Here at Edwin Coe we act exclusively for policyholders in relation to claims they have against insurers for breach of contract and/or wrongful avoidance of a policy or wrongful declinature of a claim. Whilst there are numerous reasons why insurers decline or avoid claims, one of the common themes in the cases we handle relates to insurance policy construction and the proper interpretation of questions, clauses and conditions within insurance documentation. We discuss below a recent High Court judgment dealing with those matters and which is favourable to policyholders.
Those of you familiar with insurance, whether personal or commercial, will have come across the Statement of Fact. The Statement of Fact is a record of information provided by the policyholder or a broker, intermediary or agent acting on its behalf, and often includes a series of facts assumed about the policyholder and/or a policyholder’s business.
The information provided within the Statement of Fact or proposal form is taken into account by insurers when calculating the premium and terms and conditions upon which the policy is formulated. As a result, policyholders have a duty to make a fair presentation of the risk to insurers to include disclosure of every material circumstance known to them and to ensure that the information provided is correct and made in good faith.
Conversely, insurers need to avoid asking ambiguous questions because if there is a genuine ambiguity in a question put to an applicant by insurers in a proposal form or Statement of Fact, then insurers cannot rely upon the answer as a misrepresentation of fact if that answer is true in respect of the question asked.
The importance of both fair presentation and the principles relating to the proper interpretation of the questions in a proposal form has been considered by the High Court in the recent case of Ristorante Ltd (t/a Bar Massimo) v Zurich Insurance Plc  EWHC 2538 (Ch).
The Claimant, Ristorante Ltd, traded as a bar and restaurant out of premises in Glasgow. In October 2015, the Claimant took out an insurance policy with Zurich in respect of the premises, which was renewed in October 2016 and again in October 2017. Upon inception of the policy, and at each subsequent renewal, Zurich’s automated electronic underwriting system asked the Claimant, via a drop-down menu, to either “agree” or “disagree” to a number of statements including that,
“No owner, director, business partner or family member involved with the business…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.”
Upon inception, and at each subsequent renewal, the Claimant answered “agree” to this question. However, the three directors and shareholders of the Claimant had in fact previously been directors of other companies all of which had been dissolved following liquidations.
On 3 January 2018, the Claimant’s premises were damaged by fire, as a result of which a claim was made under the policy. However, on 16 March 2018, Zurich purported to avoid the policy ab initio alleging non-disclosure and/or material misrepresentation for failing to disclose the previous liquidations. Specifically, Zurich stated that had those previous liquidations been disclosed they would not have offered cover.
Construction of the question
The Claimant commenced a claim for breach of contract/wrongful avoidance of the policy. The matter was dealt with at a trial of preliminary issues before Mr Justice Snowden.
The key issue for the Court was the construction of the insolvency question. The Claimant argued that the insolvency question simply asked about insolvency events of an owner, director, business partner or family member involved with the business of the Claimant, and did not ask about insolvency events of any other company with which any of the directors may have been connected to or involved. In the alternative, the Claimant argued that its construction of the question was an objectively reasonable one to which the answer provided was true.
Zurich argued that the Claimant’s interpretation of the question was overly literal and lacked any commercial sense in light of the fact that insolvency events could only affect companies and not individuals which meant that the question was directed to information about companies and thus the answer given was incorrect.
The Judge considered the case of Wood v Capita Insurance Services Ltd  AC 1173, which summarises the general principles of contractual interpretation and in which Lord Hodge JSC held that the Court’s task was to “ascertain the objective meaning of the language which the parties have chosen to express their agreement.”
The Judge in the present case considered that the exercise of interpreting questions posed in proposal forms does not depend on the subjective intention or understanding of the parties but is instead an objective exercise.
The Judge agreed with the Claimant’s submissions that the question had a clear and obvious meaning and that the answer given by the Claimant was true. The Court also agreed that, had the Defendant wanted to know about the insolvency events of other entities in which the directors had been involved, it should have been clear about that. There was no express mention in the question to any other connected person or corporate body and furthermore, Zurich’s construction gave rise to a lack of clarity in the question.
The Judge also noted that had he been required to consider ambiguity he would have accepted the Claimant’s submission that the question, as posed, was ambiguous and that on applying the contra proferentem rule there was no misrepresentation.
The Claimant had accepted that the other insolvency events related to connected companies were material as a result of which Zurich was induced to enter the policy by the representation. This meant that the Court also had to consider whether, by asking the insolvency question giving rise to the representation, Zurich waived its entitlement to information about the insolvency of those other companies.
By wording the question to ask only about past insolvency events for the directors personally, the Court held that Zurich had waived any requirement for the Claimant to disclose the previous company insolvencies. The Court relied upon the principle that if an insurer has asked specific questions in its proposal form, it may be inferred that it has waived its right to further information in relation to that subject matter which falls outside the scope of those questions. It made no difference that the information about the previous liquidations was potentially a “moral hazard” i.e. information in which an insurer would be particularly interested.
Further, the Court rejected the Defendant’s argument that the position was different because the policy had been arranged through an intermediary in the form of a broker. The Court concluded that it did not have enough evidence to suggest that a reasonable broker would have understood the question differently from the ordinary and natural meaning to which the Court had referred.
The judgment is a reminder to insurers of the importance of clear and careful drafting of questions in proposal forms and to consider what information they actually require from the applicant, ensuring that the questions are drafted appropriately to elicit that information. Save for limited circumstances, if there is ambiguity in a question put by insurers, it will be resolved in favour of the insured.
Furthermore, Mr Justice Snowden specifically noted that insurers need to keep abreast of developments in case law and decisions relating to the interpretation of proposal form questions if they are to avoid drafting questions which end up waiving their entitlement to material information which is necessary for underwriting purposes.
Although in this instance the Court found in the Claimant’s favour, the decision highlights the importance of the principle of fair presentation of risk and the need for policyholders or applicants to answer questions as fully and frankly as possible.
Policyholders should be aware of the significant consequences of failing to provide material information and should err on the side of caution if they are unsure about the wording of a question. Although a useful principle, policyholders should also be wary of seeking to rely on the fact that an insurer has waived its right to additional disclosure (as this will often be evaluated on a case-by-case basis, as highlighted in the case of Doheny v New India Assurance Co (2005) 1 All ER (Comm) 382 (CA) which was decided against the policyholder).
The decision also highlights the potential pitfalls of automated systems and the need to consider whether an “agree/disagree” or “true/false” option sufficiently enables policyholders to set out their circumstances in full.
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Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.
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