Underwriting on trial

Whether you are an insurer avoiding a policy or a policyholder or broker challenging a coverage decision, these two recent cases in the Court of Appeal and High Court, serve as reminders about the importance of credible underwriting evidence and the test for causation and inducement. The cases consider the position under the Marine Insurance Act 1906 (“the Act”) and the Consumer Insurance (Disclosure and Representations) Act 2012 (“CIDRA 2012”) respectively. Neither case concerned the Insurance Act 2015.

In both cases, the defendant insurer, Zurich, claimed that it was entitled to avoid the policies for non-disclosure or misrepresentation. Its underwriters gave evidence that had they known all the facts, they would not have written the policies. It succeeded in one claim and failed in the other.

When an insurer cannot avoid a policy for non-disclosure

In order to avoid a policy for non-disclosure under the Act, insurers must prove inducement. In the first case, Zurich Insurance plc v Niramax Group Ltd [2021] EWCA Civ 590, the Court of Appeal found that the High Court had been right to conclude that Zurich could not avoid a policy for non-disclosure under the Act. The reason for this was that it had failed to prove inducement.

The facts

Niramax, the insured, was in the business of waste collection and recycling. It made a claim under its policy with Zurich following a fire at its recycling premises. Zurich insured the plant and machinery whilst another insurer provided its buildings insurance. Niramax had failed to comply with a number of risk requirements imposed by the buildings insurer and because of this the buildings insurer had imposed special terms. Niramax had then failed to disclose the risk requirements and special terms to Zurich when it had renewed its policy. Zurich claimed that it was entitled to avoid the insurance policy for non-disclosure and would not have renewed the policy had it known about the undisclosed facts.

The trial judge rejected the underwriter’s evidence finding that Zurich could not avoid the policy because it could not prove that it had been induced to write it on the basis of the non-disclosure.

Why did the court reject the underwriter’s evidence?

The underwriter provided two witness statements and was cross-examined at length at trial. The trial judge heard extensive evidence about the insurance policy, the market and Zurich’s practices and attitudes. However, the underwriter was not able to show any contemporaneous notes and had only circulated draft underwriting guidelines for waste risks to his team after the loss had occurred. The judge found that on the balance of probabilities the underwriter would have offered terms for renewal partly out of a sense of fair play to the long standing assured and partly because the story of the risk requirements was nuanced.  

Importantly, Zurich had made a mistake when it had calculated the premium for Niramax because it had not applied the rate for waste risks properly. As such, the judge held that the renewal would have been offered, but with an adjustment to the premium to correct Zurich’s earlier pricing error. As the only change to the terms was to correct an error, the judge found that Zurich had not been induced to write the policy as a result of the non-disclosure. 

The test for causation and inducement

Zurich appealed the decision, arguing that the relevant test of causation to establish inducement was a “but for” test, which was satisfied on the judge’s findings because but for the non-disclosure, a different premium would have been charged.

The Court of Appeal, however, held that for inducement to be made out, the non-disclosure must have been an “efficient” or “effective” cause of Zurich imposing different terms. It held that a “but for” test of causation was insufficient. It said that in many, but not all, cases, if an insurer cannot satisfy the “but for” test, it will also be unable to satisfy the “efficient cause” test.

Applying this to the facts, the Court of Appeal found that there was no inducement. Zurich’s calculation of the premium only took into account three points: the amount of cover, the nature of the trade and the claims experience. The calculation did not take into account Niramax’s attitude to the risk, which was what the undisclosed facts went to, except to the extent that it was reflected in the claims experience. Accordingly, the undisclosed facts were irrelevant to the rating of risk by Zurich.  The non-disclosure therefore did not have any “causative efficacy” in the renewal being written on cheaper terms than would have occurred had the disclosure been made. The sole efficient cause of the cheaper terms was Zurich’s mistake, not the non-disclosure. It was insufficient to establish that the less onerous terms would not have been imposed, but for the non-disclosure. Zurich was therefore not entitled to avoid the policy.

When an insurer can avoid a policy for misrepresentation

In the second case, Jones v Zurich Insurance plc [2021] EWHC 1320 (Comm), the court found that Zurich was entitled to avoid a home insurance policy under CIDRA 2012. The reason for this was misrepresentation by the claimant.

The facts

In this case the claimant made a claim for a Rolex watch worth £190,000 under a policy underwritten by Zurich. Zurich sought to avoid the policy by reason of a failure by the claimant to disclose a previous loss when proposing cover to Zurich. In the proposal documentation, the claimant had answered “No” to a question about whether he had made any claims or suffered any losses in the previous five years. In fact, he had made a claim against another insurer for £15,000 for the loss of a diamond ring during that time period. Furthermore, when Zurich had sent to the claimant a “Statement of Fact”, which included a statement about prior claims, and had made clear that it formed the basis of the quotation and had asked the claimant to confirm its accuracy as a condition of providing cover, the claimant had again failed to disclose the prior claim.

The court found that this was a misrepresentation by the claimant who was in breach of his duty to take reasonable care not to make a misrepresentation under section 2(2) CIDRA 2012. This was a “qualifying misrepresentation” under section 4(1) CIDRA 2012 because Zurich had shown on the balance of probabilities that it would not have provided the insurance had the claimant disclosed the previous claim. Zurich was therefore entitled to avoid the policy. 

Why did the court believe the underwriter’s evidence?

In this case the court accepted the underwriter’s evidence. This was that he had been reluctant to write the policy in the first place because of the claimant’s age, residence and profession, which were all taken into account when deciding whether to provide cover. He said that he had loaded the premium quote as a result, and had he known of the prior claim, that would have tipped the balance and he would have declined cover. His concerns about providing cover were evidenced by his contemporaneous notes, a transcript of a phone call with the broker and by the high premium imposed. His notes also showed that he was particularly concerned about the jewellery element of the cover. Importantly, these concerns were present even though the claimant had declared no previous claims. 

Zurich had not disclosed a macro-enabled version of the spreadsheet that had been used to calculate the premium. It had also not disclosed any internal underwriting guidelines. The court said that this would have been significant had it not also had the underwriter’s contemporaneous evidence.

Why did the court allow one policy to be avoided but not the other?

There were a number of important differences between this case and the Niramax case, which contributed to the different outcomes and are worth highlighting and which:

• The Jones case concerned a new client for both Zurich and the broker, whereas in the Niramax case, Niramax was a long standing insured. 
• The previous undisclosed claim in the Jones case had been a substantial claim for jewellery, which went to the heart of the risk of the policy; in the Niramax case the undisclosed facts were irrelevant to the rating of risk.
• The underwriter in the Jones case had his contemporaneous notes and a transcript of a phone call to support his position; in the Niramax case, there was no contemporaneous evidence and the draft underwriting guidelines for waste risks were only circulated after the loss.

Both cases highlight the importance of insurers maintaining up to date underwriting guidelines so as to present credible evidence supported by documents on underwriting decisions, and to support coverage decisions at court before an arbitrator or the Financial Ombudsman Service. This is the case whether the policy is covered by the Marine Insurance Act 1906, CIDRA 2012 or the Insurance Act 2015.