First Insurance Act 2015 decision considers whether an insurer had waived its right to disclosure

Young v Royal and Sun Alliance plc [2019] CSOH 32 is the first case to be decided under the Insurance Act 2015.  It was alleged that the insured had breached its duty of fair presentation and the issue for the Scottish Court was whether the insurer had waived its right to disclosure of particular information that had not been disclosed.

In finding that the insurer had not waived its right to disclosure, the Court was mindful of the fact that the underwriting information provided to the insurer prior to inception in this case had been put together using the broker's software.  There was therefore no identification by the insurer of the scope of what it considered material information which could form the basis of any waiver. This was in contrast to more conventional situations where the insurer typically provides the prospective insured with a proposal form which dictates the scope of the information the insurer requires to analyse the risk through questions. In the latter case, the Court noted that waiver was developed to control unfairness that might flow from an insurer invoking some other matter, beyond the scope of the proposal questions, as material.

Background

Mr Young and a company controlled by him were co-insureds under a policy that insured commercial premises (the Policy). Fire extensively damaged the premises and Mr Young claimed £7.2 million under the Policy in respect of the damage caused.

The insurer declined the claim on the basis that the insured had breached its duty under section 3(1) of the Insurance Act 2015 to make a fair presentation of the risk. The insurer argued that Mr Young had not disclosed the fact that he had been the director of four companies which had been dissolved after an insolvent liquidation or had been placed into insolvent liquidation within the 5-year period immediately preceding the policy inception (the undisclosed information). In response, the insured argued that the insurer had waived disclosure of the undisclosed information.

The insured had provided the insurer with a market presentation in advance of inception created using software used by the broker. The undisclosed information was not included in the market presentation. The market presentation did include a question that sought to elicit information around the insured's potential moral hazard:

"Select any of the following that apply to any proposer, director, or partner of the Trade or Business or its Subsidiary Companies if they have ever, either personally or in any business capacity:"

The software used to create the presentation provided for seven possible responses including one option which was in the following terms: "been declared bankrupt or insolvent or been the subject of bankruptcy proceedings or insolvency proceedings". The response chosen from the list of drop-down options was "None".

Following the submission of the market presentation, the insurer sent a reply email to the broker attaching the terms of cover and setting out the following list of assumptions:

"Insured has never:

• • Been declared bankrupt or insolvent
  • Had a liquidator appointed
  • Been the subject of a County Court judgment..."

The insurer argued that the insured had breached the duty to make a fair presentation of the risk by not disclosing the undisclosed information in the market presentation. The insurer argued in the case that the undisclosed information was material and that had it been provided, it would not have agreed to write the risk on any terms. However, it was assumed for the purposes of argument in this motion for declarator (akin to a preliminary issue) that the facts were material; there was no argument on materiality or whether the insurer had in fact relied on the non-disclosure.

The insured raised two arguments in its motion:

• First, that there had been no misrepresentation as the response to the question around moral hazard was correct.  Neither Mr Young nor the co-insured company had ever been declared bankrupt, insolvent or had a liquidator appointed.
• Second, that the insurer had waived its entitlement to disclosure of the information by asking (as the insured put it) in its email response to the market presentation whether the insured had ever been made bankrupt or insolvent, or had a liquidator appointed.  The insured asserted that, by restricting the question to the insured, and not including companies in which the insured had been involved, the insurer waived any entitlement to disclosure of prior insolvencies or bankruptcies experienced by anyone other than the insured themselves.  The insurer denied this and argued that its email did not set out questions for the insured to respond to, rather that it set out the basis on which cover was being offered.

Decision

The Court of Session observed that waiver usually arises in an insurance context in one of two ways.  This was the position pre-Insurance Act 2015 and neither party suggested that the Act had altered the prior law on waiver:

• First, where an insured submits information which contains something to prompt a reasonably careful insurer to make further enquiries and the insurer fails to do so.  This is provided for in section 3(4)(b) of the Act.
• Second, and relevant to this case, waiver may arise where an insurer asks a "limiting" question which would enable an insured to reasonably infer that the insurer has no interest in knowing information beyond the scope of the question, even if that information was otherwise material.  The Court accepted that the test to be applied in such circumstances is: would a reasonable person reading the proposal form be justified in thinking that the insurer had restricted its right to receive all material information and consented to omission of the particular information not disclosed?

The Court found that the market presentation was intended to be the totality of the information that was provided to the insurer in relation to the risk. The scope of the market presentation was entirely within the control of the prospective insured and the insurer was not aware of the options in the drop-down menu. Indeed the question in the broker's electronic software which sought to elicit any moral hazard in fact made no sense (and communicated nothing coherent to the insurer) when answered "None", as the insured had done.

This case differs from a conventional situation in which the insurer provides the prospective insured with a proposal form which dictates the scope of the information the insurer requires to analyse the risk through questions. In a conventional situation, there may be greater scope for applying the doctrine of waiver, as the insurer controls the scope of the information it seeks and signals (via the questions asked) what it regards as material.  In contrast, in this case, as the market presentation was drafted using the broker's electronic software, the Court found that there was no identification by the insurer of the scope of what it considers material which could form the basis of a waiver.

With respect to the insurer's email sent after submission of the market presentation, the Court found that when viewed in context (i.e. as a reply to the market presentation), the list of assumptions operated as a condition or stipulation of the kinds of moral hazards required to be addressed (which included matters going to prior insolvency of the insured or companies with which he was involved).  Further, no reasonable reader would have read the email as a waiver of the insurer's rights to receive material information in relation to any other business capacity in which Mr Young may have acted.

Comment

This case is the first that we are aware of to be decided under the Insurance Act 2015 albeit the decision did not consider the construction of particular provisions of the Act itself.  Ultimately, the case turned on the issue of waiver and the Court found that the Act had not altered the law in this area.

It seems clear that in finding that the insurer had not waived its right to disclosure, the Court was influenced by the fact that the insured's market presentation had been put together using the broker's electronic software.  This is in contrast to more conventional situations where the insured completes a proposal form drafted by the insurer which may be found to limit the scope of the information the insurer requires to analyse the risk.

The decision illustrates that while the use of electronic platforms may assist with efficiency in the gathering of information for presentation to insurers, they need to be prepared with a clear understanding of the duty of fair presentation to avoid the risk of an insured inadvertently failing to discharge its duty.  It is also yet another judgment concerning the adequacy of disclosure of previous matters connected to insolvency which should put policyholders and brokers on notice to elicit and provide this information with great care.