High Court judgment considers the importance of construction of questions in insurance proposals

Ristorante Limited T/A Bar Massimo v Zurich Insurance Plc [21.09.21]

This article was co-authored by Aylish Power, trainee solicitor, Manchester.

This recent decision emphasises the importance of careful drafting by insurers of the questions posed to potential insureds at policy placement – the answers being crucial to the duty of fair presentation, misrepresentation and/or an insured’s obligation to disclose material facts.

Facts

The claimant company owned a property in Glasgow, out of which it ran a restaurant and bar. It entered into a policy of insurance with the defendant insurer in 2015 and on inception and renewal in 2016 and 2017, the claimant was required to provide a response to the following question through the defendant’s computer underwriting system:

"No owner, director, business partner or family member involved with the business:

(i) …

(ii) …

(iii) has ever been the subject of a winding-up order or company/individual voluntary arrangement with creditors, or been placed into administration, administrative receivership or liquidation.

(iv) …"

(referred to throughout the case as the “Insolvency Question”).

Each time, the claimant responded “agree”, indicating that the statement was correct.

In January 2018, the claimant sought to be indemnified by the defendant following damage caused by a fire to the property.

The defendant purported to avoid the policy on the basis that the claimant failed to make fair presentation of the risk. The defendant claimed that had it been aware that the directors and shareholders had previously been directors of insolvent companies, it would not have provided cover to the claimant.

The claimant issued proceedings.

The court had to consider:

  1. Whether or not there had been a misrepresentation made by the claimant.
  2. Whether in asking the question in the manner that it had, the defendant had waived any entitlement to information about the insolvency of the companies of which the claimant’s directors and shareholders had been directors or shareholders.

Judgment

Mr Justice Snowden found in favour of the claimant and held that no misrepresentation or unfair presentation of risk had been made by the claimant.

Snowden J concluded that the claimant had interpreted the Insolvency Question correctly in answering about insolvency events of individuals involved with the claimant as opposed to the insolvency events of any other person or company. Although the majority of the procedures listed in the Insolvency Question are corporate procedures not applicable to individuals, there is reference to Individual Voluntary Arrangements and no express mention of any corporate body, and Snowden J therefore considered that the question did have purpose for an individual.

Further, it was held that in asking the Insolvency Question the way it had, the defendant had waived its entitlement to be told about any other insolvency events not specified. The question was whether a reasonable man reading the Insolvency Question would be justified in thinking that the insurer had restricted its right to receive all material information.

Snowden J concluded that it was reasonable for the claimant to infer that the defendant did not wish to know about any other insolvency event other than those specified in the Insolvency Question.

Comment

Firstly, the decision adopted by the court is a stark reminder that insurers should play close attention to the wording of proposal forms, as well as policy wordings. The proper interpretation of the questions posed to potential insureds is fundamental to policy coverage, particularly when it comes to the duty of fair presentation and disclosure of material facts. Where there is ambiguity, the matter will be resolved in the insured’s favour and it could be the difference between being on or off risk.

Insurers should be regularly reviewing policy wordings and proposal forms, including ‘standard clauses’ – particularly in a world where electronic placement through portals is becoming increasingly common, often without the involvement of an agent.

Secondly, Snowden J also referred to the earlier cases of In Doheny v New India Assurance Co [2005] and R & R Developments v Axa Insurance UK plc [2010]. Both cases highlighted the inadequacies in simply mentioning corporate insolvency procedures in questions posed to a potential insured without clearly setting out that details of any insolvency events of companies in which the potential insured was involved are required to be disclosed – even when these corporate insolvency events are not applicable to individuals.

Snowden J emphasised that a reasonable insurer in 2015 should be expected to have known these case law developments, and therefore should understand the importance of using wording referring to companies in questions posed to potential insureds.

What this judgment tells us is that generally, insurers should be well acquainted with developments in relevant case law and also the industry standards and should review proposal forms and policy wordings frequently in light of the same. Ignorance is not a defence.

However, specifically to insolvencies, it highlights the need for clear and concise questions, which are targeted to the potential insured. This is particularly relevant in the financial lines sphere where we are already seeing an increase in the number of insolvency related claims, largely due to the pandemic.

Related item: The UK 2015 Insurance Act – why it matters