The duty of fair presentation
Under section 3 of the Insurance Act 2015 (IA2015), a business insured is required to make a fair presentation of the risk to insurers before the contract of insurance is entered into.
A fair presentation should include disclosure of every material circumstance that the insured knows or ought to know. Failing that, disclosure should give the insurer “sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances.” (section 3(4) IA2015). The insured must also not misrepresent any material matter.
Most of the essential components of the duty of fair presentation were carried forward from the previous legislative regime. This used the language of the duty of utmost good faith, and much of the extensive associated case law therefore remains relevant. In particular, IA2015 retained the requirement that (a) to require disclosure or to constitute a misrepresentation, the circumstance must be material, judged from the perspective of the hypothetical prudent underwriter; and that (b) the actual underwriter must have been “induced” to enter into the policy on the terms that she or he did.
Materiality
Key to the duty of fair presentation is materiality; a circumstance is material “if it would influence the judgment of a prudent insurer in determining whether to take the risk and, if so, on what terms.” (Section 7(3) of IA2015).
We considered the 2021 decision of Berkshire Assets (West London) Ltd v AXA Insurance UK Plc and its findings on materiality as a component of the duty of fair presentation here. In Berkshire Assets the court accepted that the well-established principles on the question of materiality still apply post-IA2015, as follows:
(i) materiality is a question of fact, to be determined by the circumstances of each case;
(ii) materiality is to be determined from the perspective of the hypothetical prudent underwriter, not the actual underwriter nor from the insured’s perspective;
(iii) materiality is to be tested at the time of placement and not by reference to subsequent events;
(iv) facts raising doubts as to the risk are sufficient to be material;
(v) a circumstance does not have to be decisive for the hypothetical prudent insurer in determining whether to take the risk or on what terms – it’s enough that the circumstance is one of which the prudent insurer would wish to be aware as a factor in coming to a decision.
The IA2015 at s. 7(4) gives a non-exhaustive list of what type of issue might be considered to be material. This includes (a) any special or unusual facts relating to the risk, (b) any particular concerns which led the insured to seek insurance cover for the risk, and (c) anything which those concerned with the class of insurance and field of activity in question would generally understand as being something that should be dealt with in a fair presentation of risks of the type in question.
The authorities indicate that allegations of (as well as actual) criminal charges are likely to be material even if (a) the insured believes that they have no substance; (b) they are unfounded; or (c) they are ultimately not pursued by the authorities. In the Brotherton decision, the Court of Appeal regarded it to be “self-evident that a prudent underwriter will or at least may be affected by rumour or allegations about matters that are material to the risk”. This means that all of the following may be material: (a) the fact of any underlying misconduct on the part of the insured; (b) the fact of allegations having been made, whether or not the allegations are in fact correct/proven; and (c) the fact of any adverse findings against the insured.
Knowledge
The insured must disclose to insurers those material circumstances which it “knows or ought to know.” An insured “ought to know what should reasonably have been revealed by a reasonable search of information available to the insured ...” (Section 4(6) of IA 2015).
Establishing what an individual insured knows (or ought to know) may be relatively straightforward, but attributing knowledge to a corporate insured may be less so. Section 4(3) of the Insurance Act 2015 provides that, for the purpose of discharging the duty of fair presentation, a corporate insured knows “only what is known to one or more of the individuals who are (a) part of the insured’s senior management, or (b) responsible for the insured’s insurance.”
Senior management means “those individuals who play significant roles in the making of decisions about how the insured’s activities are to be managed or organised.” (Section 4(8)(c) of IA 2015). Identifying who forms part of “senior management” for attribution of knowledge under s.4 IA 2015 requires an evaluation of the insured's activities, to identify the individuals who make decisions about how those activities are to be managed and organised, and to consider the significance of each individual's role in such decision-making.
Delos Shipbuilding SA & Ors v AGCS & Ors
In Delos Shipbuilding SA & Ors v AGCS & Ors, the Court of Appeal was concerned with a case in which criminal charges raised against the insured’s sole director were not disclosed prior to inception of the Policy (we considered the first instance decision in our review of A Year In Insurance Law 2024).
The insured was an SPV set up to own the insured vessel. It had one representative director against whom the charges had been made. The director was the only person with actual knowledge of the charges, but it was held on the facts that his actual knowledge could not be attributed to the insured. Despite his title, in substance the director was in fact not part of the “senior management” of the insured for the purposes of s.4(8) of IA 2015. He was purely a nominee and in an administrative role; he was contractually obliged only to act on the instructions of the insured’s beneficial owners, with no independent decision-making powers. On that basis the SPV did not have actual knowledge of the undisclosed criminal charges. There was no misrepresentation and no breach of the duty of disclosure.
Furthermore, whilst the beneficial owners were also insured under the policy, they were neither actually aware of the charges nor would a reasonable search have encompassed asking the nominee director about his ongoing fitness or propriety (still less as to whether he was the subject of criminal charges). Therefore, no insured was either actually aware or ought reasonably to have been aware of the criminal charges and there was, consequently, no breach of the duty of fair presentation.
This creates an unusual situation in which the sole director of a company is not considered to be part of the senior management. This is the opposite of the usual position of a company. The executive directors are the paradigm case of a typical company’s senior management and indeed the Board is usually the directing mind and will of the company – the main way in which actual knowledge could be attributed to a company as a separate legal person. This raises the concern as to whether an SPV can be set up so as to ring fence all knowledge from insurer. The nominee director may have knowledge but not be required to disclose it. The beneficial owners may have the duty to disclose if they in fact are, or become, aware of the charges but no duty to ascertain the true position in the first place. It puts greater emphasis in those situations on insurers asking key questions to elicit answers, with knowledge not being relevant to whether there is an actionable misrepresentation.
Waiver
Disclosure is not required of a circumstance as to which the insurer waives information (section 3(5)(e) of IA2015). In an insurance context, waiver typically arises where an insured’s presentation of the risk contains matters that would prompt a reasonably careful insurer to make further enquiries (but the insurer fails to do so), or where the insurer asks a “limiting” question from which a prospective insured might reasonably infer that the insurer has no interest in information falling outside the scope of that question.
Clarendon Dental Spa LLP & Anor v Aviva Insurance Ltd & Anor
In Clarendon Dental Spa LLP & Anor v Aviva Insurance Ltd & Anor the policyholder successfully applied to strike out parts of its insurer’s avoidance defence on the basis that the insurer had impliedly waived a requirement to disclose certain matters before the insurance policy incepted. The insured’s business had originally been set up as an LLP before a reorganisation in 2014, and the insolvency of two former corporate partners of the LLP, as well as the company that had formerly owned the insured building, was not disclosed.
The insurers’ standard form proposal asked whether the insured entity “or any partners, directors or family members involved in the business” had been declared bankrupt or insolvent, amongst other things. The previous insolvency events were not disclosed.
It was held that the insured had correctly interpreted the insolvency question. The question did not expressly ask about partners or directors of the policyholder, and the question was naturally read as referring to current partners or directors, not to former partners or directors. As such, the question could not reasonably be read as asking for confirmation about the insolvency history of "other companies with which the LLP or its members are involved", as insurers argued. The court was satisfied that, by asking the insolvency question in this way, insurers waived disclosure of the fact of the insolvency of any persons other than the subjects of the question, namely the company and its current directors.
The court acknowledged that where insurers are interested in moral hazard, managerial competence, and corporate prudence, then it might be reasonable to ask an insured about the insolvency history of those involved in management, but observed that a reasonable policyholder would not think that its contents and BI insurer would be interested in the insolvency history of separate companies.
Questions on this topic (the involvement of directors in other insolvencies) have proven a fruitful ground for dispute over the last 20 years. Each turns on the construction of the questions asked. The court in this case did emphasise that where a question is open to more than one interpretation, the insured will not be guilty of a misrepresentation if the answer was correct based on an objectively reasonable interpretation put on it by the insured.
Remedies
Section 8(1) of the IA 2015 makes clear that an insurer only has a remedy for breach of the duty of fair presentation if it can show that, but for the breach, it would either not have entered into the policy at all, or would only have done so on different terms. This is known as the inducement requirement, which stems from the House of Lord’s decision in Pan Atlantic Insurance Co. Ltd & another v Pine Top Insurance Co. Ltd [1995] 1 A.C. 501, and is a question of fact. If the insurer would not have written the risk at all, the insurer can avoid the policy (but absent the breach being deliberate or reckless, must return the premium). If the insurer would still have written the risk but on different terms, those terms will be taken to apply. If the insurer would have charged more premium any claim will be reduced proportionally.
Some Practical Pointers
It is clear that questions of knowledge, breach and the application of remedies in the context of the duty of fair presentation are highly fact-specific. In any dispute insurers will need to adduce evidence from the actual underwriters, as well as expert evidence on the objective question of materiality.
Insurers can take a number of practical steps to reduce the risk of protracted and expensive disputes, including:
- retaining full and clear records of any underwriting decisions and policies – it can be particularly helpful to point to a documented risk appetite or rating methodology that would have applied had the material matter been disclosed or represented accurately;
- reviewing proposal form questions to ensure they are clear and cover the points the insurer wants to have covered;
- checking the answers given in response to any questions asked are satisfactory and remain relevant on renewal;
- ensuring that care is taken in the event of breach not to waive rights. A carefully drafted reservation of rights can protect Insurers’ position where otherwise those rights might be lost.
