UK: Insurance Law Quarterly – Spring 2006 Where Are We Now With Valuation?

Section 20(5) of the Marine Insurance Act 1906 provides that a representation as to a matter of ‘expectation or belief’ is true if made in good faith. It is often argued that a valuation, by its very nature, must always fall within this categorisation. Consequently, it is further argued that underwriters may not rely on an inaccurate valuation for the purposes of avoidance whenever it is made in good faith.

Accurate valuation lies at the heart of commercial property underwriting but what remedies do underwriters have in the event of an inaccurate valuation? Following Rendall v Combined Insurance (2005), the position is now extremely unclear.

A similar point arose in a personal lines context in Economides v Commercial Union (1997) where an insured inaccurately estimated the value of jewellery against the background of a declaration at the foot of the proposal form in terms that the ‘statements and particulars given above…were to the best of my/our knowledge and belief, true and complete…’ Commercial Union argued that as well as honest belief in the value there was an implied representation of fact that the insured had reasonable grounds for his belief. This argument was rejected: an underwriter could only avoid where the insured had ‘wilfully shut his eyes to the truth’ and/or made a ‘blind guess’. Rendall has now confirmed that the Economides approach is not limited to personal lines.

Rendall reinsured a local carrier, Combined Insurance, for its insurance of Aon’s employees for accidental death and/or bodily injury incurred on a business trip. Aon provided an estimated number of travel days for its employees; this estimate was inaccurate. Reinsurers’ argument, that there was an implied representation that the estimate had been made on reasonable grounds, got short shrift. So too did a representation that the figures had been arrived at by reference to Aon’s historical information and experience, against the background of Aon making it plain that the figures were estimated.

A similar result in the context of commercial property insurance would leave underwriters unable to avoid. It is often suggested that this does not really matter, because underwriters are protected by the average clause (and/or that undervaluation is immaterial for this reason). This is not a complete answer especially within the context of a property portfolio where average may apply across the account rather than property by property and/or vis-à-vis outwards reinsurers.

The cases so far do not deal specifically with commercial property valuation. It is hoped that a court could be persuaded to require a commercial insured to take those sort of steps that are usual in their business. An insured would not usually speculate without advice when they were selling the property. Why should they be able to do so when representing value to insurers? Such a defence could be characterised in the following way:

• within the context of commercial property insurance it is reasonable to import an implied representation of fact (against which a misrepresentation argument could be run) that valuation has been arrived at reasonably; and/or

• there is a non-disclosure of the fact that the valuation is unprofessional or unbusinesslike.

We must wait to see whether such a defence can succeed. No underwriter could be sure of the outcome.

^{*At time of injury unless otherwise stated}

The personal injury and general damages awards table is a regular feature of the ILQ and is prepared by Tom Walshaw, an associate in the General Insurance team.

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