United States: The Undisclosed Principal in Insurance Law

Talbot Underwriting Ltd. v. Nausch Hogan & Murray, Jascon 5 [2005] EWHC 2359 (Comm)

The English High Court ruled in October 2005 that the doctrine of "undisclosed principal" is of limited application in insurance law. If the policy itself does not contemplate that an assured is acting for a third party, and the insurer is unaware that cover is intended for the third party as well, then the undisclosed principal doctrine is unlikely to apply.

Nevertheless, even if the doctrine does apply, an intention to contract on behalf of an undisclosed principal is a material fact which insurers would want to know and which would affect their underwriting judgment. Failure by an insured to disclose the agency relationship would therefore allow insurers to avoid the policy for non-disclosure. However, if the insurer is aware that the person entering into the insurance contract is acting for a third party, but fails to inquire as to the identity of the third party, then the insurers are likely to be taken to have waived disclosure by their failure to make further enquiries and the third party (i.e., the undisclosed principal) will be covered under the policy.

The general position was stated by Lord Denning MR in Teheran-Europe Co. Ltd v ST Belton (Tractors) Ltd [1968] 2 QB 545 at 555 where he said:

The Jascon 5 was a vessel (the Vessel) owned by CPL (C). C was part of the Sea Trucks group of companies. C entered into a contract with Sembawang (S) for repair and refurbishment to take place at its shipyard in Singapore. As part of this contract, C had to obtain insurance for the work and the policy was to include S as a co-assured. C instructed the risk in London to be placed by the defendant brokers NHM.NHM, via another broker, NMB, placed the insurance with the Claimant (the London Market insurers ("Insurers")). During the period covered by the policy, the Vessel sustained flooding and S incurred expense by way of the cost of repair of the Vessel. S made a claim under the policy but the claim was refused on the ground that S was not an assured under the policy.

C was named on the policy as an assured but S was not. However, the policy did insure "subsidiary, affiliates, associated and interrelated companies and/or joint ventures" of the assured. The policy also provided coverage for any "additional assured…as may be required."

The Court was asked to consider the following issues:

1. whether S was a co-assured under the policy;
2. whether S was the undisclosed principal of an agency agreement between S and C, thereby giving S the right to subrogate its claim under the policy; and
3. whether there was a real prospect of success of Insurers’ claim for damages against NHM on the basis that they failed to place a policy of insurance that expressly named S as a co-assured.

NHM submitted that S was an "associated company" or party to a "joint venture" with C; that the phrase "as may be required" in the additional assured clause meant as required or intended by the already described assured, namely C, and that Insurers did not need notification of S as a named coassured. NHM also argued that, whether or not S fell into the class of co-assured described in the policy itself, it was entitled to step in and take the benefit of the contract as undisclosed principal.

The Court rejected the argument that S was an "associated company" or part of a "joint venture," as the clause set out specific named entities and then referred to additional unnamed entities with various types of relationship to C. The Court held that the expressions used to define the various types of relationships between unnamed entities and the assured were intended to cover members of C’s corporate group. Equally, the Court held that the relationship between S and C was not a "joint venture" because all the work was to be done by S and there was no profit sharing arrangement or common management of any kind.

Nor did the Court find that S fell within the "additional assured" provisions of the policy. The Court held that the idea that S could be insured in the way suggested by NHM (i.e., not being specifically identified as an assured or able to fit within a class mentioned in the policy, but nevertheless incorporated as an assured by means of the wording in relation to "additional assured") was inconsistent with the policy as a whole and its emphasis on group coverage.

The Court concluded that the terms of the insurance contract prevented S, as an undisclosed principal, from taking its benefit. The insurance was drafted to cover the interest of C (and related entities), together with any joint venture into which the members of C’s group might enter.The failure to include S whether by name or by category showed that the intention was that S should not be covered by the policy, which cannot be circumvented by the doctrine of the undisclosed principal.

Furthermore, the Court upheld the Insurers’ argument that NHM was negligent in failing to disclose the intention that the policy was to cover S as a co-assured. The Court went on to rule that, had S had been entitled to claim on the policy as a beneficiary under the policy, then there was a failure on the part of C and NHM to disclose their intention for S to be included as a co-assured. That would have been a material non-disclosure and, in the circumstances, the Insurers could not be said to have waived the disclosure obligation. As a consequence, Insurers were entitled to avoid the policy.

It is clear therefore, that insurance contracts are not to be treated as "ordinary" contracts for the purpose of applying Lord Denning’s comments on the undisclosed principal doctrine. Insureds and undisclosed principals cannot automatically assume, without clear communication, that insurers are "willing" to include the undisclosed principals under any insurance contract.

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