When might an insurer waive its entitlement to receive disclosure of material circumstances?

Three years after the Insurance Act 2015 (the Act) came into force, policyholders should by now be well versed on their obligation to make a "fair presentation of the risk" to insurers prior to entering into a contract of insurance. This is known as the duty of fair presentation (the Duty).

To briefly recap, the duty of fair presentation requires prospective insureds to:

  1. Disclose every material circumstance which the insured knows or ought to know;
  2. Failing that, disclose sufficient information to put a prudent insurer on notice that it needs to make further enquiries;
  3. Make that disclosure in a way which would be "reasonably clear and accessible" to a prudent insurer; and
  4. Ensure that material representations of fact are substantially correct and that material representations as to expectation or belief are made in good faith.

Background

Whilst the burden of providing a fair presentation falls on prospective insureds, it is possible for the insurer to waive its right to receive information pursuant to the Duty.  

Young v Royal and Sun Alliance plc [2019] CSOH 32

The first case to consider the operation of the Duty under the Act concerned coverage for a fire loss, in which the insurer sought to avoid the policy for breach of the Duty. In Young, the Outer House of the Scottish Court of Session considered whether an email from the insurer stipulating the conditions upon which cover was offered, waived the insurer's right to receive certain information. That information was the fact that the policyholder had been a director of four companies which had been subject to insolvency proceedings within the 5-year period immediately preceding commencement of the policy (the Undisclosed Information).

One of the conditions set out in the insurer's email was that the "Insured" had never "Been declared bankrupt or insolvent" or "Had a liquidator appointed" (the Insolvency Condition).

The insurer's email followed receipt of a 20 page market presentation prepared by the policyholder's broker, which, under the heading "Material Facts", stated "None". The market presentation required the proposer to select from various options in a drop-down menu. In response to the question: “Select any of the following that apply to any proposer, director or partner of the Trade or Business or its Subsidiary Companies if they have ever, either personally or in any business capacity: …”, "None" was selected. Albeit unknown to the insurer, the drop-down menu included various other responses which could have been chosen, including the option "declared bankrupt insolvent or been the subject of bankruptcy proceedings or insolvency proceedings". Whilst not relevant to the question of waiver, the policyholder contended that the response "None" was technically correct, as neither he nor the insured company in question had been declared bankrupt or insolvent.

Waiver in the context of insurance law

Neither party suggested that the pre-Act legal position on waiver had changed. Typically, waiver in an insurance context arises in one of two ways:

  1. Where an insurer fails to make enquiries following submission of information by the proposed policyholder which would have prompted a reasonably careful insurer to make enquiries;
  2. Where the insurer asks "limiting" questions from which a prospective policyholder might reasonably infer that the insurer has no interest in knowing information falling outside of the scope of those questions.

Two additional important features of the law on waiver are that (i) waiver is not readily to be inferred; and (ii) the person asserting the waiver has the onus of proving it.

Young was concerned with the second type of waiver: whether the Insolvency Condition was a "limiting" question.

The Decision in Young

The court did not consider the Insolvency Condition to be a "limiting" question or enquiry amounting to a waiver. In considering whether there had been a waiver, the key question was whether a reasonable person would be justified in thinking that the insurer had limited its right to receive all material information.

First, in this case, the market presentation was intended to be the totality of information provided to insurers in fulfilment of the Duty. It was not appropriate to presume that responses to market presentations were "enquiries" in the same way as questions in an insurer's proposal forms.

Further, the Insolvency Condition was to be read in the relevant context, which was to consider it in conjunction with the subject of the Insolvency Declaration contained in the market presentation i.e. the word "Insured" in the Insolvency Declaration was to be read as referring to the "proposer… either personally or in any business capacity".

Having regard to that context, the proper interpretation of the Insolvency Condition was that it operated as a stipulation of the kind of moral hazards (circumstances likely to increase exposure to risk) that were required to be addressed. With this background, the court held that no reasonable reader of the Insolvency Condition would understand it as waiving the part of the Insolvency Declaration relating to "any business capacity" in which the insured might have acted.

Comment

Whilst this is only a first instance decision in Scotland, the decision in Young will be persuasive in the English courts, meaning that  it may be taken into consideration when deciding future cases on similar facts. It should be noted, however, that the case was only concerned with the existence (or not) of a waiver, which if present would prevent the insurer from relying on the insured's failure to disclose the Undisclosed Information. The court made no comment on the materiality of the Undisclosed Information, which the parties did not ask the court to determine. Whether or not the Undisclosed Information is material, however, would be essential to determining the outcome of the claim.

Whilst Young is interesting by virtue of its status as the first case decided under the Act, it is also notable that the introduction of the Duty, and the related decline in use of insurer's proposal forms, has seemingly made it less likely that a waiver will be found to have arisen as a result of "limiting" questions.