Non-disclosure of criminal charges – first Insurance Act 2015 avoidance

The High Court has considered again the issue of non-disclosure of criminal charges against an innocent insured and found that an insurer could avoid a policy under the Insurance Act 2015 (the 2015 Act): Berkshire Assets (West London) Ltd v AXA Insurance UK Plc [2021] EWHC 2689 (Comm). This is understood to be one of the first avoidance judgments for breach of the duty of fair presentation under the 2015 Act. The insurer in this case was assisted by an internal practice note which showed it did not have authority to write the risk had it been told about the non-disclosure at the time of placement.

Background

The insured was a joint venture vehicle used to purchase and develop an existing office block into residential apartments. The insured bought a Construction All Risk and Business Interruption Policy (the Policy) for the development which was underwritten by AXA.

In August 2019, criminal charges were filed against one of the insured's directors by the Malaysian public prosecutor in relation to an alleged scheme to defraud the Malaysian Government and other purchasers of bonds. These charges were unrelated to the director's involvement with the insured. However, the quote for the Policy required a declaration from the policyholder that neither it nor its partners or directors had been convicted of or charged with a criminal offence. When the insured renewed the Policy in November 2019 and accepted the quote, it failed to mention these criminal charges to AXA.

On 1 January 2020, the development was substantially damaged by flooding and the insured sought to claim for the property damage under the Policy.

AXA denied liability on basis that the insured had failed to disclose the fact that one of its directors was the subject of criminal charges in Malaysia at the time the Policy was renewed and argued that this was a material fact. AXA argued that had this been disclosed, it would not have written the risk and was therefore entitled to avoid the Policy.

The insured, on the other hand, argued that the charges against the director were not material as there had been no allegation of dishonesty against the director personally and the charges did not give rise to any element of moral hazard. The charges the director faced were solely by virtue of his having been a director of a company involved in the alleged fraudulent scheme.

There were two issues for the Court to consider:

1. Was the fact that a director had been charged a material circumstance for the purposes of the duty of fair presentation?
2. If it was, and if it had been adequately disclosed, would AXA have agreed to insure the insured in respect of business interruption, or at all, under the renewed Policy?

Decision

Materiality

The Court considered the duty of fair presentation under section 3(1) of the 2015 Act and reviewed the authorities considering non-disclosure of actual or alleged criminal charges, notably Mance LJ in Brotherton & Ors v Aseguradora Colseguros (No.2) [2003] EWCA Civ 705 whose judgment was said to alter the current state of the law. Mance LJ noted that, "when accepting a risk underwriters were properly influenced not merely by facts which, with hindsight, can be shown to have actually affected the risk but with facts that raised doubts about the risk".

Further, in North Star Shipping Ltd v Sphere Drake Insurance Plc [2005] 2 Lloyd's Rep. 76 Colman J held and the Court of Appeal agreed that a failure to disclose pending criminal charges were material facts, even though the insured was acquitted and the charges set aside.

The Court emphasised the fact that materiality must be judged at the date of placement, and facts raising doubt as to the risk are sufficient to be material.

The Court found that the criminal charges should have been disclosed. It was irrelevant that the charges against the director were later discontinued, as a reasonable insurer could not have been expected to know that at the time. The charges against the director were sufficient in raising doubt over the risk and were therefore material.

The Court emphasised that it was necessary to consider the matter from the point of view of a reasonable insurer in the position of AXA at the time: what decision would have been made had the insured given full disclosure. It is not the court's task to form its own view on materiality with the benefit of hindsight.

Inducement

AXA put in evidence an internal practice note on "disclosure of previous insurance, financial or criminal matters" which provided that if an insured client disclosed matters that fell within particular "negative criteria", the risk was not acceptable to AXA and should be declined. It was common ground that AXA had no authority to write the risk under the practice note.

The Court was satisfied that if the criminal charges had been disclosed to AXA at the time then AXA would have declined the risk. This is in fact what happened when the facts were raised with them after the fact and there was no reason to suppose any different considerations would have been taken into account if disclosure had been given at the outset or that the conclusions of the underwriting team would have been any different.

Comment

The case examines the well-trodden questions of materiality and inducement but is one of the first decisions where the Court has upheld an insurer's avoidance under the 2015 Act. It is a reminder to policyholders to approach questions around the disclosure of alleged criminal conduct with great caution. As frustrating as it may be to innocent insureds, the mere fact that an allegation of criminal conduct has been made, even if unfounded, may often meet the threshold of materiality for disclosure.

AXA was assisted in this case by its own internal practice note which showed that it did not have authority to write the risk had it been provided with a fair presentation of the risk. Now that under the 2015 Act, an insurer has to demonstrate what it would have done had it been provided with a fair presentation of the risk if there is a material non-disclosure, it will be interesting to see, in the context of different policies and different insurers, whether such internal underwriting guidelines (as was relevant in this case) are commonly used and relied upon. Those that do not will face greater challenges in proving what they would have done had a fair presentation of the risk been made.