Can Insurers avoid a policy following an honest mistake in relation to disclosure?

Does the reference to “deliberate…non-disclosure” in an insurance policy mean an Insurer can avoid the policy in circumstances where an Insured honestly, but mistakenly decides not to disclose a particular document or fact? A decision of the TCC from 23 March has confirmed that deliberate or fraudulent non-disclosure must involve dishonesty. An honest but mistaken belief that the fact or document did not need to be disclosed is not enough to allow the Insurers to avoid the policy. This case provides some guidance on an area where there has previously been very little authority and will offer Insureds, grappling with disclosure exercises some comfort.

MUTUAL ENERGY LTD AND (1) STARR UNDERWRITING AGENTS LTD AND (2) TRAVELLERS SYNDICATE MANAGEMENT LTD

The Claimants (“MEL”) owned and operated an undersea Moyle Interconnector (“MI”). The MI provided a link between the electricity systems of Northern Ireland and Scotland. Building of the MI was completed in 2001 and full operation began in April 2002.

The Defendants (the “Insurers”) were 2 of 5 Insurers who agreed to provide insurance in respect of the MI (the other 3 Insurers settled with the Claimant). The period of insurance ran from 1 December 2009 to 1 December 2011. In September 2010 there was a cable failure which led to failure of the MI. Insurers and the Insured renegotiated the policy terms for the second year, in accordance with which MEL paid additional premium.

Thereafter, in June and August 2011 there were two further failures which led to a loss of power flow. Both incidents related to a failure of the insulation around the integrated return conductor (“IRC”).

In March 2015 MEL commenced proceedings against Insurers seeking indemnity in the sum of £17,630,067. Insurers defended the claim on the basis that MEL had failed to disclose problems that had arisen pre-inception with the interconnector cables. A preliminary trial was held in October 2015 to consider the construction of the relevant insurance clauses.

THE INSURANCE CLAUSES

Clause 5: Scope of Disclosure

“The Insurers acknowledge that (i) they have received adequate information in order to evaluate the risk of insuring the Company in respect of the risks hereby insured on the assumption that such information is not materially misleading…”

Clause 6: Non-disclosure, misrepresentation and breach

“Notwithstanding any other provisions of this policy:

the Insurers agree not to terminate, repudiate, rescind or avoid this insurance as against any Insured… on the grounds that the risk or claim was not adequately disclosed, or that it was in any way misrepresented…unless deliberate or fraudulent non-disclosure or misrepresentation or breach by that Insured is established in relation thereto" (Our emphasis).

DELIBERATE NON-DISCLOSURE

MEL argued that “deliberate...non-disclosure” meant a conscious decision not to disclose something to Insurers which they knew should be disclosed. Insurers argued “deliberate” must be given a separate and distinct meaning from “fraudulent”. Fraudulent, they submitted, involved dishonesty; deliberate encompassed an honest, but mistaken decision not to disclose.

The Oxford English Dictionary indicated that “deliberate” meant carefully thought out/intentional. The case law indicated that the relevant act or omission must involve an element of culpability, of doing something which should not be done. The court was not persuaded that "deliberate" and "fraudulent" meant the same thing. For example, conduct could be deliberate and dishonest but not fraudulent. A breach of contract could be deliberate and made in the knowledge that it was a breach, but might not be fraudulent. The Financial Ombudsman Service also drew that distinction. A sensible and workable distinction between deliberate dishonesty and fraud was therefore readily identifiable. On that basis, both words had utility, but both involved an element of dishonesty. Accordingly, "deliberate or fraudulent non-disclosure" in Clause 6(a) did not extend to an honest mistake.

In reviewing the contractual context the proviso in Clause 6(a) was a carve out, an acknowledgement that despite the wide range of remedies which the Insurers accepted were not available to them, there was one type of situation they were not prepared to forgo. That was in circumstances where the non-disclosure was deliberate or fraudulent. It was clear that Insurers considered they had sufficient information to evaluate the risk. There was nothing in Clause 5 or 6(a) which supported a case for the wider interpretation proposed by Insurers.

Finally, the court looked at business common sense. Insurers had tried to argue that MEL’s interpretation would produce a wholly unbusinesslike result. The court noted that if one employee reviewed File A for documents to be disclosed to Insurers and agonized over the task, eventually concluding that half should be produced and half should not, but in reaching that conclusion he made an honest mistake about what should not be disclosed, Insurers would be entitled to avoid the policy. However, if another employee was given File B to review and inadvertently buried it under other papers so never reviewed it, that would be inadvertent (rather than deliberate) non-disclosure. On Insurers’ construction, MEL would, in those circumstances be entitled to rely on the policy. In considering this comparison the court said it was plain that Insurers’ interpretation led to a wholly unbusinesslike result. It could not be correct that MEL should be penalised for honesty but not for inefficiency.

CONCLUSION

The court confirmed that there was no doubt Clauses 5 and 6 were designed to replace or modify the very wide ranging obligations that MEL would have been bound by under Sections 17-20 of the Marine Insurance Act 1906 (notably that a contract of insurance is a contract of utmost good faith (s.17) and that the Insured must disclose every material circumstance (s.18(1)). The Insurance Act 2015 will come into force on 12 August 2016 and retains the requirement that the Insured must disclose all material circumstances which it is, or ought to be aware of. The duty is restated however so that the obligation will be fulfilled when the Insured discloses all material circumstances (of which it is or ought to be aware) or gives Insurers enough information to put them on notice that further enquiries should be made. See our earlier discussion in LawNow, Count Down to the Insurance Act.

It remains to be seen how the test for disclosure will be interpreted post the 2015 Act coming into force, however Insurers should take care when using clauses such as Clause 5 where they explicitly acknowledge they have received sufficient information to evaluate risk.

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