that the fact was material, however the issue focused largely on the proof of inducement. The actual underwriter was DF but she left her job long before the trial. The insurer therefore was not able to bring evidence from DF but asked NH to be heard as actual underwriter. NH’s witness statement was not of much help for the insurer given that while on the one hand she said that the knee would have been excluded from cover, in another statement she said it would have ‘no cover at all’ because of Norwich Union’s rules/practice of having a ‘two exclusions and out’ regime. Having emphasised inducement is a subjective test and focuses on the actual insurer,53 in the absence of the actual underwriter’s evidence, the court was dissatisfied that inducement was proved. It was clear from the evidence that DF acted in a way which was different to how NH would have acted, and in a way which was different to how Norwich Union’s own expert stated a prudent underwriter would have acted. For instance, the assured’s allergy test results were outstanding for months from June until October and the insurer tried to contact the assured’s GP only after the assured asked the insurer to do so. Before the contract was concluded the assured completed a declaration of health in which the assured referred to things other than previously known matters. Despite the newly disclosed issues, DH did not make any enquiries about the ‘course of injections’ nor did she chase the allergy test results which remained outstanding and which the Senior Underwriter had expressly stated should be obtained in writing. Therefore, none of the evidence submitted to the Court was sufficient to prove inducement.
No inducement if the outcome is the same with full disclosure or true representation
As stated above, proof of inducement requires comparison of two situations: (1) the contract in hand (2) the situation which would have arisen had there been a full disclosure or no misrepresentation. If the outcome is different under the two situations, inducement can be proved but there will be no inducement if the same outcome is achieved in both situations. This was ruled in Drake Insurance plc v Provident Insurance plc54 and was recently applied by Blair J in Sea Glory Maritime Co, Swedish Management Co SA v AL Sagr National Insurance Co.55 The facts of Drake are as follows: In February 1995, S approached his brokers, H, for new insurance for his Renault car. S wanted third party, fire and theft cover for himself and in addition for his wife, K, as a named driver. K had suffered an accident just over a year before, January 1994, when a third party had driven into the back of S’s car when she was driving it. The accident was not her fault, but under the insurer’s system it had to be recorded as a ‘fault’ accident, despite its circumstances, until the matter had been settled by the third party in the assured’s favour. In February 1996, S renewed his insurance with the insurer. Two relevant events had occurred in the previous year. The first was that K’s January 1994 accident had been settled by the third party’s insurers entirely in S’s favour. The second was that in December 1995, S received a speeding ticket, which he paid, thus admitting the conviction, in January 1996. His licence was endorsed with three points. When renewing his cover with the insurer in February 1996, S failed to disclose the conviction. In July 1996, K while driving the car collided with a motor-cyclist, B. The insurer was immediately notified of a claim, first by telephone and then in writing. Upon investigation of the latest accident for which S made a claim the insurer discovered the non-disclosure and the issue before the Court of Appeal was whether the insurer was entitled to avoid the contract for breach of the duty of good faith. The Court of Appeal decided in favour of the assured. Rix LJ and Clarke LJ found that on the true facts at the time of renewal the insurer could not be said to have induced the contract. The conviction together with the ‘fault’ accident of January 1994 would have increased the premium but without that fault accident, the non-disclosure of the conviction would have made no difference. Their Lordships came to this conclusion on a hypothesis that at the time of renewal the assured failed to inform H in relation to two matters: (1) the speeding conviction in 1995 and (2) the January 1994 accident had been settled satisfactorily. Had he informed H of both those matters, the conviction would have counted as ten points against him, but the information about the settlement of the accident would have meant that that would have been reclassified as a ‘no fault’ accident and thus would not have counted against him at all. In the circumstances he would still have been entitled to renewal at a normal rate. If the conviction had been mentioned, it would be very likely that the question of the status of the accident had been discussed because it would have been H’s duty as S’s broker to have raised the issue, and secondly because when the significance of the accident’s status was raised in correspondence S addressed it, and kept on doing so. If the conviction had been disclosed, there would have been a discussion of its impact on the premium in light of the status of the earlier accident. Such a discussion would have led to the premium remaining at the normal level and was thus fatal to this part of his case.
Recently, Blair LJ applied this analysis in Sea Glory Maritime Co, Swedish Management Co SA v AL Sagr National Insurance Co56 in which the vessel was detained at Suez in October 2008 before the hull insurance policy was renewed in December 2008. According to the expert evidence this was a material fact, as the expert stated that the port state detentions within 12 months immediately before the renewal would be material for a prudent insurer. The assured was nevertheless successful in this case because the judge found the insurer was not induced to agree the policy by reason of any non-disclosure concerning the vessel’s detention history. The judge applied the principle which was approved by Rix and Clarke LJJ in Drake stated above that had the claimants disclosed these detentions, when informed that the class surveyor had checked the deficiencies and confirmed that they were rectified, the insurer would have proceeded to renew cover on the same terms. Had the claimants disclosed the PSC detentions, they would have been bound to include the outcome.
If the underwriter was negligent in writing the risk, should his negligence have any impact on the assessment of inducement? In other words, would it be possible to argue that because the underwriter was so negligent in understanding even the nature of the risk he was writing, would it be dangerous to attribute common sense to his judgment as an underwriter in determining inducement? The issue was discussed in Marc Rich & Co AG v Portman57 in which the insurer wrote a demurrage cover although all he knew about demurrage was that it meant delay. There were a number of material facts which had not been disclosed to the insurer before the contract was concluded: (1) the route that the carriage was to be performed was a congested route, delays were common at the ports in question during loading and unloading operations, and (2) at the time when the insurance contract was concluded the assured had already experienced considerable demurrage losses. The issue focused on non-disclosure of the assured’s loss experience which was held to be material. With regard to proof of inducement the assured’s counsel argued that the insurer was too reckless to attribute any common sense to his judgment as an underwriter. The trial judge found that the insurer did not know anything about the ports of Ain Sukhna or about Constantza. The insurer agreed to insure demurrage claims by an endorsement to the policy but he had no idea about the true extent of the charterers’ liability, which was initially agreed to be covered, or the scope of cover being sought by the broker in the endorsements. He knew virtually nothing about the sort of liabilities likely to be incurred by charterers of ships; he had never seen a charterparty, could not define demurrage and had no concept of laytime or notices of readiness. The assured reiterated that the insurer knew that he was insuring delay and that he knew nothing about the charterparty, but he knew that before writing extensions to the existing cover it was essential to get the assured’s claims experience, and that he should have asked for it.58 In those circumstances, the assured’s counsel contended that no inference could fairly be drawn that if Marc Rich’s claims experience had been disclosed to him, the insurer would have read it, understood it or reacted to it. Longmore J had the evidence of the actual insurer as well as another insurer working at the same department. Moreover, expert underwriters stated that the losses were not only serious but were on such a scale as would have rendered the risk uninsurable. Longmore J was thus persuaded that the actual insurer did not think that it was a major risk; it was obvious that Marc Rich’s massive loss experience would have completely abrogated that assumption. The insurer, if he had been shown or told that Marc Rich had a substantial record or experience of previously incurred demurrage, would either have sought to confirm that that was no part of the cover or, at least, would have decided to discuss the matter with the other underwriter who originally wrote the risk, who would himself have checked that it was nothing to do with the risk. Longmore J found that in either event the risk would not have been written on the terms it was; the Court of Appeal did not interfere with that conclusion. Despite the fact that there were good grounds for supposing that the actual insurer would have been unlikely to pay any attention to information about the causes of delay, if the relevant information was provided, it was still probable that he would have refused to insure the risk given the seriousness of the assured’s loss experiences on the route in question.
Misrepresentation by a third party
In addition to the assured’s presentation of the risk, if the insurer seeks an expert opinion on the facts upon which the insurer relies and if later it appears that the expert evidence did misrepresent the fact, can the insurer still seek remedy against the assured? In Small v Atwood59 Small agreed to buy Atwood’s mine. Small appointed agents to verify Atwood’s representations as to Atwood’s earning capacity. The agents reported that Atwood’s statements were true. After the contract was concluded Small discovered that Atwood exaggerated his earning capacity and sought to rescind the contract but he was unable to do so because he relied on his own agents’ statement. Reliance of an expert view in an insurance context is seen in International Lottery Management v Dumas.60 It should be noted that in Dumas the expert whose statement was not true and was relied on by the insurer was neither the assured’s nor the insurer’s agent. The facts of the case were briefly as follows: An Israeli businessman attempted to establish a lottery business in Azerbaijan. He prepared a business plan, which was given informal approval by the Ministry of Finance. The assured then registered a subsidiary in accordance with Azerbaijan company law. The assured insured the business against confiscation, expropriation and nationalisation with London insurers. The London insurers were keen to make sure that the licences were granted. The assured presented a document that was mistranslated and confirmed that an authorisation to carry on lottery business was granted whereas in fact the assured obtained a registration and only an informal approval by the Ministry of Finance was given. Before the contract was concluded the insurer sought an independent expert view, which also contained misleading material statements as to the permission granted to the assured and implied that the assured had been granted licences following a proper procedure. After the insurance was placed, the Ministry of Finance informed the assured that the Government had decided to run the lottery as an exclusive state monopoly, despite the encouragement that had up to that date been given to him. HHJ Dean QC held that the assured was not to be held liable for the misrepresentation made by the independent legal expert. He was not the assured’s agent. However, this did not relieve the assured from his own duty of good faith given that he was obliged to disclose any material information regarding the matter which the legal expert presented to the insurer because the statement as to whether the licences were granted or not was material. If the principles of contract and insurance law are to be distinguished here it might be explained on the basis that in Contract law there is no duty of disclosure whereas the duty of disclosure is applicable in business insurance contracts.
In some cases, with regard to proof of inducement, a question may arise whether proof of materiality creates a presumption of inducement. In other words, whether proof of materiality shifts the burden of proof from the insurer to the assured, which requires the latter to present evidence displacing the presumption.
There is no such rule that says proof of materiality establishes presumption of inducement so that the burden is on the assured who has to displace the presumption. However, in some cases the courts may apply presumption depending on the facts of the case and what the other underwriters who are involved in the case have established. In St Paul Fire & Marine Insurance Co (UK) Ltd v McDonnell Dowell Constructors Ltd61 the contractors purchased a contractors’ all risks insurance. Spread foundation was used in the project although it had been presented to the insurers before the contract was concluded that pile foundations were to be used. Thus, the underwriters purported to avoid the contract for material misrepresentation. Three of the four underwriters who insured the risk brought evidence which persuaded Evans LJ – who gave the only reasoned judgment of the Court of Appeal – that the underwriters, if the true facts had been disclosed, would have either refused the risk or accepted it on different terms. The fourth underwriter, who accepted 20 per cent of the risk, did not give any evidence to this effect and the question was whether he was induced to enter into the contract. Evans LJ found the evidence of the three underwriters was clear: If the underwriters had been told the true state of the ground conditions, they would have called for further information and in all probability either refused the risk or accepted it on different terms. There was no evidence to displace a presumption that the fourth underwriter like the other three was induced by the non-disclosure or misrepresentation to give cover on the terms on which he did. Consequently, Evans LJ accepted the presumption of inducement in favour of the fourth underwriter.
The Court of Appeal in Assucurazioni Generali v Arab Insurance Group62 affirmed the existence of the presumption which can be rebutted. It was stated by Clarke LJ in Assicurazioni Generali SpA v Arab Insurance Group (BSC)63 that there is no presumption of law that an insurer or reinsurer is induced to enter in the contract by a material non-disclosure or misrepresentation.64 However, having referred to St Paul Fire, Clarke LJ confirmed that there have been cases in which the facts were accepted to be such that it is to be inferred that the particular insurer or reinsurer was so induced even in the absence of evidence from him.65 Moreover, Longmore J stated in Marc Rich & Co AG v Portman66 ‘The presumption will only come into play in those cases in which the underwriter cannot (for good reason) be called to give evidence and there is no reason to suppose that the actual underwriter acted other than prudently in writing the risk. In cases where he is called and the Court genuinely cannot make up its mind on the question of inducement, the insurer’s defence of non-disclosure should fail because he will not have been able to show that he had been induced by the non-disclosure to enter into the insurance on the relevant terms. At the end of the day it is for the insurer to prove that the non-disclosure did induce the writing of the risk on the terms in which it was written.’
A further example is International Management Group (UK) Ltd v Simmonds,67 which concerned insurance on an annual cricket tournament between India and Pakistan, known as the Sahara Cup, which was scheduled to take place in the years 1996 to 2000. It was not disclosed to the underwriters that well-placed and well-informed sources within the Cricket boards of India were of the view that the Indian Government would refuse to allow India to play in the 2000 tournament. The Indian Government indeed refused the request, and claims were made against the insurers.
Cooke J was satisfied that each of the underwriters who gave evidence was induced to write the risk in the way he did by the misrepresentations that were made to him or affected by the non-disclosures in assessing it. If any issue of Government approval had been disclosed, whether in answer to questions then or otherwise, the underwriters would either have specifically excluded liability in the event of lack of Government approval or permission, made cover expressly subject to that approval or permission, or declined to write the risk at all until evidence of such approval or permission had been obtained. It is clear that this was a risk which was hard to place. The leaders were reluctant to write the risk in the first place, on the second occasion they were approached they declined to offer a quotation at all. The leading underwriters and indeed the followers who placed subjects on their lines were all clearly dubious about writing the risk and the judge had no difficulty in finding that each was influenced by the nondisclosure and the misrepresentations to accept a risk which they would otherwise have considered in a different light. The issue about the presumption of inducement arose because one of the following underwriters, F from B syndicate, did not appear to give evidence and no statement was taken from him. F had left the employment of the B syndicate and had refused to co-operate unless he was given access to confidential information to which he was not entitled. B was unprepared to provide that information. The judge found it unrealistic to hold against B. It was plain to the judge that B’s position as a follower was very much the same as all the other followers.68 Under the circumstances B was entitled to rely upon a presumption of inducement of the kind referred to in St. Paul Fire and Marine Insurance Co UK Ltd v McConnell Dowell Constructors Ltd.69
Where a contract is signed by the leading underwriter and the followers, the assured enters into independent contracts with each of the underwriters.70 Thus, each contract itself will be subject to the duty of good faith. A question may arise in terms of whether a misrepresentation or non-disclosure to the leading underwriter could ‘travel’ so as to avail following subscribers to the same slip. While there were some negative statements on this matter71 it was held that the following underwriters rely on the presentation made to the leading underwriter and the non-disclosure or misrepresentation to the leading underwriter is itself a material fact which should be disclosed to the following underwriters.72 The following underwriters’ subscription is upon the basis that the leading underwriter had been given a full and fair presentation so that he was in a position to make a proper evaluation of the risk.73 If the leading underwriter was given a materially incomplete and misleading presentation which induced his acceptance, each of the followers would be entitled to avoid the cover for failure on the part of the assured to disclose to them the fact of the unfair presentation which was made to the leader.74 In International Management Group (UK) Ltd v Simmonds75 the facts of which were given above, whilst each of the following underwriters who gave evidence told the judge that he had made his own underwriting decision, it was plain to the judge that they placed considerable reliance upon the leading underwriters on this risk.76 In Simmonds the brokers’ evidence was that the risk was not insurable without the two leaders because they would never be able to persuade the following markets to write the risk without such a lead.77 In these circumstances, the misrepresentations and non-disclosures which prevented a fair presentation of the risks to the leaders represented a material circumstance, which was required to be disclosed to the followers, in order to make a fair presentation to them.78 Similarly, in Aneco Reinsurance Underwriting Ltd v Johnson & Higgins Ltd79 Cresswell J considered the authorities and decided that the evidence in the case adduced before him did support a finding of fact that the following market accepted the risk on the basis that a full and fair presentation had been made to the leader. He held that the presentation to the leader was not complete and correct. This should have been disclosed to the followers in order to ensure a fair presentation to them but the brokers had failed to do so. The followers were entitled to avoid the policy as well as the leader. In Dumas, HHJ Dean QC80 stated that the applicability of the abovementioned principles does not depend upon any rule of law or proof of a strict custom but upon facts establishing the particular way of doing business in the case. HHJ Dean QC found Aneco certainly in accordance with market expectation as disclosed in evidence in this case and reflected the practicalities of the way business is conducted in this particular market at Lloyd’s.81
Material facts are analysed under two separate headings:
1 Physical hazard.
2 Moral hazard.
Physical hazard refers to the risks that are related to the physical characteristics of the subject matter insured. For instance if a yacht is insured the location of where the yacht is moored may be material.82 In an insurance policy taken out by a charterer against demurrage claims the characteristics of the loading and destination ports (for example, they may be very congested) or the weather conditions in particular seasons at which the voyages will be made may be material.83
This was discussed in Marc Rich & Co AG v Portman84 in which the assured was a well-known oil and gas commodity trader whose business included buying and selling large quantities of crude oil. For this purpose they chartered vessels to collect oil from loading ports such as Kharg Island in Iran and Constantza in Romania, and deliver it to discharge ports throughout the world. The route from Kharg Island in Iran to Ain Sukhna in Egypt was liable to give rise to problems of demurrage. The popularity of the route often caused congestion at Kharg Island and at Ain Sukhna. The operators at both terminals had stringent terms preventing traders from passing on demurrage liabilities in the event of delay. The assured gave instructions to Dutch brokers to obtain demurrage cover for voyages from Kharg Island to Ain Sukhna with a limit of US250,000 per vessel for a period of ten days in excess of three. It was not disclosed to the insurer that particular features of the port of Ain Sukhna would be likely to give rise to demurrage claims, for example, bad weather, difficult tides, swell, liability to congestion and other such matters. Neither was it disclosed that the average turnaround time for vessels loading at Kharg Island and discharging at Ain Sukhna within the past six months before the insurance was proposed exceeded six days. Longmore J referred to the particular features of the ports in question as ‘adverse port characteristics’ and non-disclosure of such facts was material.85
If an assured has a substantial loss experience this is a material fact that should be disclosed to the insurer.86 The insurer is entitled to assume that there has been a fair presentation of the risk. These issues were ruled by Longmore J and approved by the Court of Appeal in Marc Rich the facts of which were stated above. In Marc Rich when the risk was proposed to the insurers the assured’s broker was not asked nor did he volunteer anything about the incidence of demurrage liability in respect of vessels previously chartered for the Kharg Island to Ain Sukhna route. On the Kharg Island/Ain Sukhna route Marc Rich had, at the time when the endorsement was entered into, incurred demurrage liabilities of about US3.9m at the ports in question on more than 50 vessels in the previous ten months before the contract was initialled by the insurer. This fact was, as the Courts agreed, plainly material. The assured argued that the insurer waived his right of full disclosure of the previous loss experience, the issue of which will be discussed below.87
If there is a substantial loss experience which was not disclosed the fact that the insurer knows or is presumed to know that a loss experience exists does not make this fact immaterial for the reason that the insurer’s actual or presumed knowledge about the existence of loss experience says nothing about the size of the losses.88 If the losses are modest or insignificant they need not be disclosed89 and if nothing is disclosed about the loss experience, the insurer is entitled to assume it is insignificant.90
The principle that the assured’s claim history is not material if it is modest or insignificant was applied in Sealion Shipping Ltd v Valiant Insurance Co.91 In Sealion the defendant insurer issued to the claimants a loss of hire marine policy on the vessel, for the year commencing 20 May 2008. The daily sum insured was US70,000, the coverage was limited to 30 days in excess of 14 days any one occurrence and 21 days in respect of machinery claims. The assured made a claim arising from a propulsion motor breakdown which happened on 25 February 2009, after which the vessel was placed off-hire by her charterers. The insurer purported to avoid the policy on the basis of material non-disclosure and/or misrepresentation that the assured stated that ‘apart from scheduled dry-dockings and a few hours off hire now and again, the vessel has not experienced any significant off hire period’, but in fact the vessel had experienced approximately ten days off-hire in 2004, over two days at the time of the breakdown in September 2004, and a further period of over seven days when repairs were carried out in November 2004. The judge, however, found such loss experience immaterial. Blair J stated that in general, insurers are interested primarily in the potential for claims and, in the circumstances, ten days’ loss of hire experienced in 2004 compared to a 21-day excess under the 2008 policy was not material. It was not a particularly long period of off-hire, it occurred nearly four years previous to the placing of the policy with the defendant, it did not result in a claim, and it did not come close to the excess period.
As seen above, whether and to what extent previous loss history is material depends on the type of the policy and the size of the previous claims. One recent example on this matter is Bate v Aviva Insurance UK Limited,92 which involved a property insurance policy. The representation about the claims that the assured had made within the last five years was untrue. The assured’s answer on the form suggested that there had been a fire caused by a contractor at an address he had left. But the fire occurred on the Estate, his home for twenty years and was caused by his own wholly-owned company. This was a material misrepresentation.
Port State Controls
In Sea Glory Maritime Co, Swedish Management Co SA v AL Sagr National Insurance Co,93 the expert witness stated that a prudent underwriter would only be concerned with detentions in the recent past, which he said was the period 12–18 months before the inception date of a policy. At least on a renewal, it is detentions in the previous twelve months that are relevant. Thus, Blair J rejected the argument that the vessel’s five detentions in the four years prior to the date of the Policy were material and should have been disclosed.
Moral hazard generally concerns the characteristics of the assured. As explained above, a ‘material circumstance’ is one that would have an effect on the mind of a prudent insurer in estimating the risk and it is not necessary to prove that it should have a decisive effect on his acceptance of the risk or the amount of premium to be paid. Moral hazard refers to the facts which would indicate whether the insurer would like to enter into a business relationship with the assured such as the assured’s criminal record or general dishonesty of the assured. One might then argue whether a fact that is not directly related to the risk insured should still be disclosed despite the fact that it may satisfy the mere influence test but has no connection with the risk insured against. In other words, whether the mere influence test should be qualified that only the matters which affect the likelihood and extent of any loss to the insurer under the insurance proposed should be disclosed.94 An attempt to define materiality to this effect is seen in The Martin P where Mr Richard Siberry QC, sitting as a Deputy High Court Judge,95 stated that the definition of materiality includes not only matters going to the likelihood of a loss to the subject matter by a peril insured but also matters relevant to the likelihood and extent of any subrogation rights. In North Star Shipping Ltd v Sphere Drake Insurance plc96 the assured’s counsel argued ‘allegations that related to the risk itself were one thing but allegations of dishonesty, which had nothing to do with the risk and nothing to do with either the particular insurance or with insurance at all, were another’, to which Waller LJ responded ‘I might have been tempted to follow’,97 nevertheless, his Lordship decided for the insurers and found the facts material. Having noted that the law in this area is capable of producing serious injustice, Waller LJ avoided proposing any reform but referred the matter to the Law Commissions.98 Mance LJ in Brotherton v Aseguradora Colseguros SA99 – as will be mentioned below under ‘Allegations of misconduct’ – did not find such a qualification satisfactory and said ‘The legal test of materiality established by authority and by statute is on the face of it clear. A matter is material if it would influence the mind of a rational underwriter governing himself by the principles and practices on which underwriters do in practice act or would influence the judgment of a prudent insurer in fixing the premium, or determining whether to take the risk.’100
Whether rumours are material or not depends on the grounds of the rumours and sources of them. In North Star Shipping Ltd v Sphere Drake Insurance plc,101 Waller LJ expressed his view that allegations of not very serious dishonesty are not material. Nevertheless, in International Management Group (UK) Ltd v Simmonds102 the facts of which were given above, the assured who insured a cricket tournament against cancellation for political risks failed to disclose to the insurers that before the contract was made the assured had been informed that well-placed and well-informed sources within the Cricket boards of India were of the view that the Indian Government would refuse to allow India to play in the 2000 tournament. This fact was found material as having been received from reliable resources rendered the fact more than rumour. In Simmonds, Cooke J distinguished immaterial loose rumours, gossip and speculation from material hard intelligence, and held that the information fell into the latter category.
Allegations of misconduct
In Brotherton v Aseguradora Colseguros SA103 the reinsurers purported to avoid the reinsurances of two Columbian reinsureds for non-disclosure of reports in the Columbian media of allegations of misconduct and related investigations involving the original assured’s business and officers. The original policies were bankers blanket and professional indemnity insurances covering losses caused by dishonest or fraudulent acts of bank employees. The bank was a state-owned bank, C, the reinsurance was effected from 7 November 1997 and extended in late November 1998 until 31 January 1999. The allegations against the bank officers appeared in media between 28 January 1997 and late November 1997: seven news bulletins and fifteen newspaper articles were published reporting allegations of misconduct and related investigations involving the bank officers. Reinsurers argued that the reports alone, and all the more the reports coupled with the fact of the investigations, were material to be disclosed, firstly as constituting circumstances which might give rise to claims under the reinsurances, and secondly as suggesting moral hazard. The reinsureds argued that there was no basis for the allegations, they were part of a political campaign by the opponents of the then government to smear its supporters and friends in order to discredit the government in the run-up to the 1998 elections. According to the reinsureds, 63 of the 65 criminal investigations of the bank manager had been concluded in his favour; the remaining two were still pending; one of them related to the use of the aeroplane for private purposes and the other related to an alleged infringement of public tendering regulations. Sixteen out of 17 investigations have been closed and only one was live, which was then being challenged before the Colombian courts. Therefore, the reinsureds submitted that materiality, at least in cases of moral hazard, must depend on the known existence of actual moral hazard, rather than the possession of information suggesting the possibility of moral hazard. Mance LJ disagreed. Referring to the mere influence test in Pan Atlantic, Mance LJ found it difficult to see any reason why, if the evidence satisfies the court that a prudent underwriter would have regarded information suggesting the possibility of moral hazard as material in the sense identified by Lord Mustill, that should not suffice. This was, according to Mance LJ, the basic legal position.104
A question then may follow, if the assured is under investigation for, or has been charged with an offence that he knows that he did not commit, does he still have to disclose the charge to the insurer? The assured argued in Brotherton that the only circumstances requiring disclosure are those which actually exist at the time of making the contract, and that allegations or investigations with respect to possible misconduct do not have to be disclosed, if there was in fact no misconduct, even if there was at the time of placement no way of knowing or showing this. Mance LJ, however, disagreed due to the fact that the issues of both materiality and inducement would in all likelihood fall to be judged on the basis that, if there had been disclosure, it would have embraced all aspects of the assured’s knowledge. Such disclosure should include the assured’s own statement of his innocence, and such independent evidence as he had to support that, by the time of placing. In Strive Shipping Corp v Hellenic Mutual War Risks Association (Bermuda) Ltd (The Grecia Express)105 Colman J stated that non-disclosure of a mere allegation of dishonesty could not justify avoidance if the assured maintained that it was wrong, and would, if allowed, be able to prove this. According to the judge ‘it would be open to the assured to disprove his guilt and thereby to disentitle the insurers to avoidance of the policy’.106 Mance LJ in Brotherton disagreed and stated that since what is material depends upon what would influence the judgment of a prudent insurer at the time of the placing, both the known fact of guilt, in the case of an acquittal, and the (known) fact of a conviction, in a case where the assured himself knows that he is innocent, may be capable of being material to a prudent insurer. In the latter case, the assured can disclose not merely the conviction, but all matters supporting his statement that he was wrongly convicted.
The critical question was still, however, whether the validity of reinsurers’ purported avoidance for their non-disclosure depends or may depend upon whether the allegations were correct and there was actual misconduct justifying the allegations and investigations. This issue is discussed in detail below under ‘(Un)conscionable avoidance’.
Pending Criminal/Civil Charges
Pending charges are disclosable whether or not they were well-founded.107 When accepting a risk underwriters are properly influenced not merely by facts which, with hindsight, can be shown to have actually affected the risk but with facts that raise doubts as to the risk.108 Pending criminal and civil charges were both discussed in North Star Shipping Ltd v Sphere Drake Insurance plc109 in which the vessel was insured against war risks and then became a constructive total loss after an explosion. There were a number of facts that had not been disclosed and two of them were (1) Four separate pending criminal proceedings against the assured in the Greek courts; the allegation was that the assured persuaded people to part with their money by telling them that it would be invested in copper-bottomed investments whereas the money was used for other purposes and some of it was taken by the assured. The amount said to have been lost is about US1.35 million. (2) Civil proceedings in Panama against the assured companies claiming damages for fraudulent trading.
The facts were plainly material. However, the assured’s counsel argued that these facts had no relation with the risk insured against in a war risk policy.110 Therefore, they need not be disclosed before the contract was concluded. He submitted that the court ought somehow to limit the extent to which allegations, which ultimately turned out to be false, should be held to be material to the risk and disclosable. His suggestion was that allegations that related to the risk itself were one thing but allegations of dishonesty, which had nothing to do with the risk and nothing to do with either the particular insurance or with insurance at all, were another. In relation to the Greek criminal proceedings, or the Panamanian civil proceedings, the allegations of dishonesty had nothing to do with the risks being insured and nothing to do with claims under an insurance policy. He argued that Brotherton should be distinguished as it was in fact concerned with allegations relating to the risk.
Waller LJ was sympathetic to this submission as he noted that the law in this area is capable of producing serious injustice.111 If every false allegation of dishonesty must be disclosed in all types of insurance, that may place some assureds in the position of finding it difficult to obtain cover at all, and will certainly expose them to having the rates of premium increased unfairly. The decision in Drake may provide an answer in some but very few cases, and in any event as Mance LJ noted Drake did seem to provide a remedy for the increased premium that an assured may have had to pay on the basis of a false allegation. Thus, Waller LJ was tempted by the assured’s submission but he nevertheless decided that as Pan Atlantic accurately recorded, a ‘material circumstance’ is one that would have an effect on the mind of a prudent insurer in estimating the risk and it is not necessary that it should have a decisive effect on his acceptance of the risk or the amount of premium to be paid.
Waller LJ112 noted – obiter – that spent convictions no longer have to be disclosed but it was unrealistic to contemplate a prudent underwriter giving evidence, that he would not take into account, in assessing the risk or the terms of the insurance, a recent allegation of serious dishonesty the truth or falsity of which has yet to be determined, even if it is quite unconnected with insurance or the risk being insured. Although he highlighted the controversies, Waller LJ refused to explore in any detail what change in the law might mitigate the possible injustice and referred the matter to the Law Commission.113
Pending charges against the assured’s employees
In Inversiones Manria SA v Sphere Drake Insurance Co, Malvern Insurance Co and Niagara Fire Insurance Co (The Dora)114 it was held that the pending criminal charges against the skipper employed on the assured’s yacht was a material fact which should have been disclosed regardless of whether the skipper was innocent or not. The facts of The Dora were briefly as follows: A Swiss company, Euro-Exchange, of which B was the chief executive decided to import a number of yachts to Europe from Taiwan. B’s plan was to make improvements and additions to the fixtures and fittings of the yachts at an Italian yard and to this end he engaged L. An agreement was made to purchase Dora from a Taiwanese shipbuilder and L was instructed to travel to Taiwan to supervise the final stages of construction to which L went together with M as assistant and English interpreter. Dora was arranged to be carried to Trieste aboard Nipponica. In the meanwhile Dora was sold to the assured Panamanian company for 480,000 on condition that the yacht remained in the Mediterranean for a year after delivery. Nipponica arrived at Trieste with Dora on board in June 1983 and L, M and F (the assured’s representatives) took delivery of the yacht. On June 26, while Dora sailed into Santa Margherita she was boarded by customs officials who found a quantity of yacht fittings in boxes and charged L, M and F with smuggling. L, M and F were later paid a penalty and were released from arrest. In October when she was sailing to Greece a fire broke out in the engine compartment and the yacht sank after an explosion. The insurer contended that they were entitled to avoid the policy on the grounds of non-disclosure and misrepresentation of several facts including that Dora and her crew were involved in smuggling charges and the skipper of Dora, M, had a criminal record. Phillips J found for the insurer as the facts which were not disclosed were material.
The assured’s counsel argued that there was no relevant relationship between those charged with smuggling and the assured. He relied on the facts that (1) When Dora and her crew were arrested for smuggling they were acting on behalf of Euro-Exchange. (2) At the time that the insurance was placed L had not yet been engaged to manage Dora for the assured company and M had not been appointed as skipper. Phillips J, however, found that both L and M were plainly persons whose moral standards were material to underwriters contemplating the insurance of Dora. The judge noted that so far as the Italian authorities were concerned Dora was in the possession and control of the assured at the time of her arrest. There was no reason to suppose that L would not continue to use M as the skipper of the vessel, as indeed he intended to do and subsequently did.
In addition to the charge for smuggling a further fact regarding M was that he had pending criminal charges. Despite the assured’s counsel’s attempt to challenge the contention that M’s criminal record need not be disclosed firstly because it was not known to the assured and secondly it was not material, Phillips J found for the insurer. The assured had, according to Phillips J, constructive knowledge of M’s criminal record given the fact that the assured should communicate to the insurer every material fact of which the assured in the ordinary course of business ought to have knowledge. In order to discharge the duty the assured should take necessary measures through the ordinary channels of intelligence in use in the mercantile world and acquire all the information as to the subject matter of the insurance.115 Phillips J took into account that the assured entrusted the management of their vessel to L and, in particular, they entrusted him with the insuring of the yacht. L engaged M as skipper for the voyage to Santa Margherita. Moreover, one of L’s most important duties as manager of Dora was to appoint a properly qualified skipper of the vessel. The normal course of business required him to check on M’s character. He made no such check. Had L made enquiries he would have learned of M’s criminal record. Prospective employers are entitled to obtain particulars of these records. M’s convictions should have been known to L and to the assured in the ordinary course of business and should have been disclosed to the defendants.
Dishonesty of the assured
A fraudulent attempt to defraud a third party before the insurance contract was concluded is in itself a material fact.116 In Insurance Corp of the Channel Islands v Royal Hotel Ltd117 M, whose knowledge was attributable to the Royal Hotel, had instructed an accounts clerk with Royal Hotels’ parent company, C, to create invoices showing accommodation at the hotel let to C in July, August and September 1991. No such accommodation had in fact been let to C. As was held by the Court, M’s purpose and intention in giving the instruction was to manipulate Royal Hotel’s occupancy figures so as to create a more favourable picture of its trading performance to present, if it became necessary, to one or other of Royal Hotel’s bankers. A tendency to be dishonest with bankers was a material fact as it would suggest both a risk of distortion of any figures which might be presented in the context of a material damage claim as well as the possibility of other more serious types of dishonesty in relation to the property and claims.118 Similarly, in James v CGU Insurance plc119 the fact that the assured was in dispute with the Inland Revenue and Customs & Excise over a sum which brought into question the viability of the business was held to be material to disclose in relation to a policy covering the business property and business interruption.
Previous refusals to insure
In the context of marine insurance previous refusals of cover was found not material. In Glasgow Assurance Corp v Symondson,120 Scrutton J stated that the material facts are the subject matter, the ship and the perils to which the ship is exposed, once these facts are disclosed the insurer must form his judgment of the premium or whether to take the risk or not and other’s people’s judgment of the risk is quite immaterial. Proposal forms may enquire whether the proposer has ever been refused insurance on a previous occasion and any express question as such, doubtlessly, must be answered truthfully.121 In the non-marine context however, this fact is material. In Locker & Woolf Ltd v Western Australian Insurance Co Ltd122 previous refusal on a motor policy was held to be material to a proposal for fire insurance. This was a material fact because, according to Slesser LJ,123 if known to the insurers it might lead them to take the view that the proposers were persons with whom it was undesirable to have contractual relations.
When the assured and insurer agree on the value of the subject matter insured, that is conclusive in terms of the amount of the indemnification that the assured receives if the risk occurs.124 If the assured declares the value of the subject matter insured higher than the actual value of the vessel the question then may arise whether overvaluation is a material fact which should be disclosed to the insurer. One consideration might be that the nature of the risk is not affected by the amount at which the goods are valued.125 On the other hand it might be argued that the greater the excess over market value the greater will be the temptation to advance a fraudulent claim.126 Furthermore, it might be a concern that the excessive valuation may lead not only to suspicion of foul play, but that it has a direct tendency to make the assured less careful in selecting the ship and captain, and to diminish the efforts which in case of disaster he ought to make to diminish the loss as far as possible, and cannot therefore properly be called altogether extraneous to the risks.127 In The Dora,128 the facts of which were given above under ‘Pending charges against the assured’s employees’, in the policy Dora’s value, inclusive of all fixtures and fittings, was represented to be 480,000. This was the real price that the assured paid for her. This exceeded Dora’s market value by at least 80,000. Phillips J was persuaded by the expert who stated that underwriters assume and accept that an assured insuring a yacht will put forward the value he subjectively believes the yacht to have. More particularly, the purchaser of a yacht will naturally insure the yacht for the price he pays. One expert said his company’s proposal form specifically asks for details of the purchase price. Thus, in the case of a valued policy, where a yacht owner insures for the price he has paid, a discrepancy between the insured value and the open market value was not material.
Valuation of a vessel might include an amount of the ship’s net earnings on the voyages for which she has firm freight contracts.129 Alternatively, valuation of a ship may be fixed in a very rough and ready way, such as cost of building or amount of shipping in the market.130
Overvaluation because of good management reasons can also be taken into consideration. The market value might take into account the current condition of the vessel, for instance, if the vessel was time chartered, that might slightly increase the value. Moreover, the owner, in the valuation, might include the previous expenditure on maintenance. Colman J in North Star Shipping Ltd v Sphere Drake Insurance plc131 found it not unreasonable for an assured valuing the vessel at a level reflecting his discounted earlier capital investment as well as the future net revenue to be derived from the time charter. In North Star