Material non-disclosure was not an “efficient cause” of different policy terms in Court of Appeal case
Zurich Insurance plc v Niramax Group Limited [23.04.21]
This case review was co-authored by Sarah Hitchcock, Trainee Solicitor, London.
The Court of Appeal dismissed the appeal of Zurich Insurance PLC (Zurich) on the basis that Niramax’s material non-disclosure was not an “efficient cause” of Zurich providing different policy terms. It was not enough for Zurich to show that less onerous terms would have been imposed but for Niramax’s non-disclosure.
The claimant, Niramax Group Limited (Niramax) is a waste collection and recycling company. On 4 December 2015, a fire at Niramax’s main premises spread into a new building containing a brand new multi-million pound sorting machine, known as the Eggersmann plant. The machine and other items of plant were destroyed. The claimed losses were approximately £4.5 million.
Niramax held buildings cover with Millennium Insurance (Millennium) for the policy period 2014/15 (the Millennium policy). Following a survey on 14 February 2014, Millennium imposed a number of risk requirements. Niramax did not comply with the requirements, so Millennium imposed special terms that Niramax must self-insure for 35% of any losses and should bear the first £250,000 of any loss.
Niramax’s mobile plant was covered by a separate insurance policy with Zurich (the Zurich policy). The Zurich policy was renewed on 14 December 2014 and the Eggersmann plant was added to cover on 5 September 2015. It is important to bear in mind that the Insurance Act 2015, which came into force in August 2016, does not apply to the Zurich policy.
The Zurich policy was underwritten by a junior employee, who applied a “commoditised and streamlined” process. The process required three inputs to calculate a premium, namely the amount of cover needed, the nature of the risk and the applicant’s claims experience. The result of these inputs was a “technical price”, a “target price” and a “walkaway price”. When entering the inputs, the junior employee incorrectly categorised the risk as “contractor’s portable plant,” which produced a premium of 2.25%, rather than “waste,” which would have produced an automatic premium of 6%. The policy excess was also lower than it would have been, had the inputs been correct.
By 5 September 2015, when the Eggersman plant was added to the Zurich policy, Niramax had complied with nearly all of Millennium’s outstanding requirements. However, Niramax did not disclose to Zurich that Millennium’s special terms remained in place.
Following the fire, Zurich reserved its right to avoid the policy on the basis that Niramax had failed to disclose relevant information regarding the outstanding requirements and special terms imposed by Millennium. Niramax sued for an indemnity.
First instance judgment
At the trial at first instance, Zurich alleged that it was entitled to avoid the policy from renewal or from the date of the extension of its policy when the Eggersmann plant was added, and that, had it been aware of the non-disclosed facts, it would not have renewed the policy at any price.
The trial judge, Cockerill J, held that there had been a material non-disclosure with regard to Millennium’s risk requirements and special terms. Had these been disclosed to Zurich, the matter would have been referred to a senior underwriter who would have corrected the error of the junior employee and renewed the Eggersmann plant policy on different terms. However, the non-disclosure was not causative of the mistake and Zurich may have declined to insure the Eggersmann plant, but the Court did not accept that it would have cancelled the policy.
Niramax’s claim was successful in part, in that it recovered damages to reflect the value of the mobile plant and Niramax’s own plant, but not the Eggersmann plant.
Zurich appealed, arguing that it would have refused to write the policy on renewal and that the Judge was wrong to hold that inducement had not been established, having found that an additional premium would have been charged by Zurich. Zurich considered that the causation test for inducement was met, even if it was necessary for non-disclosure to be an efficient cause. Niramax responded that it was not self-evident that a higher premium would have resulted and the policy may have been written on the same terms.
The Court of Appeal dismissed Zurich’s appeal. Zurich had not taken independent account of attitude to risk as it had used a streamlined process to calculate the premium. The undisclosed facts were therefore irrelevant to the rating of the risk and could not have had any causative efficacy on the renewal terms. The mistake by the junior employee was the sole reason for the lower premium.
This matter provides a helpful illustration of the court’s approach to material non-disclosure and the avoidance of insurance policies where the Insurance Act 2015 does not apply, highlighting the importance for insurers of having clear processes demonstrating when decisions are made and by whom.
Of course, under the 2015 Act, the insurer has a proportionate remedy against the insured for a breach of the duty of fair presentation if, ‘but for’ the breach, the insurer would not have entered into the insurance contract at all, or would have done so only on different terms. This contrasts with the Court of Appeal’s approach in Niramax, where it considered that the ‘but for’ test was insufficient to characterise the causative link between the insured peril and the loss and, instead, required the non-disclosure to be an ‘efficient cause’ of the difference in terms. However, the Court’s decision to apply a higher standard to insurers in this case could indicate its future approach under the 2015 Act; insurers may be required to demonstrate the material non-disclosure was an efficient cause under the 2015 Act.