Breach of duty of fair presentation under Insurance Act, 2015 – Court finds insurer had the right to evade the policy

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In Berkshire Assets (West London) Limited v Axa Insurance UK Plc [2021] EWHC 2689 (Comm), the insured failed to disclose to the insurers of his Construction All Risks and Business Interruption policy that one of his directors was the subject of criminal proceedings in Malaysia at the time of the policy renewal. Although the charges were dropped after the policy was put in place, the High Court found the charges to be a material circumstance which should have been disclosed and therefore the insured had breached his duty of fair presentation under the 2015 Insurance Act (2015 Act). The Court was convinced that the insurer would not have accepted the risk had it been aware of the charges and therefore had the right to invoke the annulment remedy under the 2015 Act. The case highlights the the need for those responsible for underwriting insurance to carry out adequate internal inquiries into the material circumstances when taking out or renewing insurance contracts. In addition, while the 2015 law introduced new remedies in the event of breach of the duty of fair presentation, this case serves as an important reminder that the court can still uphold the insurer’s appeal for annulment.

Background

Berkshire Assets (West London) Limited (the Insured) was a joint venture vehicle used to purchase a real estate development project in West London (the Property), for which it had purchased All Risks Construction and Business Interruption insurance (the Police) to AXA Insurance UK Plc (the insurer). The policy was first taken out for the period from November 30, 2018 to November 29, 2019, and then was renewed.

On August 9, 2019 (prior to the policy renewal in November 2019), the Attorney General of Malaysia filed criminal charges (the charges) against one of the insured’s administrators, Michael Sherwood. The charges involved an alleged scheme to defraud the Malaysian government and buyers of certain bonds underwritten by Goldman Sachs and issued by subsidiaries of 1Malaysia Development Berhad (1MDB), a company that was under scrutiny for its suspicious allegations of money transactions. Mr. Sherwood was a director of one of the subsidiaries of Goldman Sachs allegedly involved in the underwriting of these bonds. The charges against Mr. Sherwood (which had no connection with his role with the insured) were finally dropped on October 9, 2020.

When the policy was first submitted in November 2018, the documents provided by the insurer aimed to obtain a statement confirming that the partners or administrators of the insured had not been charged or convicted of a criminal offense. At that time, Mr. Sherwood had not yet been charged. However, when renewing in November 2019, the insurer’s quote indicated that the premium was based on the information provided when the policy was first taken out, but the insured was required to inform the insurer of any material changes. since this information was provided. The director involved in the policy renewal, Mr Garside, failed to disclose the charges he was not aware of.

On January 1, 2020, the Property was flooded causing significant damage and the Insured made a claim under the Police. The insurer denied the claim on the grounds that the insured had not disclosed the charges against Mr. Sherwood and that it was a breach of his duty of fair presentation under the 2015 Act. The insurer argued that, had the charges been disclosed, it would not have purchased the risk and therefore had the right to avoid the policy as a whole.

The Court had to consider two questions:

  1. Were the Charges a Material Circumstance for the Purposes of the Fair Presentation Requirement?
  2. If they were and the charges had been adequately disclosed, would the insurer have agreed to insure the insured under the renewed policy?

Question 1 – the question of materiality

Article 3 of the 2015 law obliges policyholders, before entering into an insurance contract, to make a “fair presentation of the risk” which, in general, obliges policyholders to disclose to the insurer “any material circumstances which the insured knows or should know. “A” material circumstance “is defined by section 7 as” that which would influence the judgment of a prudent insurer in determining whether to take the risk and, if so, under what conditions “.

The Court ruled that the authorities regarding the material circumstances prior to the 2015 law continue to be relevant. These authorities set out a number of important principles relating to material circumstances, including:

  1. Materiality should be judged at the time of investment, and not by reference to subsequent events.1
  2. The facts giving rise to doubt about the risk are sufficient to be material. It is not necessary for the facts to be demonstrated, with hindsight, to have actually affected the risk.2

In light of the above, the Court considered that the charges represented an important circumstance within the meaning of the 2015 law which should have been disclosed. The charges stem from a large scale dishonest and fraudulent scheme. It was irrelevant that the charges were subsequently dropped, as the insurer could not be expected to know at the time.

Question 2 – the question of incentive

Article 8 of the 2015 law provides that “the insurer has recourse against the insured for breach of the obligation of fair presentation only if he demonstrates that, without this breach, the insurer: ( (a) would not have entered into the insurance contract at all; or (b) would have done so only under different conditions. “

Among other things, the Insured relied on the fact that several other underwriters were prepared to cover Mr. Sherwood after the disclosure of the Charges. The judge ruled that this was irrelevant as they were different types of policies and the Court was only interested in what the insurer would have done in the present case.

The Insurer has pointed out the existence of an internal document regarding “disclosure of prior insurance, financial or criminal matters” (the Practice Note). The practice note provided that if a client made a disclosure that met certain “negative criteria” (such as criminal charges) then the risk would not be acceptable and should be denied. The Court accepted this position and concluded that the insurer had been induced by the non-disclosure to enter into the policy and was therefore entitled to invoke the annulment action.

This case is a powerful reminder that an action for annulment remains open to insurers under the 2015 law. The judgment confirms that allegations of criminal acts may constitute a material circumstance that must be disclosed to insurers, even if these allegations appear unrelated to the role of the alleged offender with the insured and are ultimately withdrawn.

As mentioned above, section 3 of the 2015 law requires policyholders to disclose to insurers “any material circumstance of which the policyholder is aware or should be aware”. In this case, the person responsible for obtaining insurance coverage for the insured, Mr. Garside, was not aware of the charges. In addition, Mr. Garside understood that only significant changes regarding construction work on the Property would be relevant. It did not occur to him to check with his co-directors that none had been charged with a criminal offense.

Section 4 of the 2015 law contains detailed provisions regarding what an insured “knows or should know”. Insured businesses are expected to know what is known to those in the senior management of the insured or who are responsible for the insured’s insurance. In addition, an insured must know what “should reasonably have been revealed by a reasonable search of the information available to him”. Therefore, it was not enough that Mr. Garside did not conduct such surveys of others within the company.

In light of the above, policyholders should consider the following when obtaining / renewing their insurance policies:

  1. If the insurer or the broker provides the insured with a proposal form to be completed (either when the contract is first taken out or when the contract is renewed), the obligation of fair presentation cannot be limited to responding to the specific questions raised in the form. All facts and circumstances material to the risk must be disclosed, whether or not the insurer has specifically requested such information.
  2. Those responsible for providing insurance should consult with each other and inquire with senior management of any material circumstances of which they may become aware. Indeed, certain questions on the insurer proposal forms may explicitly oblige the insured to obtain information from other people.
  3. Finally, these inquiries should not focus only on questions clearly relevant to the risk. In the Berkshire Assets In this case, Mr. Garside wrongly considered that the insurer of the All Risks Construction / Operating Loss guarantee would only be interested in substantial modifications to the construction work. What constitutes an important circumstance will depend to a large extent on the type of policy, but insurers will generally regard as important factors those which raise doubt as to the integrity of the insured or its administrators, including criminal charges, convictions and regulatory investigations involving directors as well as the disqualification of directors.


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