What's on the menu? Insurers must ask the right questions at placement

In Ristorante Limited T/A Bar Massimo v Zurich Insurance Plc [2021] EWHC 2538 (Ch), the Court considered the interpretation and legal effect of a question asked by an insurer to a prospective insured around prior insolvency issues. The insured agreed with the insurer's question, as framed, that there were no prior insolvency issues. Insurers failed in their attempt to avoid the policy for breach of the duty of fair presentation based on alleged misrepresentation. Insolvency events in relation to other companies did not need to be disclosed.

The Court considered whether the insured's answer to the insurer's question amounted to a misrepresentation of material facts and whether the insurer had limited its right to disclosure in respect of other persons or companies.

Background

The claim was brought by an insured, Ristorante Limited (Ristorante), who alleged that Zurich Insurance Plc (Zurich) had wrongfully avoided an insurance policy that provided cover for inter alia business interruption, money, employers' liability and legal expenses. Ristorante operated a bar and restaurant from a property in Glasgow.

There were three individuals who were directors and shareholders of Ristorante. These three individuals had been directors and/or company secretaries of three other companies which had each entered liquidation at various times and had subsequently been dissolved: one of the companies had gone into voluntary liquidation, while the other two had entered into compulsory liquidation (the Other Insolvency Events).

Zurich utilised an automated computer underwriting system (Z-Trade) through which applications for insurance were evaluated and processed without the need for individual underwriter involvement.

The policy was renewed with effect from 12 October 2016 and again on 12 October 2017. Upon renewal, Z-Trade required Ristorante to indicate its response to various statements of fact, one of which was: "No owner, director, business partner or family member involved with the business: … (iii) has ever been the subject of a winding-up order or company/individual voluntary arrangement with creditors, or been placed into administration, administrative receivership or liquidation" (the Insolvency Question). The only drop-down options available to Ristorante were "Agree" or "Disagree", and Ristorante (through its broker) indicated that it agreed with the Insolvency Question.

On 3 January 2018, the property was damaged in a fire, and Ristorante notified Zurich that it sought £633,000 for losses suffered. Zurich purported to avoid the policy from its inception, arguing that there had been a "material non-disclosure and/or misrepresentation in this case regarding previous company liquidations".

Zurich argued that, had Ristorante disclosed the Other Insolvency Events, it would not have offered cover.

Decision

The Court considered two issues:

• whether Ristorante's answer to the Insolvency Question amounted to a misrepresentation of material facts; and
• whether Zurich had limited its right to disclosure in respect of other persons or companies.

Interpretation of the Insolvency Question

Ristorante submitted that the Insolvency Question posed by Zurich had a clear and obvious meaning, that there was no ambiguity, and that the answer given was true. On its face the Insolvency Question simply asked about insolvency events relating to individuals (i.e. any owner, director, business partner or family member involved with business of Ristorante), and did not ask about insolvency events of any other person or company with which any of them might have been connected or involved in some way.

Zurich, however, argued that Ristorante's construction was overly literal, and lacked commercial sense. Specifically, it was argued that:

• the Insolvency Question could clearly be seen to be primarily concerned with insolvency events that could only affect companies and not individuals and therefore the only sensible meaning was that it was directed at ascertaining whether other corporate entities with which the directors or owners of Ristorante had been involved had been the subject of one of the various insolvency events referred to; and
• it was not necessary to read any additional words into the Insolvency Question. It was not stretching the language to conclude that when a company was wound up, the company’s directors and shareholders could be said to be “the subject of” that insolvency process by reason of the change in their status and the effect of the process upon them.

The Court disagreed with Zurich and applied a literal analysis of the opening words of the question ("No owner, director, business partner or family member involved with the business"), noting the lack of express reference to any corporate body with which any of the persons expressly identified has been or is involved or connected with in some way. The Court noted that Zurich's argument would require a different meaning to be given to the opening words, which was not objectively an "obvious intention to impute to the parties". Furthermore while most of the insolvency procedures referred to in the question related to corporate bodies, the question did in fact refer to at least one individual insolvency procedure. There was no impetus to read words into the question as Zurich suggested.

With regards to Zurich's second argument, the Court again assessed the natural meaning of the language used, and noted that it "is plain that individuals cannot, either grammatically or legally, be the subject of a winding up order or a corporate voluntary arrangement. Moreover, the second part of the Insolvency Question speaks in terms of a person “being been placed into administration, administrative receivership or liquidation”. Even on the broadest meaning of words, if a company goes into administration, one does not speak of its directors “being placed into administration."

In this analysis, the Court distinguished the present case from Doheny v New India Assurance Co [2005] 1 All ER (Comm) 382 (CA), where, when asking the applicants (Mr and Mrs Doheny) about previous bankruptcies, the insurer expressly referred not only to the directors of the business but also to “any Company in which any director/partner… [has] had an interest”.

The Court agreed with Ristorante that the present case was more akin to R & R Developments v Axa Insurance UK plc [2010] 2 All EW (Comm) in which the insurer’s question did ask about insolvency events in respect of the “directors either personally or in connection with any business in which they have been involved…” . In R&R, even this wording – which was absent in the present case – was not wide enough to include insolvent companies in which the directors had previously been involved.

The Court found that a reasonable insurer should have been aware of both Doheny and R&R, and should therefore have understood the importance of using words which specifically referred to other companies if it wished to make inquiry into insolvency events of other companies with which directors of an applicant company had previously been involved.

A further argument advanced by Zurich was that a reasonable broker would have understood that the insurer was interested in information about the insolvency events of companies in which the directors or owners of Ristorante had previously been involved. The Court did not accept this on the basis that (i) no evidence was given to show how a reasonable broker would have understood the Insolvency Question differently from the ordinary and natural meaning of the words and (ii) Zurich presented no authority to suggest that the appropriate hypothetical reasonable person for the purposes of interpretation is one who is advised by a hypothetical reasonable broker.

In summary, the Court held that the insured's interpretation of the Insolvency Question was the clear meaning of it (i.e. that the language included no reference whatsoever to any other business in which owners or directors had been involved). It was therefore not necessary to consider which principles would have applied had the construction of the question been ambiguous.

Waiver

In deciding whether the insurer had limited its right to disclosure in respect of other persons or companies, the Court rehearsed the now well-trodden path that when an insurer asks a question of the insured it may be inferred that the insurer has waived its right to information on the same matters outside of the question asked.

The Court noted that the test is an objective one: whether a reasonable man reading the Insolvency Question would be justified in thinking that the insurer had restricted its right to receive all material information, and had consented to the omission of specific information (here, the Other Insolvency Events). The Court held that since Zurich had identified previous liquidations as a subject on which disclosure was required, and had specified the persons relevant to this disclosure, Zurich had indeed limited its right of disclosure in respect of other unspecified persons or companies which had been placed into liquidation. It was a reasonable inference for the insured to draw that the insurer did not wish to know about any other liquidations other than those specified in the Insolvency Question.

Comment

This case has echoes of Young v Royal and Sun Alliance plc (see our blog post here) which also concerned use of an electronic platform for provision of information to insurers pre-inception (albeit in that case it was the broker's automated software that was used) and the alleged non-disclosure of information around the insured’s potential moral hazard.

Whilst the insured in this case was ultimately successful, it is yet another judgment concerning the adequacy of disclosure of previous matters connected to insolvency. Insureds and their brokers should take great care in providing this information to insurers prior to inception. Insurers that are concerned to know about insolvency matters concerning companies unrelated to the insured must ask questions clearly stating that is the information they seek.