Non-disclosure to insurers (pre-Insurance Act 2015)

Zurich Insurance PLC v Niramax Group Limited, Court of Appeal

Summary

The Court of Appeal has clarified the position regarding inducement in cases of non-disclosure in contracts pre-dating the Insurance Act 2015. See our Commentary below for a discussion of the current position.

It has held that in cases of non-disclosure, it is not enough for an insurer to establish that "less onerous" terms would have been imposed "but for" the non-disclosure; instead, an insurer has to show that the non-disclosure was an "efficient cause" of the difference in terms.

Factual Background

In December 2015, waste collection and recycling company Niramax Group Limited suffered a fire at its main premises in Hartlepool. The fire destroyed various items of mobile plant and a fixed shredding machine. The mobile plant was insured by Zurich under a mobile plant insurance policy renewed on 14 December 2014 (the Policy). The risk was underwritten by a junior employee at Zurich, who applied a "commoditised and streamlined" process when calculating the premium, and made errors when entering data for the process. The fixed shredding machine was insured with Zurich under an extension to the Policy added on 5 September 2015.

Niramax also had property insurance with a separate insurer, Millennium Insurance (the Millennium property cover). Millennium had imposed a number of risk requirements, which Niramax had failed to meet. By October 2014, Millennium imposed special terms on the Millennium property cover requiring Niramax to self-insure 35% of the value of any loss and to bear the first £250,000 of any loss. At the time of renewal of the Policy, in December 2014, the outstanding risk requirements had been met, but the special terms to the Millennium property cover remained in place.

When Niramax sought to make a claim under the Policy, Zurich declined the claim on the basis that there had been a non-disclosure of material facts. By the time Niramax's claim was brought to trial, the main allegation of non-disclosure related to Niramax's failure to comply with the risk requirements attached to the Millennium property cover.

Insurer's position

Zurich argued that if the failure to comply had been disclosed at renewal in December 2014, then the underwriting would have been referred to a more senior individual at Zurich who would have declined to provide cover. Zurich argued that this would also have happened if the information had been disclosed when the policy was extended in September 2015.

Zurich contended that it was entitled to avoid the Policy from renewal on 14 December 2014, or alternatively that it was entitled to avoid the extension of the Policy; and if the non-disclosed facts had been disclosed in September 2015, it would have cancelled the Policy.

The Commercial Court decision

At first instance it was held that: (i) there was a material non-disclosure of Millennium's risk requirements and special terms, and that if proper disclosure had been made it would have been referred to a more senior underwriter at Zurich; (ii) that the non-disclosure did not induce Zurich to write the Policy on the terms on which it had been written in December 2014; and (iii) had the material facts been disclosed at the time of the extension of the Policy to add the fixed shredding machine, Zurich would have declined to insure the fixed shredding machine (but would not have cancelled the Policy).

As a result, Niramax's claim was successful in part - it could recover the value of the mobile plant but not the fixed shredding machine. Cockerill J noted that if the decision had been referred to a more senior underwriter at Zurich, they would have corrected the errors in calculating the premium - but this change would have related to the Zurich employee's earlier errors, not the non-disclosure on the part of Niramax.

Zurich appealed.

The Court of Appeal

On appeal, Zurich argued that, on the basis that the judge at first instance had held that the premium would have been higher if the relevant disclosure had been made, inducement had been established (regardless of the amount of the increase, or the thought process behind it). In doing so, Zurich maintained that "but for" causation was sufficient for inducement to be found.

Niramax contended that the non-disclosure had to be an "effective, real and substantial cause of the different terms on which the risk would have been written if full disclosure had been made". Further, it suggested that there was no evidential basis for the judge's conclusion that the senior employee would have charged an increased premium than the premium that was charged. It could therefore not be said that "but for" the non-disclosure the Policy would have been written on different terms.

The Court of Appeal rejected Zurich's appeal.

In relation to the test for inducement, in his leading judgment Popplewell LJ held that

"in order for non-disclosure to induce an underwriter to write the insurance on less onerous terms than would have been imposed if disclosure had been made, the non-disclosure must have been an efficient cause of the difference in terms".

The "but for" test is therefore not, on its own, sufficient to establish causation.

Applying the "efficient cause" test to these facts, the Court of Appeal agreed with the finding at first instance that in this case, there was no inducement. The process by which the premium was calculated was a "formulaic, streamlined process based only on the amount insured, nature of the trade and claims history". Therefore, Niramax's attitude to risk, and therefore the non-disclosed facts, was "irrelevant to the rating of the risk". The non-disclosure did not have any causative effect on the renewal being written on cheaper terms than would have occurred if disclosure had been made.

Regarding the argument that the judge erred in deciding that the change would have been limited to an increased premium, Popplewell LJ held that this point was a question of fact rather than law. As per Lewison LJ in Fage UK Ltd v Chobani UK Ltd [2014] EWCA Civ 5 at [114], the appellate court "will not readily interfere with findings of fact of a trial judge. The appellate court should only interfere if the high bar is met that it can be proven that the "Judge's conclusions were not reasonably open to her on the evidence"". Zurich fell short of meeting this high threshold in their appeal.

Comment

This case relates to a contract pre-dating the Insurance Act 2015. Would the same approach would be taken for insurance contracts covered by the Act?

Under the Insurance Act 2015, policyholders have an obligation to "make to the insurer a fair presentation of the risk" (s.3(1)).

In respect of breaches of this duty, the Insurance Act 2015, provides that "The insurer has a remedy against the insured for a breach of the duty of fair presentation only if the insurer shows that, but for the breach, the insurer - (a) would not have entered into the contract of insurance at all, or (b) would have done so on different terms" (s.8(1), emphasis added).

At first glance, it appears that under the new statutory regime, the "but for" test may be enough for insurers to claim a remedy for breach of disclosure duties.

This suggests that remedies for breaches of duties of disclosure in insurance contracts pre- and post-dating the Insurance Act 2015 might be subject to different rules regarding causation.

However, the stated principle behind the finding in this case was that "if a non-disclosure has not had any influential effect on the mind of the insurer, in the sense that if disclosed it would not have played any part in his underwriting judgment, there is no connection at all between the wrongdoing of the assured and the terms on which the insurance is written by the insurer. It is difficult to see any justification for affording the insurer a windfall remedy in such circumstances."

It seems likely that the Courts would wish to apply this principle equally in cases of insurance contracts to which the Insurance Act 2015 applies. It will be interesting to see the approach that the Courts will take to this provision in due course.

Zurich Insurance PLC v Niramax Group Limited