UK: Insured’s Duty To Make Full Disclosure At Placement Reaffirmed By Court Of Appeal
Last Updated: 22 May 2003

In an important judgement delivered today, the Court of Appeal have unanimously rejected the reinsureds’ appeal in Brotherton v Colseguros, and confirmed that the duty to disclose material information must be assessed by reference to what was known to the (re)insured when cover was placed.

Evidence not available at placement, which might call into question the accuracy or materiality of information not disclosed by the underwriter, will not be admitted in the court’s examination of the validity of an avoidance of the cover.

The Court of Appeal also conclusively rejected the approach formulated by Mr Justice Colman in The Grecia Express, that the court may refuse to allow underwriters to avoid for non-disclosure if to do so can be shown, by reference to later events, to be unconscionable or unfair.

The Court of Appeal’s ruling gives insurers certainty that their decision to avoid, if it is based on evidence that the Assured was aware of material circumstances at placement which it failed to disclose or misrepresented which made a difference to their assessment of the risk, will not later be overturned by the court.

Simon Greenley of Reynolds Porter Chamberlain, whose team represented the reinsurers led by ACE Global Markets Syndicate 490, comments:

"This decision makes sense. It removes what would otherwise have been not only an erosion of the duty of disclosure, but also the prospect of avoidances becoming subject to long and uncertain after-the-event enquiries."

"The Court of Appeal has confirmed the long established principle that insureds must give full and proper disclosure of known circumstances at the time of placement. The court rejected the argument that the materiality of previously undisclosed facts can be conditioned by subsequent events."

"This is a welcome recognition of the commercial importance for insurers of being entitled to make an assessment of a risk on the basis that all material circumstances known to the insured at the time of placement have been disclosed."

*****

In Brotherton, the appellant reinsureds had argued that they should be entitled to seek to establish, at trial, that allegations against the original insured, which had not been disclosed, were untrue. Mance LJ roundly rejected this argument, and the relevant part of the decision in The Grecia Express, by reference to established legal principles and insurance case law going back to the 18th Century. Mance LJ held that it would be unsound to introduce into English law a principle which would allow an insured not to disclose material intelligence in circumstances where, if insurers subsequently found out about it, they "would have to…investigate its correctness…and…the insured would be entitled to put its insurers to the trouble, expense and…risk of expensive litigation" in circumstances where they "would not have been exposed to any of this had the insured performed its prima facie duty to make timely disclosure."

Buxton LJ commented that if the reinsureds’ argument was successful "the underwriter, even though he complains of non-disclosure of a matter that on the facts known at the date of placement was material, has to await a trial in order to determine whether he is at risk." That would be an "unsatisfactory" departure from the established law.

Background Note To Original Commercial Court Decision In Brotherton V Colseguros

In the original commercial court decision in Brotherton v Colseguros on 26 February 2003:

  • The Ace Syndicate and other Lloyd’s syndicates and London insurance companies had reinsured fidelity insurance (protection against employee dishonesty) for a Colombian bank. They had avoided this policy on the basis that allegations of corruption involving the bank’s president, widely reported in the Colombian media, had not been disclosed to them. Had they known of these allegations, the reinsurers say they would not have wanted to provide cover.
  • However, the bank’s Colombian insurers argued that the corruption allegations could now be shown to be unfounded and cited last year’s controversial court decision in The Grecia Express which suggested that although allegations might not be known to be untrue when an insured or reinsured applied for cover, the Court should not allow a policy to be avoided if it could subsequently be shown that they were untrue.
  • Mr Justice Moore-Bick declined to follow judgment in The Grecia Express. He held that whether allegations were material and should be disclosed must be assessed as at the time of placement. If Underwriters wrote the risk because, judged by what was known at that time, there had been a material non-disclosure of allegations, the Court could not intervene to prevent them from avoiding the cover even if it could now be shown that those allegations were untrue.

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