Court of Appeal upholds first avoidance judgment for breach of duty of fair presentation under the 2015 Act

Berkshire Assets (West London) Ltd v AXA Insurance UK Plc [07.03.22]

Kennedys acted on behalf of the successful defendant and take this opportunity to thank Jeremy Nicholson QC and Aidan Christie QC for their assistance.

On Monday 7 March 2022, the Court of Appeal denied the claimant permission to appeal, thus upholding the judgment in Berkshire Assets (West London) Ltd v AXA Insurance UK Plc [2021].

In reaching its decision, Rt. Hon. Lord Justice Males confirmed that:

Materiality is best approached by reference to the statutory wording (section 7 of the Insurance Act) rather than by reference to the concept of “moral hazard”.

Whilst the criminal charges against a director of the Insured did not require proof of his dishonesty, nevertheless these were serious charges. Furthermore, AXA was not in a position at the relevant time to determine whether or not the allegations were entirely unconnected to any allegations of personal wrongdoing.

The court was therefore entitled to conclude that the charges were material and ought to have been disclosed.

The Judge was entitled to conclude that AXA would not have accepted that risk, in accordance with its underwriting policy. The fact that AXA subsequently declined coverage was no more than support for this conclusion.

Finally, whilst this would be the first case to consider issues of materiality and inducement under the 2015 Act, this was not a valid reason for giving permission to appeal.

Facts

The Insured, Berkshire Assets (West London) Ltd (BAWL), a special purpose vehicle, had purchased an office block in West London (the Property) which it was seeking to turn into residential flats.

BAWL had taken out a Contractors’ All Risks (CAR) policy with AXA, in joint names with the contractor. Prior to renewal BAWL also sought to add business interruption/DSU type cover (BI) to the policy.

A few months prior to renewal on 9 August 2019, the Attorney General as Public Prosecutor in Malaysia filed four criminal charges against Mr Sherwood (director of the Insured) and sixteen other individuals arising out of the 1MDB fraud, where billions of dollars from a state fund meant to help the Malaysian people went missing. Mr Sherwood became aware of the charges shortly thereafter. The charges were never in fact served upon Mr Sherwood and were unrelated to his activities at BAWL. Such proceedings were eventually discontinued on 9 October 2020.

On 1 January 2020, there was an escape of water through a sprinkler pipe at the property and BAWL claimed under its policy.

AXA denied liability on the grounds that, had it been made aware of the charges, it would not have agreed to insure BAWL. Therefore it was entitled to avoid the policies (although it did continue to insure the contractor under its CAR policy as they were an innocent party).

Duty of Fair Presentation

The two key issues the court was asked to consider were:

  • Was the fact that Mr Sherwood had been charged with criminal charges in Malaysia a material circumstance for the purposes of the duty of fair presentation?
  • If it was, and if it had been adequately disclosed, would AXA have agreed to insure the claimant in respect of business interruption, or at all, under the renewed policy?

Insurers accepted that the burden of proof was upon them in relation to both issues. In determining burden of proof, the following was considered:

Duty of Fair Presentation

Section 3(1) of the Insurance Act 2015 (the 2015 Act) provides that:

“Before a contract of insurance is entered into, the insured must make to the insurer a fair presentation of the risk”.

A fair presentation of the risk is one—

(a) which makes the disclosure required by subsection (4) …

The disclosure required is as follows, … —

(a) disclosure of every material circumstance which the insured knows or ought to know, …

Materiality is defined as:

7(3) A circumstance … is material if it would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms.

(4) Examples of things which may be material circumstances are— …

(c) anything which those concerned with the class of insurance and field of activity in question would generally understand as being something that should be dealt with in a fair presentation of risks of the type in question.

Materiality

Materiality

The court held that the Insurance Act did not alter well established case law setting out important principles of materiality. In particular:

  • The materiality of a particular fact is a question of fact, and is determined by the circumstances of each case.
  • Materiality is to be tested at the time of placement and not by reference to subsequent events.
  • Facts raising doubts as to the risk are sufficient to be material. It is not necessary for the facts to be shown, with hindsight, to have actually affected the risk.
  • The overall effect of the ‘prudent insurer’ test is that whether there has been a fair presentation of the risk remains to be assessed principally from the perspective of an insurer.
  • A circumstance does not have to be decisive for the hypothetical prudent insurer in determining whether to take the risk or on what terms. It is enough that the circumstance is one which the prudent insurer would rightly take into account as a factor in coming to its decision.

Relevance of moral hazard

There was considerable debate as to whether the charges against Mr Sherwood amounted to a moral hazard that BAWL was required to disclose because it was a material circumstance. BAWL submitted that the charges did not constitute a ‘moral hazard’ (as Mr Sherwood was not charged with any offence involving dishonesty) and therefore was not material. AXA submitted they clearly did.

The Judge noted that there was no settled definition of moral hazard.

Instead it was preferable, in his view, for the court to rely upon the statutory definition of material circumstance in Section 7(3)(4) of the 2015 Act (referred to earlier) when considering the facts of the particular case before it. This view was endorsed by the Court of Appeal.

Here, it was well established case law that a charge of a criminal offence will often constitute a material circumstance.

It is also established that the duty to act in good faith does not preclude an insurer from avoiding the insurance for non-disclosure of an allegation of criminality even when the insured has (subsequently) been acquitted. Here, the risk of injustice is said to be diminished by the right of the insured to present exculpatory evidence to the underwriter when disclosing the allegation made against him.

The Judge endorsed the reasoning in Brotherton v Aseguradora Colseguros (No.2) [2003] that the court is entitled to take into account all of the evidence that was, or would have been, available to the assured at the time the insurance was placed. Here the Judge noted that AXA’s denial of cover was made after they had received and had taken into account all of that which BAWL and Mr Sherwood had to say.

Were the charges material?

Materiality was to be tested at the date of placement.

The court had to take into account all of the points that BAWL would have made had they appreciated they had a duty to disclose.

The Judge also accepted that, on analysis, it was not necessary for the Malaysian prosecutors to allege that Mr Sherwood was guilty of deceit or dishonesty. He also found there was no deceit or dishonesty on his part.

It was necessary to consider the matter from the point of view of a reasonable insurer at the time the decision (whether to accept the risk) was made if all relevant circumstances had been disclosed.

The Judge held they were material.

He accepted that AXA were not in a position to determine whether or not the allegations were entirely unconnected to any allegations of personal wrongdoing. Nor were they bound simply to accept the assertions made on behalf of BAWL.

It was important to recognise that AXA could not be expected at that time to resolve the issue of whether the charges against Mr Sherwood did or did not involve allegations of deceit or dishonesty. They were not under an obligation to BAWL to carry out a detailed check into, or analysis of, the nature of those charges.

Importantly he held that facts raising doubt as to the risk are sufficient to be material.

Inducement

 As to inducement, the 2015 Act provides:

“… The insurer has a remedy against the insured for a breach of the duty of fair presentation only if the insurer shows that, but for the breach, the insurer—

(a) would not have entered into the contract of insurance at all,

or

(b) would have done so only on different terms ...”

Inducement too is a question of fact.

 It was common ground that AXA’s branch office had no authority to write the risk under its Practice Note. If the charges had been disclosed to them and the exculpatory matters upon which BAWL relied had been referred to London, the Judge was satisfied that AXA would have declined the risk, as they did when it was in fact referred to them. 

The Judge also found that the fact that other underwriters were prepared to cover Mr Sherwood following disclosure of the charges to them was not of assistance in his consideration of the issues in this case. The insurance policies were different in nature from the policy under consideration here. He was concerned with AXA’s conduct in relation to the cover which they provided.

The Court of Appeal confirmed that the Judge applied the correct test, by reference to the position at the time and had the evidence to support his conclusions. The fact that AXA subsequently declined coverage was no more than confirmation for this decision.

Comment

This is a sensible decision which reflects the commercial realities of insurance, namely underwriters are not expected to carry out a detailed check into, or analysis of, the nature of complex charges or have to analyse whether they give rise to moral hazard.

Instead, it is clear that facts raising doubt as to the risk are sufficient to be material.

Before making any decision, it is crucial that underwriters should take into account all evidence which was or would have been available to the insured at the time of placing the insurance. However, they are not bound simply to accept the assertions made on behalf of an insured.

Therefore, it is important that insurers take time to obtain and consider such information before making a final decision.

The decision highlights the importance of having underwriting procedures in place to support any decision. Also a timely reminder to brokers and insureds of the need to ensure full disclosure of any charges or convictions.

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