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Avoidance: materiality and inducement

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In a rare case concerning the avoidance of liability under a combined liability policy (Brit UW Limited & F&B Trenchless Solutions Limited), the insurer Brit was held to have validly avoided the policy on the grounds that it was induced to enter into the contract as a result of F&B’s (the insured’s) material non-disclosure and misrepresentation. The key issues were the materiality of the information not disclosed and the allowable period of time before an insurer is deemed to have affirmed the policy/waived its right to avoid.

Background

The defendant insured, a specialist tunnelling sub-contractor, entered into a contract with Brit for employers’ liability, product liability and public liability insurance for its work of building micro-tunnels for cables underground railway tracks in Nottingham. Brit did so on the basis that the works would settle the ground between 2-4mm (which was less than the 5mm limit determined by the relevant rail authority (Network Rail) and agreed to by the head contractor, Morgan), and on the basis of F&B’s statement that the works would at no point in time take place underneath an active railway.

Before contracting with the insurer, the insured knew of an actual ground settlement of up to 15-18mm and the creation of a visible void in the ground in the vicinity of the works. The insured was also undertaking works under an active railway line.  

Eight days after the insurance contract had been entered into, a freight train derailed when passing over a level-crossing above the insured’s construction site. The derailment was determined to have been caused by severe settlement of the railway tracks as a result of the insured’s works. The main contractor filed a claim against F&B which in turn attempted to claim an indemnity from Brit.

Brit sought a declaration that it had validly avoided the policy on the grounds of non-disclosure of the actual ground settlement of which the insured was already aware and misrepresentation concerning the undertaking of works below active railway lines, both being material circumstances. 

What is material?

In determining whether the difference between the expected settlement of 2-4mm and actual settlement of 15-18 mm, as well as whether conducting works around active railways, was ‘material’ information that ought to have been disclosed by the insured, the court noted that it was a question of fact from the objective perspective of a ‘prudent’ insurer. The issue was whether knowledge of the actual facts would, on the balance of probabilities, have influenced the decision of a prudent insurer to enter into the policy or alter its terms. If the answer is in the affirmative, then the information is sufficiently material to raise the question of inducement into a contract.

Circumstances of inducement

The question of whether there was inducement depends on whether the information not disclosed and/or misrepresented was a substantial cause of the underwriter’s decision to write the risk on the terms on which he or she did. The increased settlement and undertaking of works under active railways were held to be “matters which would clearly influence the judgement of a prudent insurer”. The Judge accepted the underwriter’s evidence that had he been told about the settlement and the void, in the lead up to writing the risk, he would have excluded the site from the policy and asked F&B what it would do to prevent similar issues arising in the future. 

Affirmation?

It was alleged against the insurer that it had affirmed the policy by not avoiding when all the matters relied upon for avoidance were known, five months before it actually sought to avoid. It was held that the issuance of policy documentation and its endorsement during that five month period did not amount to an affirmation of the policy, since these acts did not unequivocally represent a waiver of the right to avoid. The Judge also concluded that “A period of 4 to 5 months to carry out investigations, take legal advice and the decision to avoid cannot be said to have been unreasonable.”  

Impact

This case does not change the duties of both the insurer and insured in terms of conducting due diligence and making a fair presentation when entering into an insurance policy. While all cases are fact specific and the five month period cannot be considered as applicable in every case, this decision does reaffirm the legitimate interests of an insurer in conducting adequate enquiries before it is deemed to have waived its right to avoid a policy. 

Had this case been decided in accordance with the proportionate remedies regime set out in the Insurance Act 2015 for breach of the duty to make a fair presentation, it is likely that the claim would not have been recoverable because the site would have been excluded from the policy (though the insured would still have had the benefit of cover for its remaining operations). This is because the underwriter’s evidence was that had he received a fair presentation (namely, one without the misrepresentation and non-disclosure) he probably would have been prepared to write the risk but with an exclusion in respect of the Nottingham site.

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