UK: Duty to Make Full Disclosure of Material Facts at Placement Re-affirmed by Court of Appeal

Last Updated: 22 July 2003

By Edward Mann and George Mortimer

First published in June 2003

In an important unanimous judgment the Court of Appeal has rejected the reinsureds'appeal in Brotherton v Colseguros, and confirmed that the duty to disclose material information must be assessed with 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 to the underwriter, will not be admitted when the court considers the validity of an avoidance of the cover.

The Court of Appeal also conclusively rejected the approach formulated by Colman J last year 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 London market (re)insurers certainty that their decision to avoid, if it is based on evidence that the (re)insured 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.

Background

Ace Global Markets' Brotherton Syndicate 490 and other reinsurers had reinsured fidelity insurance for a Colombian bank. Reinsurers have avoided the reinsurance for non-disclosure of allegations of corruption involving the bank's president, widely reported in the Colombian media and issued proceedings seeking a court declaration that their avoidance is valid. The bank's Colombian insurers argue that the corruption allegations can now be shown to be unfounded and, relying on The Grecia Express ,have contended that the court should not allow the reinsurance to be avoided if it could be shown at trial that the allegations were untrue, even if the reinsureds did not know that they were untrue when they failed to disclose them at placement. Reinsurers have argued that what the reinsureds might be able to demonstrate now is irrelevant, if there was material non-disclosure judged by what was known to the reinsureds at placement.

Reinsurers therefore applied to the court for a ruling that retrospective "post placement" evidence be excluded from the trial. Reinsurers' application was heard in February this year. Moore-Bick J declined at first instance to follow The Grecia Express and held that post placement evidence was inadmissible. Moore-Bick J held that whether allegations were material and should be disclosed has to be assessed as at the time of placement. If reinsurers wrote the risk because, judged by what was known at that time, there had been a material non- disclosure of the allegations, the court could not intervene to prevent them from avoiding the reinsurance even if it could later be shown that the allegations were untrue.

The Court of Appeal judgment on 22 May 2003

The Court of Appeal, in upholding the decision of Moore-Bick J, re-affirmed the long established law relating to the duty of disclosure and materiality. Lord Justice Mance, giving the main judgment of the court, stated that:

"A matter is material …if it would …influence the judgement of a prudent insurer in fixing the premium, or determining whether to take the risk (including of course whether to take it on at the same terms)".

Materiality should be considered as at the date of the placing by reference to the circumstances which were then within the (re)insured's knowledge.

Mance L J rejected the reinsureds' argument that, in a case where allegations against the insured are the subject of dispute, there should be a trial to ascertain, on the basis of post placement evidence, whether those allegations were true and therefore material. The argument went that, if the allegations could be proved to be untrue, they could not have been material, and reinsurers would have suffered no harm as a result of that non-disclosure. However, Mance L J stated in response to this argument:

"Mr Millett [Counsel for the reinsured ] submits that materiality, at least in cases of moral hazard, must depend on the known existence of actual moral hazard, rather than the possession of information suggesting the possibility of moral hazard …It is difficult to see any reason why, if the evidence satisfies the court that a prudent underwriter would have regarded information suggesting the possibility of moral hazard as material …that should not suffice. In my view that is the basic legal position".

Mance L J also dealt, at length, with Colman J's judgment in The Grecia Express which was heavily relied upon by the reinsureds. Colman J had held that the court can refuse to permit (re)insurers to avoid a policy for non-disclosure if it would be unfair or unconscionable for the (re)insurer to exercise his right to avoid. Mance LJ rejected this approach, holding that the avoidance of a (re)insurance policy takes effect by an act of the (re)insurer operating independently of the court exercising his right to rescind the contract. The court will not subsequently interfere with an avoidance if the (re)insurer can show that the non-disclosure was material and induced him to write the policy.

Similarly, Mance LJ held that the (re)insured has no right to litigate the issue of the truth of allegations which they had failed to disclose at placement in order to seek to argue that the (re)insurer would be acting in bad faith or unfairly/unconscionably in maintaining the avoidance. Mance LJ stated:

"It would be an unsound step to introduce into English law a principle of law which would enable an insured either not to disclose intelligence which a prudent insurer would regard as material or subsequently to resist avoidance by insisting on a trial in circumstances where:(i)if insurers never found out about the intelligence, the insured would face no problem in recovering for any losses which arose …;and (ii)if insurers found out about the intelligence then (a) they would in the interests of their syndicate members or shareholders have normally to investigate its correctness, and (b)the insured would be entitled to put its insurers to the trouble, expense and (using the word deliberately)risk of expensive litigation, and perhaps force a settlement, in circumstances when insurers would never have been exposed to any of this, had the insured performed its prima facie duty to make timely disclosure."

Buxton L J in his supporting judgment also commented on the practical difficulties inherent in the reinsureds' argument.

"…great difficulty is caused when the underwriter discovers the undisclosed allegations, and wishes to rescind. On the [reinsureds'] argument, he cannot safely do so unless he satisfies himself that the allegations are accurate or, perhaps, not plainly untrue …That would seem to be a complete departure from the important requirement of certainty in insurance dealings. In each case 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 on risk. That unsatisfactory position is the direct outcome of moving the decision on materiality from the date of placement to a later occasion."

Buxton L J further made the point that, on the facts of the present case, it would be difficult for the English courts to investigate the allegations of misconduct in Colombia and the political situation there.

Conclusion

This decision by the Court of Appeal is a very important and welcome one for the London insurance market. It has confirmed the long established principle that (re)insureds must give full and fair disclosure of known circumstances at the time of placement of the risk. It has also prevented an erosion of the duty of disclosure and the prospect of avoidances becoming subject to long and uncertain after the event enquiries. The court rejected the argument that the materiality of previously undisclosed facts could be conditioned by subsequent events. This is a welcome recognition of the commercial necessity for (re)insurers to make an assessment of a risk on the basis that all material circumstances known to the (re)insured at the time of placement have, in fact, been disclosed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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