It has long been trite law that insurance contracts are contracts of “utmost good faith” and as such a policyholder owes a duty to the insurer to disclose material facts and refrain from making material misrepresentations.
Under the Marine Insurance Act 1906 in order to successfully allege that an insured had failed to comply with duty of disclosure, the insurer had to satisfy a two stage test, proving that:
- The non-disclosed facts were material; and
- That non-disclosure of those material facts induced the insurer to accept the risk.
If an insured breached the duty of utmost good faith, the only remedy available to the insurer was avoidance of the policy.
The Insurance Act 2015 (which came into force in August 2016) introduced a scheme of proportional remedies for insurers in the event of an insured’s breach of the duty of fair presentation, making the issue of inducement of central importance to the resolution of future insurance disputes.
The Act asks whether the insurer would have done anything differently had it been in receipt of all material facts and the answer to that question will determine the remedy available to insurers.
In the recent case of Axa Versicherung AG v Arab Insurance Group  EWCA Civ 96 the Court of Appeal upheld a decision that reinsurers failed to prove inducement, accepting the reinsured’s argument that although certain past loss statistics were material, the underwriter in question had not been induced by their non-disclosure.
Whilst that decision turns on its own facts and concerned policies written before the Insurance Act came into force, the Court made some helpful general observations about proving inducement.
Christopher Clarke LJ confirmed:
- That it is for the insurer (or reinsurer) to prove that its underwriter was induced by the breach of duty to write the risk on the terms which it did. This requires the objective consideration of a reasonably prudent underwriter to determine what a fair presentation should consist of.
- When considering whether a presentation is fair the Court should also consider what additional matters the insured or the broker would have brought to the insurer’s attention as a reason for writing the business.
- Although the insurer must prove inducement, the insured or broker has the burden of proving it would have raised additional matters had a fair presentation been made. This test is subjective and, in the absence of direct evidence, it was open to the Judge to infer from surrounding circumstances what the brokers would have said.
The inducement argument is generally one which crystallises at trial and under cross-examination of the witnesses, in particular the insurer’s underwriter. In this particular case the Court also expressed dissatisfaction that the insurer/reinsurer was not given prior notice either in a pleading or in any witness statement, of what the insured felt would have been the content of a fair presentation i.e. the hypothetical factual case the insurer has to meet.
There will be more examples of this kind of hypothetical factual investigation following the introduction of the Insurance Act because the question of what would have happened will have as much bearing on the remedy as it does in relation to inducement.
If you require any advice in relation to the above topic, please contact Insurance Litigation Partner, Nicola Maher at Edwin Coe.
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