Zurich Insurance PLC v Niramax Group Ltd [2021] EWCA Civ 590 (23 April 2021)
Finding that the 'but for' test is insufficient to establish inducement, the Court of Appeal has dismissed an insurer's claim that it would not have underwritten the policy had the material facts been disclosed.
Zurich's appeal was from a first instance decision that had found largely in its favour in respect of cover for losses arising out a fire at the policyholder's waste recycling plant. Zurich challenged a finding of partial cover in respect of mobile plant on that basis that, as with the policyholder's claim for the fixed plant that had not succeeded, it had similarly been induced by a material non-disclosure to underwrite the Policy renewal.
The main focus of the appeal was on whether, in circumstances where the premium charged would have been higher had full disclosure been made, the judge at first instance had been wrong to hold that inducement had not been established. Zurich argued that the increase in premium that would have resulted was of itself sufficient to meet the causation test for inducement, irrespective of the amount of the increase or the thought process by which the additional premium would have been calculated. Niramax contended that the non-disclosure had to be an effective and real and substantial cause of the different terms on which the risk would have been written if full disclosure had been made and there was no such causation on the facts.
The Court of Appeal found that the relevant test is whether the non-disclosure was an efficient cause of the difference in terms: it is not sufficient merely to establish that the less onerous terms would not have been imposed but for the non-disclosure.
The distinction is of particular relevance on the facts of this case because the impact of the non-disclosure was that the premium was calculated by a junior trainee who made a mis-calculation. Conversely, had the disclosure been made, the risk would have been referred to the head underwriter who would have priced the premium correctly. The non-disclosure therefore fulfils a 'but for' test of causation in that it provided the opportunity for a mistake to be made in the calculation of premium that would not otherwise have been made.
It was, however, necessary to apply the relevant test, namely whether the non-disclosure was an effective, or efficient cause, of the contract being entered into on the relevant terms. On the facts of this case, the process by which the premium was calculated took into account: the amount insured, nature of the trade, and the claims history. The undisclosed facts, which related to Niramax's attitude to risk, were irrelevant to the rating of the risk. Therefore, the non-disclosure could not have had any causative efficacy in the renewal being written on cheaper terms than would have occurred if disclosure had been made.
The underlying principle is that if a non-disclosure has not had any influential effect on the mind of the insurer, impacting on the underwriting judgment, then there is no connection between the wrongdoing and the terms of the insurance, and no justification for the insurer to be awarded a windfall.
Of note is that this decision is based on the law prior to the Insurance Act 2015, the application of which may have led to a different outcome. Under the provisions of the Act, an insurer has a remedy for a breach of the duty of fair presentation if, but for the breach, the insurer would not have entered into the contract of insurance at all or would have done so only on different terms. Policyholders should be aware, therefore, that under the new law, the 'but for' test alone may be sufficient to entitle the insurer to a remedy.
Originally published 23 April 2021
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