UK: Insurance Law - All for One and One for All?

Last Updated: 8 July 2004
Article by Jo Whyld and Francis Kean

Issues of fraud and dishonesty arise in a number of ways in the context of insurance and can often lead to difficult considerations for insurers and their advisers. This article focuses on some key remedies (both common law and contractual) applicable when considering whether the fraud or dishonesty of one individual entitles insurers to avoid or deny cover against the others. These issues often fall to be considered in the context of professional indemnity and D&O policies.

Common Law Remedies

The first question is whether the policy in question is composite in nature, that is there is more than one assured and each assured is insured separately, or joint i.e. there is more than one assured but all assured are insured jointly. Under a composite policy the innocent partners or directors will not be denied cover as a result of the fraud/dishonesty of a fellow partner or director, absent clear wording to the contrary. It is a question of construction in each case and a useful analysis is contained in New Hampshire Insurance Co v MGN Limited (1995), one of the Maxwell Group of companies cases. The Court of Appeal in that case, in concluding that the policy of insurance for the group of companies was composite in nature, had regard to a number of factors including the description of the insured in the policies, the manner in which the insurance was broked and the nature of the documents provided to insurers in the broking of the risk. Having reached this decision, Mr Justice Potter made clear that the right to avoid for non-disclosure relates to the contract of insurance made with each individual insured and where there are a number of independent interests separately insured there can be no question of avoiding for non-disclosure unless the individual insured in question was privy to the nondisclosure. Thus it is possible for a policy to be avoided in part and remain on foot in part.

Attribution

Notwithstanding that the policy in question may be a composite policy, it is also necessary to consider whether the circumstances are such that the conduct of the individual insured in question was effectively the conduct of the insured firm or company as a whole, thus entitling insurers to avoid against the insured as a whole. So what is the test? There is a body of company case law which is concerned with whether the knowledge or acts of a director or directors of a company should be imputed to the company itself because (i) the director in question was acting as an agent of the company; and/or (ii) the director in question was the "directing mind and will" or "alter ego" of the company. A useful summary of the basis for both theories can be found in the judgment of Lord Hoffman in the Court of Appeal case El Ajou v Dollar Land Holdings Plc (1994). In essence, the directing mind and will need not necessarily be that of persons with general management powers and control and it is necessary to identify the person with control in relation to the act or omission in question. In terms of agency, the general rule is that the fact that an individual is acting as an agent of a company is sufficient to attribute his knowledge to the company. However, in the case of Re Hampshire Land, it was decided that where an agent has been guilty of fraud against his principal, the agent’s knowledge is not to be imputed to the principal since it is contrary to common sense to expect an agent to disclose his own fraud to his principals.

In Arab Bank Plc –v– Zurich (1998) the fraud had been perpetrated on the insured’s clients rather than on the insured itself (in the context of fraudulent property valuations) but Mr Justice Rix nevertheless felt that the Hampshire Land "exception" would apply on the basis that common sense dictated that the fraudster would not disclose his fraud to the company and that the company was therefore to be regarded as a secondary victim of his fraud. Mr Justice Rix cautioned that any rule of attribution had to be consistent with the clear intention of the policy, ie in that case to provide cover to other innocent insureds even in circumstances where a director of the primary insured had been dishonest. He saw no reason to distinguish between fraud in the performance of the policy and fraud in its formation. Although there is no current English case law which considers attribution in the context of LLPs, one can expect that similar questions of attribution will arise and, since an LLP is a corporate body with legal personality separate from that of its members, it would be surprising if the authorities applicable to companies did not also apply to LLPs.

Contractual Remedies

Where the information in the proposal form is expressed to form the basis of the contract, the truth of the statements in the proposal form becomes a condition precedent to the liability of the insurers (Dawsons Ltd –v– Bonnin (1922)). The proposal form may contain qualifying words such as "to the best of my knowledge" (as was the case in Arab Bank). In the Australian case Yorkville Nominees Pty Ltd (in liquidation) –v– Lissenden (1985) there was no such qualification and the proposal form and declaration was signed by an innocent partner who was not aware of circumstances which might give rise to a claim, whereas his partner was. The Court construed the relevant question in the proposal form as a warranty by each partner about the other partner’s knowledge (there were only two partners) and thus it followed that the innocent partner’s statement was untrue. The insurers succeeded in their defence of the claim under the policy.

Some policies state specifically that no statement or omission in the proposal form by any one partner or director shall be imputed to any other partner or director for the purposes of determining cover, which can raise difficult issues if there are no qualifying words such as "to the best of my knowledge" in the proposal form. In these circumstances there is, strictly speaking, a breach of warranty and a consequent entitlement to avoid the policy against all directors/partners notwith-standing the nonimputation clause, although it is likely that avoidance in these circumstances would be vigorously challenged by the insured.

Summary

The indications from Arab Bank are that questions of attribution and policy based defences such as breach of warranty and exclusions will be considered in the context of the nature and intention of the policy as a whole and where the policy is composite in nature, the assumption is likely to be that cover will be afforded to innocent directors/partners unless the wording is unambiguous to the contrary.

Finally, insurers should also bear in mind that even if a claim is pursued and settled with no allegation of fraud having been made by the Claimant, insurers are nonetheless entitled to rely on a dishonesty exclusion if, in reality, the proximate cause of the loss suffered by the insured is fraud.

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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