Scottish Appeal Court revisits first Insurance Act 2015 decision on whether an insurer had waived its right to disclosure

The Scottish Inner House has dismissed the insured’s appeal in Young v Royal and Sun Alliance Insurance Plc [2020] CSIH 25. Upholding the Outer House decision of Lady Wolffe, the Inner House held that the insurer could not be considered to have impliedly waived the insured's duty of fair representation of risk under the Insurance Act 2015. In finding there had been no waiver, the Inner House held that no reasonable person would consider the insurer had restricted its right to receive all material information, and it was therefore entitled to avoid the policy.

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. It included 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 […]”.

At first instance, the Outer House rejected Mr Young’s argument that the insurer’s email response to the broker had amounted to waiver of its entitlement to be provided with the undisclosed information. The Outer House found that when viewed in context (ie 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. Mr Young appealed. Prior to the appeal hearing, he accepted that the undisclosed information was material and that, had it been disclosed to the insurer, the insurer would not have entered into the policy. He thus conceded both the materiality of the information and that the insurer was induced by the non–disclosure. The only issue for the Outer House to determine was whether the insurer had waived its entitlement to be provided with the undisclosed information.

Decision

The Inner House dismissed Mr Young’s appeal, taking the opportunity to analyse an insured’s duty of fair presentation and the issue of waiver by an insurer. It did so by reference to case law that pre–dated the Insurance Act 2015 and which it described as uncontroversial. The Inner House noted that a policyholder seeking the insurance of a risk must assume that any prospective insurer will wish to know every relevant circumstance which would influence the judgment of the notional prudent insurer. If the policyholder is to discharge his duty to make a fair presentation, he must therefore disclose everything that the notional prudent insurer would want to know. A failure to discharge this duty, said the Inner House, will allow the insurer to avoid the policy for material non–disclosure (which observation presumably is not intended to override the regime of proportionate remedies in the Act). The Inner House noted that an insurer can impliedly waive an insured’s duty to disclose certain information by the questions it asks, for example by using a proposal form. The significance of a proposal form is that, by directing the insured to provide material information by answering specific questions, the insurer takes control of the process of communicating information between it and the policyholder. It chooses the matters on which it requires information, by asking questions directed at that information and, by implication, the matters about which it does not require information where it does not ask questions.

However, in order to show that an insurer impliedly waived its entitlement to disclosure of material information, there must be some sort of enquiry by the insurer directing the insured to provide certain information but not other information. In addition to the wording reproduced above, the insurer’s email also stated, amongst other things:

“Terms have been based on your presentation 13/02/17, our recent discussions and that adequate Risk Management features are in place ie […] Annual Premium £19,000 + IPT […] Commission has been based on 20% […] Given nature of portfolio and recent claim we would need to pitch our terms £19k minimum +IPT”.

The Inner House found that there was nothing in the email that amounted to an enquiry by the insurer. The broker had made a presentation of the risk by means of the market presentation. They had requested that the insurer provide a quotation based on the information provided in the market presentation. The insurer responded with an offer to insure on a variety of terms and conditions. That offer was capable of immediate acceptance. It was not an enquiry and did not limit the insurer’s concerns about Mr Young’s past experience of insolvency, which he was required to disclose in order to make a fair presentation of the risk. The insurer was accordingly entitled to avoid the policy.

Comment

In finding that the insurer had not waived its right to disclosure, the Inner House 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 situations where the insured completes a proposal form drafted by the insurer which will usually constitute an enquiry by the insurers and may therefore 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. The case remains as a reminder to insureds and to brokers about the importance of disclosure of previous matters connected to insolvency. The decision should put policyholders and brokers on notice to elicit and provide this information carefully.