UK: An Underwriter is Entitled to a Fair Presentation of the Risk

Last Updated: 21 June 2002

Defining the limits of waiver in relation to non-disclosure by an Assured: a clarification of the situation in which an Insurer can be deemed to have waived the right to full and fair disclosure of claims history.

It is well-established that a contract of insurance is a contract of utmost faith. Accordingly, there is a duty on the party proposing for insurance to give full and fair disclosure to the Insurer of all material facts known to him and unknown to the Insurer. If the duty of utmost good faith is not observed, the contract may be avoided by the Insurer.

It is also established law that the Insurer can waive its right to full and fair disclosure of material facts which have not been disclosed if, knowing of prejudicial facts and/or knowing that material facts have not been disclosed, it accepts a presentation and issues a policy. The burden of proving such waiver is on the Assured who asserts it, and he must show a clear case.

The recent case of George Henry Stowers -v- (1) G A Bonus plc & (2) Helm Insurance Brokers Limited (presently unreported, but in which judgement was handed down on the 1st of January this year) in the Central London County Court Business List clarified the previously uncertain situation in which an Insurer issues a policy on the basis of an incomplete proposal form by relying instead on the placing information that has been passed to him during the course of the pre-proposal enquiries.

The case was brought by a manufacturer of pine furniture on the Isle of Wight, a Mr Stowers, who via his broker approached the Insurer with a request for commercial insurance of his factory. He provided the details of his claims history in an initial Request for Commercial Insurance form provided by the broker. On the form, the Claimant stated that in the past five years he had suffered one fire claim with a loss of approximately £40,000.

On the basis of this form the Insurer offered a (satisfactory) quotation and sent the Claimant a proposal form for completion. There was dispute as to whether the Claimant or his broker completed the proposal form, but the parties agreed that the form returned to the Insurer was incomplete. In particular, in response to the question – "During the past five years, have you sustained any losses or had any claims made against you, whether or not insured?" - the answer "Yes" had been added, but the box provided for the proposer to list details of such losses had been left blank.

The Claimant had in fact suffered a large number of losses and had made claims totalling some £200,000 in the preceding five years.

In due course the Claimant reported a theft from the property and, shortly thereafter, a substantial flood. The Claimant submitted claims for approximately £200,000 in respect of the two incidents. After investigation, the Insurer rejected the claims and avoided the policy on the basis of misrepresentation and material non-disclosure of claims history.

The Claimant subsequently commenced legal proceedings against the Insurer and against its broker. The first ground of the action was that the Claimant had allegedly passed full details of its claims history to its broker who had negligently failed to pass these on to the Insurer.

Of more interest to Insurers was the second ground in which it was alleged that the underwriter concerned had waived the Insurer’s right to avoid the policy by accepting the incomplete proposal form. The Claimant submitted that the "Yes" answer to the previous claims history question, with no further details provided in the details box, was so obviously incomplete and unsatisfactory on its face that acceptance of the proposal form without making further enquiries operated as a waiver of the Insurer’s right to obtain full disclosure of material facts.

The Insurer submitted in reply that in making its decision as to whether to accept and issue the policy, it was entitled to rely upon the totality of the placing information that had been passed to it by the Claimant and his broker. Accordingly, the Insurer was entitled to rely upon the Request for a Quotation for Insurance in which the Claimant had stated that his claims history for the previous 5 years was limited to one fire at a loss of £40,000. The Insurer submitted that when reading the proposal form the underwriter was entitled to assume that the answer "Yes" in the previous claims history box referred to the £40,000 claim that had previously been disclosed. Further, the underwriter had made additional enquiries of the Claimant in respect of the £40,000 fire claim, to which he had received satisfactory responses.

The Court accepted the Insurer’s submission and held that the Claimant had not given a proper disclosure of his claims history, stating that "The Insurer was entitled to a fair presentation of the claims history. The underwriter was assured by the broker that there was only the fire claim back in 1991. The underwriter was reassured on that score when he made further enquiries. On the facts [he] was entitled to assume that the answer "Yes" in the proposal form related to the 1991 fire claim and to act on that assumption."

The Judge held that, because the underwriter had made further enquiries and had previously been supplied with what appeared to be precisely the information which should have been incorporated in the box in the proposal form which had been left blank, he was entitled to assume that the "Yes" referred to those details. Those details were in fact incomplete because of the omission of the other material claims and the disclosure was therefore not full and fair. Not having received a fair presentation, the underwriter did not have the requisite knowledge to waive the right to be made aware of those other (undisclosed) claims, so the actual writing of the insurance could not be said to constitute an intentional act in the relevant sense and, accordingly, there could be no waiver.

Commercial Court confirms that the scope of indemnity under a Products Liability policy is limited to physical loss or damage, and does not extend to consequential financial loss

In this case(1) a sugar importer purchased a Combined Commercial insurance policy which contained, amongst other things, a section providing cover against Public and Products Liability.

Sadly one particular consignment of sugar supplied by the Assured to a customer in the food processing industry turned out to be contaminated. This was not discovered until the sugar had been used as an ingredient in the production of foodstuffs, which foodstuffs - although not presenting any health risks -had to be withdrawn.

The food processing company complained to the Assured, and sought recompense. The Assured notified a claim to its Insurer.

There was much which was not in issue, including:-

  • that the sugar had been contaminated;
  • that it had damaged the property of the food processing company (viz the other ingredients and final baked products);
  • that the Assured was liable for such;
  • that it was entitled to an indemnity from its Insurer in respect thereof.

However, amongst the claims facing the insurer was a suggestion from its client that the assured should compensate it for the fact that two of its customers (i.e. customers of the food processing company) had ceased to trade with it and/or renegotiated - downwards - the value of their contracts in light of what had happened.

Insurers felt that such a type of loss - were it ever established - would be outwith the terms of the indemnity there were granting, on the basis that the Policy was not such as the cover consequential financial loss suffered as a result of loss of business, but required that losses be attendant upon physical damage.

The Assured issued a Part 8 Application in the Commercial Court, where the matter came on before Mr Justice Moore-Bick - who found in the Insurer’s favour.

It is a feature of the policies of insurance offered by different insurers that they are often worded differently as between different providers. Thus this decision has to be viewed as a decision on the basis of this particular wording alone. It is, however, the third occasion upon which the Courts have been asked to consider this point . No two wordings were the same but on each occasion the decision has gone Insurers’ way, with the Court construing the insuring clauses and definitions as limiting the extent of indemnity available under each policy to losses relating to physical damage.

The moral seems clear.

If liability resultant upon loss of business not necessarily directly linked to physical damage is perceived as a risk, then a broker should always recommend to its client the seeking of a Financial Loss extension to its Products Liability policy.

1 James Budgett Sugars Limited -v- Norwich Union Insurance Limited (unreported) in the Commercial Court.

Judgment handed down on the 15 May 2002.

Gouldens acted for Norwich Union in each of the Stowers and Budgett cases.

(The two cases which preceded the decision in Budgett, and to which reference was made in that case, were A S Screen Print -v- British Reserve Insurance Company (1999) Lloyd’s Reports IR430 and Rexodan International Limited -v- Commercial Union Insurance Company Plc (1999) Lloyd’s Reports IR495).

This briefing note is intended to raise your awareness of certain issues (as at June 2002) under the laws of England and Wales, and is not intended to be comprehensive or a substitute for proper advice which should always be taken for particular queries.

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