Alleged breach of the duty of fair presentation
Although the insurers broadly accepted that the
requirements for a constructive total loss under
the policy were met, they nonetheless denied
the insured's claim on four grounds, including
avoidance for material non-disclosure (ie a
breach of the duty of fair presentation).
Section 3(1) of the 2015 Act imposes a duty on
an insured to make a fair presentation of the
risk to the relevant insurer before the contract
in question is entered into. By virtue of section
3(4) of the Act,this must include "disclosure of
every material circumstance which the insured
knows or ought to know".
Section 7(3) of the Act further provides that a
circumstance is material "if it would influence
the judgment of a prudent insurer in determining
whether to take the risk and, if so, on what terms".
However, section 8(1) of the Act makes clear that
an insurer only has a remedy for breach of the
duty of fair presentation if it can show that, but
for the breach, it would either not have entered
into the policy at all, or would only have done
so on different terms. This is known as the
inducement requirement, which stems from the
Court of Appeal's decision in Pan Atlantic
Insurance Co Ltd v Pine Top Insurance Co Ltd
(1994) 2 Lloyd's 427.
The parties agreed that it was the substance
of the role played by Bairactaris which was
important in this regard, rather than the label
attached to it.
It appeared on the face of the corporate
documents that Bairactaris had very
wide-ranging powers; he was not only the
sole director and president of the insured,
but also the secretary and treasurer. However,
Bairactaris was contractually obliged to act
only on the instructions of the Moundreas
family, who were the beneficial owners of the
insured. Moreover, they had agreed to
indemnify Bairactaris and hold him harmless
from, "without limitation, all actions, claims,
court proceedings, damages and other liabilities".
Bairactaris and Moundreas both gave oral
evidence that Bairactaris had been appointed
as nominee director of the insured purely for
convenience so that he could sign transactional
documents quickly when required and had no
substantive involvement in anything to do with
the insurance programme of the insured, or
its group.
The court accepted that Bairactaris was
essentially only discharging an administrative
function: he exercised no independent judgment
and had no decision-making power; he was
simply "a vehicle for the execution of decisions"
by the beneficial owners. On that basis, as
Bairactaris was the only one who knew of the
criminal charges but was not part of the
"senior management" of the insured for the
purposes of section 4(8), the court found that
neither the insured, nor its group (which was
the named policyholder), had actual knowledge
of the criminal charges.
Constructive knowledge
Section 4(6) of the 2015 Act provides that
an insured "ought to know what should
reasonably have been revealed by a reasonable
search of information available to the insured
(whether the search is conducted by making
enquiries or by any other means)". The court
determined that the correct test to apply is
one that is objective in nature, "by reference to a
reasonable, prudent insured in that class".
The court rejected the insurers' arguments on
constructive knowledge. Given Bairactaris's
role, the court found that it would not have
been reasonable to make regular enquiries
of him in order to assess that he continued
to be a fit and proper person to hold a nominee
directorship. Even if it would have been
reasonable to enquire, only enquiries during
the very limited period of March to June 2018
would have elicited the criminal charges.
| It was common ground between the parties
that the criminal charges brought against
Bairactaris had not been disclosed by
the insured prior to inception of the policy.
As a consequence, the insured accepted that
insurers would have a defence to the claim
provided they could discharge the burden of
proof by establishing the following: - knowledge on the part of the insured,
- the materiality requirement (namely, that
the charges against Bairactaris would
influence the judgment of a prudent
insurer); and - the inducement requirement.
"Section 8(1) of the 2015 Act makes
clear that an insurer only has a
remedy for breach of the duty of
fair presentation if it can show that,
but for the breach, it would either
not have entered into the policy at
all, or would only have done so on
different terms. This is known as the
inducement requirement"
Actual knowledge
Section 4(3) of the 2015 Act provides that,
for the purpose of discharging the duty of
fair presentation, a corporate insured knows"
only what is known to one or more of the
individuals who are (a) part of the insured's
senior management, or (b) responsible for
the insured's insurance". In this case the only
individual who had actual knowledge of the
criminal charges prior to inception of the policy, was Bairactaris himself.
Section 4(8)(c) of the Act defines senior
management as "those individuals who play
significant roles in the making of decisions
about how the insured's activities are to be
managed or organised".
The court found the insurers' suggestion
that the senior management of the
insured's group,or those responsible for
placing the group's insurance, should have
asked Bairactaris whether he knew of any
circumstances which might affect the risk to
be "implausible". Given that he had no
operational role or function regarding the
trading of the vessel or its insurance, asking
him about the risk to be involved would,
objectively, have been a pointless exercise
anyway. "When it comes to assessing
knowledge of material
circumstances, it is important
to look at the substance rather
than just the form of individuals
who may be perceived as playing
(but not in fact play) an operational
role in the insured's business"Accordingly, the court found that the insured
had neither actual nor constructive knowledge
of the criminal charges against Bairactaris,
such that the insurers' case on breach of the
duty of fair presentation fell at the first hurdle. Commentary Despite the fact that, as a result of its
findings regarding the insured's knowledge,
the court was not required to consider the
materiality or inducement requirements,
it nevertheless recognised the lengths that
counsel for the parties had gone to in their
submissions and therefore went on to
address these points obiter. Although the
analysis is too comprehensive to discuss as
part of this article, it is undoubtedly worth
reading in full to understand fully the details
of the issue. It is also worth noting that the insurers declined
the insured's claim on three other grounds,
namely that the: - loss was not fortuitous;
- claim fell within a policy exclusion; and
- delay in the release of the vessel was
materially caused by the insured's
breach of its duty to sue and labour.
Again, the court addressed these
points in meticulous detail.
Overall, this decision is an important reminder
of the factual hurdles that an insurer must
overcome to successfully decline a claim for
breach of the duty of fair presentation. When
it comes to assessing knowledge of material
circumstances, it is of critical importance to
look at the substance rather than just the
form of those individuals who may be
perceived as playing (but not in fact play)
an operational role in the insured's business.
|
