Insurance Law: Cases and Materials 9781509955534, 9781841132747

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For Allen Ward Rawlings George Leonard Lowry

Preface This book complements our earlier work, Insurance Law: Doctrines and Principles (Oxford, Hart, 1999). The structure follows the contract of insurance from its inception through its formation and concluding with claims. A distinctive feature is that we draw materials, including cases and legislation, from other common law jurisdictions as a means of illustrating how problems that have long confronted the UK judiciary and legislature have attracted different responses elsewhere. While the book is not systematically comparative in approach, it does have a comparative component. In writing and compiling this work the authors have incurred debts to various colleagues, particularly Loukas Mistelis, Rod Edmunds of Queen Mary, and Michael Bridge of UCL. We also owe a debt of gratitude to John Birds, Malcolm Clarke and Rob Merkin for their help and encouragement along the way. We are most grateful to authors and owners of copyright materials for their kind co-operation. Needless to say, we thank Richard Hart and all at Hart Publishing for their support and patience. We have endeavoured to state the law as it stood in October 2003. John Lowry and Philip Rawlings St Albert’s Day, 2003 Roy Goode House, London

1 The Insurance Contract 1.1 Introduction At its root, an insurance contract is a means by which the risk of loss is shifted from the person who otherwise might suffer on to an insurer and, through the insurer, on to other insureds. It is true that an important part of life insurance business is concerned with investment, but even there the element of riskshifting will be present (eg see [114]). Of course, the skilful insurer is able to persuade people that they should not bear the risks to which they are subject, and is able also to calculate matters so as to take in more income in premiums than is paid out in claims (although in reality the picture is rather more complex than this since insurers earn income by investing premiums and they cover part of their potential liabilities by reinsurance). The insurance contract contemplates, therefore, the possibility, not just that the insurer will become liable to the insured, but also that the insurer will never become so liable. In other words, this is an unusual sort of contract in that it requires performance by one party — the

insured — in the shape of the payment of a premium, while the other party — the insurer — is only required to promise to perform if a loss is sustained that comes within the terms of the policy.

1.2 Risk [101] F Ewald (trans J-M Dautrey and CF Stifler), “Risk in Contemporary Society” (2000) 6 Connecticut Insurance Law Journal 365 [footnotes omitted] ‘THE SOCIAL PERCEPTION OF RISK’ This is the domain of insurance. Here, risk pertains to a future event, one that may also be possible, probable, contingent, fortunate or unfortunate. In any case, one that is feared for its possible consequences to property. In this realm, risk is always potential. However, insurance gives a current value to risk and ascribes it a cost — an insurance premium or fee. Thus, with regard to insurance, risk remains within the confines of monetary valuation. In fact, insurance risk is nothing but the assessment of a value. Insurance is what gives a price to risk in the economic sense, a monetary value, which is really what quantifies value.

How does one establish the cost of risk? Two theories apply. Under the first one, of a largely psychological nature, the cost of risk is measured by the aversion to risk of the individual who wishes to avoid it. In this case, quantification is not required. The cost of risk is the total premium agreed upon between the individual who wishes to transfer it and

the one who agrees to assume it. The following anecdote illustrates this point. In an effort to promote his whisky, the president of the Cutty Sark distillery had offered a large monetary sum to the first person to see the Loch Ness Monster. It may be that one night he had a nightmare or suffered remorse, but he would have to keep his foolish promise none the less, which would undoubtedly endanger his company’s financial well-being. He therefore hastened to find an insurer, someone to whom he could transfer the risk he had taken so brashly. And he found one, Lloyd’s of London, with which he agreed on a premium. The coverage of this unsurpassable, potential, and exceptional risk involved a cost — a risk transfer. There was insurance without any need to quantify. The concept of insurance risk is not so much tied to the notion of danger as it is to that of expectation or fear. Risk is the measure of an expectation — a mathematical expectation that, according to Pascal, is the product of the probability of the event multiplied by its value. A moral expectation…which relates to what I am willing to and what I ought to pay, in terms of mathematical expectation in order to avoid risk. The “additional cost” would measure exactly what the value of the risk is for me. In the words of Michel Albert who initially made the distinction, this purely contractual vision of insurance corresponds to a more “maritime” than “riparian” view of insurance. In continental Europe, France in particular, one views insurance as tied to the concept of mutuality, or as a function of statistics and probability. This view stems from the fact that, in

France, insurance had to set itself apart from gambling and betting to be recognised. It follows that risk reflects the probability that an event will take place in a given population. Consider the population of French drivers, the road conditions, and the number of cars on the road. There are currently about 8,000 annual road deaths. In the words of the wellknown sociologist Adolphe Quetelet, these deaths represent the “budget” that the French population commits to road travel each year. One can anticipate that, all things being equal, this figure will remain constant from year to year, within a few standard deviations. The average premium per inhabitant or per driver can then be established. At the same time, it is possible to assess the chance that any one individual has of being among the 8,000 victims. This chance is a function of a car’s power, a driver’s experience, the places where he drives and so forth, and these criteria are used to calculate an individual’s insurance premium. Indeed, not everyone represents the same risk to the group. Some individuals drive less carefully than others. This is another way of establishing the cost of risk; it corresponds to the greater or lesser probability of incurring an accident in relation to the average. This cost is called the equitable cost. Under this second analysis (more sociological than psychological) the group outweighs the individual. Risk influences the group. It affects it with depressing regularity and affects every individual as members of the group. Risk has a defining and unifying effect on the group and gives it a personality and an identity.

This is the paradox of freedom: each member can feel as free as he will; through his actions he will contribute in one way or another to reproducing the common statistics. Such a group, identified on the basis of its risk, is what is called a mutuality. By assessing the cost of risk so that it can become the subject of a contract, insurance gives existence to non-existence, immediacy to the non-current, and form to potential. It inverts the course of time. The feared event exists whereas it has not taken place and may in fact never take place. Risk exists, materialised through a contract, in the form of an infinitesimal fraction of what it will become. That is, it exists in such a manner that its presence, while thoroughly real, remains almost imperceptible. This is what makes insurance doubly effective. The fragmentation of that risk renders feared events no longer feared. Insurance eradicates and decimates adversity. It makes these fears more bearable. Sometimes too much so. But the merit of insurance extends beyond what would otherwise closely amount to a public-aid dynamic. It transforms the perception of events in such a way so that not to carry insurance becomes a fault. This point was well illustrated last century by Edmond About in his booklet insurance [L’Assurance (1865)]: As you know, as the wheels of horse-drawn carriages wear out on cobbles, they shed more than 20 kilos of iron every day on the streets of Paris. These 20 kilos of precious metal are not completely destroyed but they are lost. If you will,

their infinitesimal division makes them useless by dint of making them irretrievable. Suppose that a patient and ingenious worker manages, however, to pick up these atoms of iron, restore their cohesion, resistance and all useful qualities. Further suppose that he forges thern into a lever. Will he not have created capital for individuals to use? A centime is no more capital than a wisp of iron is a lever. It has barely any value. You will find very few individuals who are sensitive to the loss or gain of a centime because a single centime amounts to nothing. But he who would obtain by honest means this useless centime from his fellow citizens would create a capital of 10 million centimes; that is, a nice lever for moving mountains.

The merit of insurance ensues from pricing expectation and giving reality to potentiality so that any individual who does not account for the possibility of risk in his conduct becomes a factor of individual and collective loss. An individual loss with regard to what his situation will be if the risk becomes real; a collective one as he deprives society of the power to move mountains. Insurance owes its economic effectiveness to solidarity. As it turns potential events into reality, insurance becomes the mechanism by which a possible loss transforms itself into capital. It is simultaneously a combination of protection and an economic mechanism that inverts symbols and turns a loss into a principle of yield. Its value lies in its being much more than a simple mechanism of allocation of liability. Insurance suggests a social experience of risk to both liberalism and democracy. To the former because liberalism is a political philosophy that

advocates risk management as a principle of government. Individuals must face risk in order to become truly aware of their real identity; finding resources in themselves in the form of foresight and, in others, in the form of voluntary association. But insurance, at least in its practical form, is also the product of democracy to which it gives its image of solidarity. Thus, for two centuries, insurance has continuously prompted us to be aware of ourselves both individually and collectively. As the Baron de Beauverger said in 1868 during a parliamentary debate on industrial accidents: “As a system, our society is nothing but an all encompassing insurance, insurance against weaknesses, insurance against misfortune, insurance against ignorance. Look at institutions through that prism and you will see that they all seek the same goal, a noble and generous goal.” This analysis of risk was seriously undermined when an attempt was made to make insurance resolve social problems linked to the development of an industrial society. With the rise of social insurance, insuring oneself becomes mandatory…It is a matter of seeing to it that individuals are protected against certain risks of a welfare nature. The concept is twofold: regardless of his income, every individual must be protected from these risks since such risks are not equally allocated throughout society…. If there are social risks, it is because society itself generates them as it develops without regard to a fair allocation. Compensating for inequalities in the face of risks, establishing equalities in the face of

opportunities…. Social insurance makes coverage against social risks no longer an act, but an entitlement. It is first a salaried worker’s entitlement, and the institution of social security makes it a citizen’s entitlement. The actualisation of the potential, of which the economic translation is capitalisation, gives way to a sort of generalised assistance based on allocation. This rationale regarding insurance became extremely widespread. Today, welfare outlays in the nation of France exceed the budget of the state of France. And the gap continues to widen in accordance with a rationale under which the nature of covered risks (health and retirement) hardly suggests a shift. Yet, the limit beyond which welfare outlays seem destined to ruin their own sources of supply has been reached: social costs are exhausting the economy. The economic rationale couples with a moral rationale: instead of creating an incentive to take risks, health and welfare services engender phenomena of “demoralization” that are counterproductive. Insurance no longer operates as an incentive to take risks, indeed, it directs us to never have to take any. We have considered some of the issues regarding the necessary limit to risk-taking and the danger of excessive risk-taking. We now find ourselves facing an inverse situation: what we may fear is not excessive risk-taking, but, on the contrary, the absence thereof. Once again, there arises an issue of balance.

THE LEGAL PERCEPTION OF RISK …In an industrial society, it is believed that there can be no risk-free activity, or business…. Risk is inevitable and beyond debate; the only issue therefore is the allocation of its cost. The issue is not to inflict a penalty, but to determine who, between the one who caused the risk and the one who suffered from it, must bear the cost. Penal considerations are irrelevant; only social considerations come into play. It is not property speaking an issue of liability but an issue of risks: who must bear the risks? Reason and legal fairness dictate that it must be borne by the individual who by virtue of his actions has assumed the consequences of his deed and activity. [R Saleilles, Les Accidents du Travail et La Responsabilité Civile (1897)]

It is inconceivable to require that, as a condition of acceptance, an activity or a business must be free from risk to others. There is none the less a condition. The burden must not be borne by those individuals who are subjected to the risks, those who impose such risks must bear their costs. Rules governing liability regulate such transfers on the basis of risk, hence the existence of objective liability and presumptions of liability whose rationale lies in placing the burden of risk on the individual who creates or profits from it. Thus, the response to risk is indemnification rather than prevention. In other words, insurance has developed considerably with the multiplication of required liability coverage (there are about a hundred of them in France). Until recently, nobody was concerned about this new

social contract the contract of solidarity according to which, risk is acceptable so long as it is indemnified and its cost not borne by the victim. Today, we are witnessing a remarkable shift in this pattern. The issue is no longer so much that of multiplying risk liabilities and structuring through insurance the solvency of those liable as it is to prevent certain risks from being taken. Not only is prevention outpacing indemnification, but efforts are also made to avert risks that have not yet been recognised. Precaution governs. Several factors account for these recent developments. First, damages no longer pertain to individual accidents as much as they pertain to catastrophes. The amounts currently involved exceed the limits of what can be insured as well as indemnified. Secondly, the cost of liability is also being reevaluated. The First World War provides a good scale by which to weigh this new method of measuring risk. During the war, a general could send 300,000 men every two weeks off to be killed, as was the case during the Chemin des Dames battle. Today, only “zero-risk” wars can be waged. A peculiar transmutation of values, indeed! Under the traditional cost-benefit analysis, it was enough that advantages outweighed risks to feel justified in taking risks and thus in accepting a portion of loss. Today, risk tends to be measured on the basis of the loss portion: what justifies the sacrifice? Do not those unfortunate enough to make up the loss portion count as much as others? Such is the method of valuation underlying the zero-risk problematic.

The rationale of precaution does not advocate, as it has been said, a change of focus from risk to fault. It results from a twofold reassessment of risk. First, it results from the technological powers that are now at work and over which we know we fail to exercise full control. We are witnessing an excess of might over power that we do not really know how to express from a legal standpoint. It can be characterised as a developmental risk, principle of precaution depending on whether we look at it from a legal or political standpoint. Secondly, the rationale of precaution results from a sort of backlash of victims who no longer accept the cynicism arising from the traditional formula for the acceptance of liability. What they challenge is not so much the amount of damages as the imbalance of power linked to technological risks. And, today, as a result of this backlash, liability tends to be assessed on the basis of what was hitherto considered negligible. Here again is another case of how the experience of risk has its limits. Given the inordinate power now in existence (which can be measured by the fact that we cannot measure its effects), the relations of asymmetry and dependence (with the sense of a loss of autonomy that ensues), and the magnitude of the risks created, should it be appropriate, short of putting an end to the process, at least to take a pause that would allow us to regain control over the changes governing us? Time for precaution is time for moratoria. CONCLUSION

…The purpose [of this paper] was not to consider every experience of risk. The intent was solely to understand how risk could be at the core of contemporary society. Not simply because of the threats hovering over us, but more importantly, as a general principle of valuation. By seeking the value of values through risk, contemporary society found itself inexorably subjected to the dialectic of risk. The morality of risk, while encouraging sacrifice, sets it as its limit. The perception of risk constitutes a defining experience for contemporary society: how far is too far? While valuing risk, adventure and entrepreneurship, contemporary society seeks to keep it within measure. Thus, while risk stands as a principle of valuation, motivation, and action, it also constitutes a principle of limitation, restriction, and prohibition. When overvalued or undervalued, risk quickly turns human experiences into inhuman ones. There is therefore no need to set a morality of risk against a morality of protection. Indeed, the morality of risk is inextricably a morality of protection. Risk and safety are not opposite concepts independent from each other, Risk both affirms and negates. It arises from the need to surpass oneself, from the necessity to transcend the accepted frontier and also from the pressing awareness of the danger of going beyond the limit. This is precisely why, by taking on risks, individuals in contemporary society have set the conditions for feeling perpetually restless, better still, have dedicated themselves to anxiety and responsibility.

1.3 General Definition of Insurance Since those who conduct insurance business are subject to regulation (see chapter 2) and insurance contracts involve rights and obligations not generally present in other forms of contract (such as the duty of disclosure, see chapter 4), it might seem to be of fundamental importance to have a clear definition of ‘insurance’. Unfortunately, its meaning remains obscure, and, with some exceptions, judges and legislators have been reluctant to attempt a definition. [102] Lucena v Craufurd (1802) 2 B & P (NR) 269 Lawrence J: Insurance is a contract by which the one party in consideration of a price paid to him adequate to the risk, becomes security to the other that he shall not suffer loss, damage, or prejudice by the happening of the perils specified to certain things which may be exposed to them.’

[103] Prudential Insurance Co v Commissioners of Inland Revenue [1906] 2 KB 658 Channell J: ‘Where you insure a ship or a house you cannot insure that the ship shall not be lost or the house burnt, but what you do insure is that a sum of money shall be paid upon the happening of a certain event. That I think is the first requirement in a contract of insurance. It must be a contract

whereby for some consideration, usually but not necessarily for periodical payments called premiums, you secure to yourself some benefit, usually but not necessarily the payment of a sum of money, upon the happening of some event. Then the next thing that is necessary is that the event should be one which involves some amount of uncertainty. There must be either uncertainty whether the event will ever happen or not, or if the event is one which must happen at some time there must be uncertainty as to the time at which it will happen. The remaining essential is that which was referred to by the Attorney-General when he said the insurance must be against something. A contract which would otherwise be a mere wager may become an insurance by reason of the assured having an interest in the subject-matter — that is to say, the uncertain event which is necessary to make the contract amount to an insurance must be an event which is prima facie adverse to the interest of the assured. The insurance is to provide for the payment of a sum of money to meet a loss or detriment which will or may be suffered upon the happening of the event. By statute it is necessary that at the time of the making of the contract there should be an insurable interest in the assured. It is true that in the case of life insurance it is not necessary that the interest should continue, and the interest is not the measure of the amount recoverable as in the case of a fire or marine policy. Still, the necessity of there being an insurable interest at the time of the making of the contract shows that it is essential to the idea of a contract of insurance that the event upon which the money is to be paid shall prima facie be an adverse event. Thus a contract depending upon the dropping of a life, such as a contract whereby two or more people purchase a property as joint tenants with the object of the longest liver getting the benefit of survivorship, would not be a contract of life insurance, although it would be a contract with reference to a contingency depending upon a life or lives; it would not be

a contract of insurance at all. A contract of insurance, then, must be a contract for the payment of a sum of money, or for some corresponding benefit such as the rebuilding of a house or the repairing of a ship, to become due on the happening of an event, which event must have some amount of uncertainty about it, and must be of a character more or less adverse to the interest of the person effecting the insurance. Then does the particular contract with which we have here to deal come within that definition of a contract of insurance? The contract is to pay a sum of 95l. if the person insured attains the age of sixty-five, and 30l. if he dies under that age. It seems to me that for the purpose of determining whether that contract comes within the definition we must look at it as a whole, and not split it up into two separate parts. If it were to be so split up, and treated as two separate contracts, I should incline to the view that even the old age endowment portion of it—that is to say, the contract to pay the sum of 95l.—would satisfy the definition. In the first place, the event on which the money is to be paid is uncertain, for it is uncertain whether the assured will live to the age of sixty-five, and whether consequently the money will be payable at all. Secondly, it seems to me that the event, in addition to being uncertain, is prima facie adverse to the interests of the insured. A person whose life was insured at a premium of 6d a week would presumably be a poor person and one who would have to earn his own living, and his capacity of so earning his living would probably be materially diminished by the time he reached the age of sixty-five. The reaching of that age, with its attendant disadvantages, is to my mind an event which is sufficiently adverse to the interest of a poor person to make it a proper subject against which to insure. Therefore, even if this endowment portion of the policy stood alone, and if the contract purported to be nothing more than a provision against old age, I am strongly of opinion that it would be a policy of insurance, and if a policy

of insurance, then also a policy of life insurance, for it seems clear that it would be an insurance upon a contingency relating to life — the contingency of the insured living to the age of sixty-five. But, as I have said, we must look at the contract as a whole. And when you take the whole contract together, there does not seem to be any real difficulty about the matter. A contract of life insurance is one by which persons entitle their executors to receive a sum of money for distribution among their family in the event of their death. The objection to insurance is that, if the insured lives beyond the average period of life upon which the premiums of insurance are based, he has made a bad bargain, and he would have done better if he had saved his money and invested it at compound interest. Consequently, in order to attract insurances, it is usual for the insurance companies to give benefits to persons who live beyond the average period of life. Most of them do this by way of bonuses after the policy has been in existence for a certain period, and the giving of such a bonus, of course, does not prevent the contract from being a contract of insurance. Sometimes it is provided that the sum insured shall be payable either upon the assured reaching a certain age or upon death, whichever first happens. It is clear that that also would be a contract of insurance. That is very like this case, the only difference being that here a larger sum is payable in the former event, and that is a difference which, in my opinion, is immaterial. I have come to the conclusion that this contract, taken as a whole, is clearly a contract of life insurance within the meaning of the Stamp Act, and that the appeal must, therefore, be allowed.’

[104] Department of Trade and Industry v St Christopher Motorists’ Association Ltd [1974] 1 All ER 395

[The issue before the court was whether the Association came within the terms of the relevant statutory regulation for those conducting insurance business and as such required authorisation. According to its own literature, ‘St. Christopher Motorists Association protects you against being unable to drive your car. For as little as £10 a year the St Christopher Motorists Association will help keep you on the road, when you cannot be behind the wheel. Whether disqualification or injury prevents you from driving, SCMA will provide you with a driver and, if necessary a car and driver, for up to 40 hours a week, for a maximum of 12 months.’ It was held that the Association required authorisation]. Templeman J: ‘In return for annual sums, if there happens an event which is uncertain at the date when the member joins, then on that happening the member is entitled to services and those services are to compensate him for the loss or disadvantage which has happened to him as a result of the happening of the uncertain event. Prima facie that would appear to me to be coming very near what, without any guidance, I would have thought was the essence of insurance… [His lordship next quoted extensively from Channell J’s judgment, above] Applying that definition to the present case, we have a contract not for the payment of a sum of money but for some corresponding benefit, the provision of a chauffeur or the provision of a hired car and chauffeur to become due on the happening of an event. The event is a physical accident which debars the member from driving himself or the interposition of the law which positively forbids him to drive himself. Then the event must have some amount of uncertainty about it. Well, there is a great

deal of uncertainty about it. The event must be of a character more or less adverse to the interest of the person effecting the insurance. Well, that is fulfilled here because it is adverse to the interests of the individual member that he should be immobilised either for physical reasons or because of the requirements of the law. That definition, including the learned judge’s careful pronouncement that there must either be the payment of a sum or some corresponding benefit, seems to me to meet the present case and particularly so when, in substance, there seems to me to be no difference between the defendant company paying a chauffeur on the one hand and on the other hand agreeing to pay to the individual member a sum of money which would represent the cost to him of providing himself with a chauffeur in the event of his being disabled from driving himself. I cannot see any difference in logic between the two and therefore I see no reason why, in the present particular case, the arrangement made by the defendant company should not amount to insurance. It does not follow that the definition given by Channell J in a case based on the facts with which he was concerned and applied by me to the case in which I am now concerned is an exhaustive definition of insurance. There may well be some contracts of guarantee, some contracts of maintenance which might at first sight appear to have some resemblance to the definition laid down by Channell J and which, on analysis, are not found to be true contracts of insurance at all. I wish to guard myself, particularly in view of the fact that, as I have said, counsel for the department has had no vocal opposition except mine, against deciding anything other than that the rules and trade of the defendant company in the present case amount to insurance. Counsel for the department himself suggested some further limitation in that the event which must happen must not be an event within the control of the insurer, but whether that, in fact, be so, I need not now decide. It is

sufficient for my purposes that the narrow distinction which might have been argued to differentiate the case of the defendant from the normal type of insurance, that narrow distinction being the insistence that the defendant company pays for a service instead of paying the member the amount which it will cost him to provide a service, is not one which enables the defendant company to carry on business outside the provisions of the Insurance Companies Acts.’

[105] Medical Defence Union Ltd v Department of Trade [1980] Ch 82 [The issue was whether the Medical Defence Union Ltd was carrying on insurance business within the meaning of the relevant legislation. Its membership consisted of doctors and dentists, who paid subscriptions and whose contracts with the union were governed by the terms of the union’s memorandum and articles. Among the objects of the union was giving advice on various issues, including employment, defamation and professional matters. In addition, the articles gave the union absolute discretion to undertake the conduct of any matter concerning a member’s professional character or interests and to grant an indemnity regarding any claim concerning a member’s professional character or interests]. Megarry V-C: ‘… there are two categories of insurance which may respectively be called indemnity insurance and contingency insurance. Indemnity insurance provides an indemnity against loss, as in a fire policy or a marine policy on a vessel. Within the limits of the policy the measure of the

loss is the measure of the payment. Contingency insurance provides no indemnity but instead a payment upon a contingent event, as in a life policy or a personal injury policy. The sum to be paid is not measured by the loss but is stated in the policy. The contractual sum is paid if the life ends or the limb is lost, irrespective of the value of the life or the limb. With these two categories of insurance in mind, the three elements in a contract of insurance may be expressed as follows: and in this I draw largely on what Channell J said in the Prudential case [1904] 2 KB 658, 663. First, the contract must provide that the assured will become entitled to something on the occurrence of some event. This, of course, is the disputed element, and the dispute is about what the “something” is. For Mr Chadwick it is “some benefit,” whereas for Mr Alexander it is “money or money’s worth.” To this I shall have to return. Secondly, the event must be one which involves some element of uncertainty. Mr Chadwick would add “outside the control of the insurer.” This may be right, but I do not have to decide the point, and like Templeman J in Department of Trade and Industry v St. Christopher Motorists’ Association Ltd. [1974] 1 WLR 99, 106, I leave it undecided. Thirdly, the assured must have an insurable interest in the subject matter of the contract. On the three elements as a whole, I would also follow Templeman J in the St Christopher case at p 106, and say that I do not aspire to any exhaustive or comprehensive definition, good for all purposes and in all contexts. I only say that for the purposes of this case it seems to me that a contract which contains these three elements is likely to be a contract of insurance, and a contract that lacks any of them is likely not to be a contract of insurance. I may add that Templeman J instanced some contracts of guarantee or of maintenance which might satisfy such a test and yet be no true contracts of insurance.

On the facts of this case it seems clear that all three elements are present, subject to the disputed point on the first element. That point arises in this way. On the face of the memorandum and articles a member of the union has no right to require the union to conduct legal proceedings for him, and no right to require the union to indemnify him against claims for damages. All that he has is the right to have his request for the union’s help under these heads properly considered by the council or by one of its committees. In practice it is rare for such a request to be refused. Yet although the prospects of such a request succeeding are great, all that the member has by way of right is that his request should be properly considered, and, of course, if it is granted, that the union should conduct the proceedings or indemnify him, or both. On that footing, Mr Chadwick contends that although this right is not a right to money or money’s worth, it is of value, and so is a benefit; and for the first of the three elements of insurance, all that is required is that on the occurrence of some event the assured will become entitled to some benefit. Mr Alexander, on the other hand, says that this is far too wide. The first element is satisfied if on the occurrence of the event the assured becomes entitled to a benefit consisting of money or money’s worth, but not if the only benefit is something else. As I have indicated, that is the central issue in the case. I therefore return to the main point on the footing that the right of a member in relation both to proceedings and to indemnities is merely a right to have his request fairly considered by the council or one of its committees. Only if the request is granted is the member entitled to have the proceedings conducted by the union and to have an indemnity, subject to the provisions of the articles and not least Article 44 (3). For the purposes of this case I do not think that it matters whether the right is a right to have the request heard and determined “fairly” or “in good faith.” It

is common ground that it must not be dealt with by whim or caprice, and it is not contended that such a right is valueless. As I have indicated, the short point is whether, in the first of the three elements of insurance, it suffices that on the occurrence of the event the assured becomes entitled to “some benefit,” or whether this does not suffice unless it amounts to “money or money’s worth.” The right to have a request relating to proceedings or an indemnity properly considered by the union is plainly a benefit, but equally plainly it is not money or money’s worth. Templeman J’s conclusion at p 106 was that the “careful pronouncement” of Channell J that “there must either be the payment of a sum or some corresponding benefit” met the case before him. He could see no logical difference between the club paying the driver, and the club paying the member a sum representing the cost to him of providing a driver. Such contracts were thus contracts of insurance, and so fell within the Insurance Companies Act 1974. This decision has been differently treated by different editors. In Chitty on Contracts, 24th edn. (1977), vol II, p 686, the words “to pay money” were amplified into “to pay money or provide services,” citing the St Christopher case. A warning footnote suggests that the decision may be open to question in that the extension of the definition could embrace a number of contracts not previously regarded as being contracts of insurance. A formulation in terms of the “provision of services” does not seem to me to represent the true ratio of the St Christopher case; and it appears to be at once both too wide and too narrow. The decision was based on the absence of any logical distinction between the club paying the driver and the club paying the member the cost to him of providing a driver: in each case the club met the member’s claim by paying money that it otherwise would not have paid. If instead the service provided had consisted of the club staff giving the member advice or assistance, I do not think that this would fall within the ratio of the case,

and I doubt whether it would have satisfied the requirements of insurance. Yet although in this respect the phrase “provision of services” may be too wide, in another respect it seems to be too narrow. It would include the right to the services of engineers to repair a television set when it became faulty, but not, it seems, a right to have the set replaced if it became unserviceable. It is difficult to see any sound basis for such a distinction. I do not think that this formulation should be relied on as it stands. Halsbury’s Laws of England, 4th ed, vol 25 (1978), p 9 adopts a different approach. It leaves standing the proposition stated in the previous edition, vol 22 (1958), p 180, and adds the St Christopher case…to the Prudential case…as a supporting authority. The proposition is that “a sum of money will be paid by the insurers on the happening of a specified event.” This says nothing about the person to whom the money is paid: there is no, “to or for the benefit of the assured.” Attention is thus focused on the liability of the insurers to make a payment rather than on the right of the assured to require something to be paid to him or for his benefit. This formulation certainly seems to be better supported by the St Christopher case, but I feel considerable doubt about confining it to the payment of a sum of money, thus narrowing what Channell J said in the Prudential case. If one takes again a television set, and a contract by a company that in return for an annual premium the company will replace the set when it becomes unserviceable, the requirement would be satisfied if the company had to purchase a replacement set every time an insured set became unserviceable, but it would not be satisfied if the company had replacement sets in stock: for “will be paid… on the happening of a specified event” cannot apply to what has already been paid. The exclusion of the equivalent of money may lead to curious results. Again, I would hesitate to rely on this formulation as it stands.

I do not know whether a satisfactory definition of “a contract of insurance” will ever be evolved. Plainly it is a matter of considerable difficulty. It may be that it is a concept which it is better to describe than to attempt to define; and, as I have said, I do not seek to lay down an exhaustive or comprehensive definition. It is enough if I can find a principle which suffices for the decision of the case before me. Plainly a provision for the payment of money is one of the usual elements in a contract of insurance. The main difficulty lies in formulating what extension of this concept there should be; for plainly there must be some. If the extension is framed in terms of the equivalent of money, then this will be both limited in extent and consonant with the central concept. If on the other hand the extension is framed in terms of “some benefit,” then that seems to me to be far more than a mere extension: it is a reformulation of the concept in wider terms. In other words, “money’s worth” is merely an extension of “money,” whereas “benefit” is no mere extension of “money” but a wider concept which engulfs money. “Money” would then be subsumed under “benefit,” with many other things. Obviously much is a “benefit” which is not money or money’s worth, ranging from matters such as peace and quiet to the pleasure of listening to the arguments of counsel in this case, and much else besides. I am quite unable to see any justification for replacing “money” or its equivalent by “benefit” as a constituent part of the definition of a contract of insurance. I can see nothing in the authorities which gives any real support for so wide and extensive a generalisation, especially as the term “money or money’s worth” seems to be adequate for all normal circumstances. It may be that in view of the St Christopher case…some further addition should be made so as to cover explicitly the provision of services, but I shall defer the consideration of this until I turn to the services provided by the union in this case.

In rejecting the term “benefit” I may say that I think that one is in a different world from the world of insurance when the only contractual right is a right to have a claim fairly considered. No doubt one must not attach too much importance to the basic meaning of words; but terms such as “insure” and “assure,” like “ensure,” seem to me to convey the sense of making something certain, and not merely of giving a hope or expectation, no matter how well founded. When a person insures, I think that he is contracting for the certainty of payment in specified events, and not merely for the certainty of proper consideration being given to his claim that a discretion to make a payment in those events should be exercised in his favour. The certainty must be direct, and not at one remove. There are other features in this case which are at least unusual in the case of normal contracts of indemnity insurance. Once a member has joined the union his obligation is simply to pay the annual subscription at the rate for the time being applicable to all who are in the same class of membership. However many claims have been made against him, he may remain a member at the rate of subscription common to all in his class of membership. By virtue of Articles 11, 57 and 58, so long as his name remains on the Register of Medical or Dental Practitioners and his registration has not been suspended in consequence of disciplinary proceedings, he has only to pay his subscription, and with one exception the union cannot determine his membership. That exception is where his conduct has been detrimental to the honour and interests of the union or of the medical profession: somewhat oddly, the dental profession is not mentioned. An anonymous instance of 1976 illustrates the operation of the scheme in this respect. A member had had many claims made against him. He received a warning, and then, when there was another claim, he was refused assistance. This may be contrasted with the increased annual premiums and ultimately a refusal

to renew the policy which might be expected under any normal insurance policy, and also the insurer’s obligation to meet the final claim if the policy was still in force when that claim was made. Mr Alexander also pointed to the very wide ambit that would be given to the term “contract of insurance” if Mr Chadwick’s submission on “benefit” is right. An important part of the union’s work is giving advice and assistance to members on matters other than proceedings and indemnity. Indeed, as I have mentioned, numerically, though not financially, this constitutes the great bulk of the union’s help to its members. Advice is called for on a wide range of professional work, on matters connected with contracts of employment, and on defamation. Such advice and assistance is obviously of benefit to those who receive it, and equally obviously is not money; nor, I think, could it fairly be said to be money’s worth, at all events in the sense of being the equivalent of money. The need for such advice will normally arise from some event involving an element of uncertainty, and the member plainly has an insurable interest in the successful pursuit of his career. If “benefit” is the right expression, it is difficult to see why a contract to provide such advice and assistance should not be a contract of insurance. Many professional and other bodies which give their members the right to advice and assistance may thus be brought within the Act, or at least be in danger of being treated as such. Like Monsieur Jourdain, who was astonished to find that for 40 years he had been speaking prose without knowing it, such bodies might equally be astonished to discover that for many years they have been insurance companies carrying on insurance business without knowing it, or at least that they were in peril of being so regarded. In view of the St Christopher case…it may be that the term “money or money’s worth” will not suffice by itself. A possible addition would be “or the provision of services to be paid for by the insurer.” The last seven words are

intended to reflect the fact that in the St Christopher case the provision of the services for each member was an additional cost for the club, incurred when the member made his claim, and was not merely part of the general costs of running the club for the benefit of members generally. As at present advised I would hesitate to omit these last seven words. If members of a club or other body have the right to be given advice and assistance by the staff of that body, so that the provision of this advice or assistance to any individual member adds nothing to the expenses of the body, I doubt whether this could fairly be regarded as being insurance. Looking at the case as a whole I have no hesitation in rejecting Mr Chadwick’s contention that the union is an insurance company carrying on insurance business within the meaning of the Act of 1974. I do not have to decide whether “money or money’s worth,” with or without an addition relating to providing services such as I have discussed, is the right phrase to appear in the first of the three elements of a contract of insurance. I only say that I think that something of that kind is probably on the right lines. What I do decide is that “benefit” is far too wide an expression, and I reject it. In particular, I reject the contention that the right to have an application properly considered suffices for a contract of insurance. I also consider that the general nature of the business carried on by the union is too far removed from the general nature of the businesses carried on by those who are generally accepted as being insurers for the union’s business to be fairly regarded as the effecting and carrying out of contracts of insurance. …I do not think that my decision is likely to open the door to colourable evasions of a beneficial statute. I very much doubt whether commercial concerns will find it possible to establish thriving businesses which are insurance businesses in substance and yet escape the Act. It seems

improbable in the extreme that many people would be content for their premiums to purchase no right to any money or money’s worth in any event but merely a right to have their claims considered by a body of directors or others with full discretionary power to pay nothing or merely as much as they think fit. Where the body concerned, like the union in the present case, is run by honourable members of an honourable profession it may well be that many members of that profession will be content to rely on the discretion being always exercised in a proper way by the governing body which they elect, with meritorious claims being admitted and the unmeritorious excluded; but this reliance does not convert a legitimate expectation of receiving discretionary benefits in all proper cases into a contractual right to receive those benefits.’

[106] FSA, The Authorisation Manual: Consultation on Draft Guidance on the Identification of Contracts of Insurance, Consultation Paper 150 (London, FSA, 2002) [The Financial Services and Markets Act 2000 and the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (as amended), which sets out the activities for which authorisation is required, do not provide a definition of ‘contract of insurance’. However, the Financial Services Authority has recognised in a way that its predecessor, the Department of Trade and Industry, seemed not to, that in view of both the general prohibition against firms engaging in insurance business without authorisation (s 19(1) FSMA) and the general policy of improving transparency, there is a need to provide

firms and contractors with guidelines as to the activities which the FSA consider to be insurance]. ‘1.3.2 The Regulated Activities Order, which sets out the activities for which authorisation is required, does not attempt an exhaustive definition of a ‘contract of insurance’. Instead, R makes some specific extensions and limitations to the general common law meaning of the concept. For example, it expressly extends the concept to fidelity bonds and similar contracts of guarantee, which are not contracts of insurance at common law, and it excludes certain funeral plan contracts, which would generally be contracts of insurance at common law. Similarly, the Exemption Order excludes certain trade union provident business, which would also be insurance at common law. One consequence of this is that common law judicial decisions about whether particular contracts amount to ‘insurance’ or ‘insurance business’ are relevant in defining the scope of the FSA’s authorisation and regulatory activities, as they were under predecessor legislation. 1.3.3 The courts have not fully defined the common law meaning of ‘insurance’ and ‘insurance business’, since they have, on the whole, confined their decisions to the facts before them. They have, however, given useful guidance in the form of descriptions of contracts of insurance. 1.3.4 The best established of these descriptions appears in the case of Prudential v Commissioners of Inland Revenue [1904] 2 KB 658. This case, read with a number of later cases, treats as insurance any enforceable contract under which a ‘provider’ undertakes: (1) in consideration of one or more payments;

(2) to pay money or provide a corresponding benefit (including in some cases services to be paid for by the insurer) to a ‘recipient’ (3) in response to a defined event; (4) the occurrence of which is uncertain (either as to when it will occur or as to whether it will occur at all); and (5) adverse to the interests of the recipient. 1.3.5 The courts have not, so far, taken account of the balance of regulatory cost and benefit in deciding whether a particular contract should be classified as insurance. In Fuji v Aetna [1997] Ch 173 (CA), the court decided that the regulatory consequences of treating a contract as insurance were not relevant to the classification of that contract. 1.4 Limitations of this guidance 1.4.1 Although what appears below is the FSA’s approach, it cannot be definitive of the law, which is a matter for the courts. Accordingly, this guidance is not a substitute for adequate legal advice on any transaction. 1.4.2 The list of factors is not closed and the guidance by no means covers all types of insurance-like business. 1.4.3 The FSA will consider each case on its facts and on its merits. 1.4.4 In some cases transactions with the same commercial purpose may be classified as either insurance or noninsurance. This will depend on the features of the particular contract under which the transaction is effected or carried out. 1.5 General principles 1.5.1 The starting point for the identification of a contract of insurance is the description set out in 1.3.4. Any

contracts which fall outside that description are very unlikely to be contracts of insurance. 1.5.2 In identifying a contract of insurance, the substance of the contract prevails over its form. This was the effect of the court decisions in Fuji v Aetna [1997] Ch 173 (CA), and In re Sentinel Securities [1996] 1 WLR 316. The FSA will adopt the same approach, looking primarily at the substance of the provider’s rights and obligations under the contract. 1.6 The factors 1.6.1 Contracts under which the provider has an absolute discretion as to whether any benefit is provided on the occurrence of the uncertain event, are not contracts of insurance. This may be the case even if, in practice, the provider has never exercised its discretion so as to deny a benefit… 1.6.2 Contracts covering risks or losses, the insurance of which would be general insurance business, are unlikely to be regarded as contracts of insurance if the provider assumes no risk as a result of having effected them. The “assumption of risk” concept is illustrated in 1.7.2 G (Example 2: Disaster Recovery Business). 1.6.3 In the FSA’s view, the same principle should apply in general to contracts covering risks the insurance of which would comprise long-term insurance business. However, the courts have, on specific facts, characterised some contracts of this kind as insurance, even though the insurer did not assume any risk. See Fuji v Aetna [1997] Ch 173 (CA), citing Joseph v Law Integrity [1912] 2 Ch 581 (C.A.) and Flood v Irish Provident [1912] 2 Ch 597 (CA). 1.6.4 Contracts under which the occurrence of the uncertain event lies solely within the control of the provider are unlikely to be regarded as insurance, because there will be no transfer of risk.

1.6.5 Contracts under which the amount and timing of the payments made by the recipient makes it reasonable to conclude that there is a genuine prepayment for services to be rendered in response to a future contingency, are unlikely to be regarded as insurance. In general, the FSA expects that this requirement will be satisfied where there is a commercially reasonable and objectively justifiable relationship between the amount of the payment and the cost of providing the contract benefit. 1.6.6 Contracts under which the provider undertakes to provide periodic maintenance of goods or facilities, whether or not any uncertain or adverse event (in the form of, for example, a breakdown or failure) has occurred, are unlikely to be contracts of insurance. 1.6.7 Contracts under which, in consideration for an initial payment, the provider stands ready to provide services on the occurrence of a future contingency, on condition that the services actually provided are paid for by the recipient at a commercial rate, are unlikely to be regarded as insurance… 1.6.8 The recipient’s payment for a contract of insurance need not take the form of a discrete or distinct premium. Consideration may be part of some other payment, for example the purchase price of goods (Nelson v Board of Trade (1901) 17 TLR 456). Consideration may also be provided in a nonmonetary form, for example as part of the service that an employee is contractually required to provide under a contract of employment (Australian Health Insurance Assoc. Ltd v Esso Australia Ply Ltd (1993) 116 ALR 253). 1.6.9 The following factors are also relevant: (1) a contract is more likely to be regarded as a contract of insurance if the amount payable by the recipient under the contract is calculated by

reference to either or both of the probability of occurrence or likely severity of the uncertain event; (2) a contract is less likely to be regarded as a contract of insurance if it requires the provider to assume a speculative risk (ie a risk carrying the possibility of either profit or loss) rather than a pure risk (ie a risk of loss only); (3) a contract is more likely to be regarded as a contract of insurance if the contract is described as insurance and contains terms that are consistent with its classification as a contract of insurance, for example, obligations of the utmost good faith; (4) a contract that contains terms that are inconsistent with obligations of good faith may, therefore, be less likely to be classified as a contract of insurance; however, since it is the substance of the providers rights and obligations under the contract that is more significant, a contract does not cease to be a contract of insurance simply because the terms included are not usual insurance terms.

Note: This passage is followed by illustrations of the application of the principles: for example, a medical scheme, which formed an employee benefit, would be insurance if the employee had a right to that benefit, but not if the employer had an absolute discretion over the benefits.

[107] Insurance Act, RSA 1980, c 1–5 (Alberta), s 1(k 1) ‘[insurance is] the undertaking by one person to indemnify another person against loss or liability for loss in respect of certain risk or peril to which the object of the insurance might be exposed, or to pay a sum of money or other thing of value on the happening of a certain event’.

[108] Saskatchewan Crop Insurance Corp v Greba (1997) 154 Sask R 289 (Saskatchewan Court of Queen’s Bench) Harbinsky J: ‘A contract of insurance is a contract whereby the insurer promises in return for payment of a premium by the insured to pay the insured a sum of money upon the occurrence of one or more specified events, the occurrence of which is uncertain. To obtain insurance the insured must have an insurable interest in the property insured.’

[109] Glynn v Scottish Union & National Insurance Co Ltd (1963) 40 DLR (2d) 929 (Ontario Court of Appeal) Kelly JA: ‘Speaking generally with respect to all insurance other than life, the purpose of insurance is to relieve the insured in whole or in part from the financial impact of some contingent event, by shifting the risk of the insured’s possible loss to the shoulders of the insurer, a person who for a pecuniary consideration is willing to assume the risk, up to a maximum amount stated in the contract, of the peril insured against’.

[110] California Insurance Code § 22 (2000) ‘Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.’

[111] New York Consolidated Laws Services Ins § 1101 (1999) ‘[an insurance contract is] any agreement or other transaction whereby one party, the “insurer”, is obligated to confer benefit of pecuniary value upon the happening of a fortuitous event in which the “insured” or “beneficiary” has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event.’

[112] Union Labor Life Insurance Co v Pireno 458 US 119 (US Supreme Court, 1982) Justice Brennan: ‘In sum [Group Life & Health Insurance. Co v Royal Drug Co (1970) 440 US 205 (Supreme Court of the United States)] identified three criteria relevant in determining whether a particular practice is part of the “business of insurance” exempted from the antitrust laws [under the McCarrenFerguson Act 1945]…: first, whether the practice has the effect of transferring or spreading a policyholder’s risk; secondly, whether the practice is an integral part of the policy relationship between the insurer and the insured; and thirdly, whether the practice is limited to entities within the insurance industry.’

[113] Professor Vance, Handbook on the Law of Insurance (ed, BM Anderson), (St Paul, Minn, West Publishing: 1951) [Professor Vance specified the following requirements for an enforceable insurance contract:] ‘(a) The insured possesses an interest of some kind susceptible of pecuniary estimation, known as an insurable interest. (b) The insured is subject to a risk of loss through the destruction or impairment of that interest by the happening of designated perils. (c) The insurer assumes that risk of loss. (d) Such assumption is part of a general scheme to distribute actual losses among a large group of persons bearing somewhat similar risks. (e) As consideration for the insurer’s promise, the insured makes a ratable contribution, called a premium, to a general insurance fund. A contract possessing only the three elements first named is a risk-shifting device, but not a contract of insurance, which is a risk-distribution device; but, if it possesses the other two as well, it is a contract of insurance, whatever be its name or its form.’

Notes: 1. Channell J’s definition has enjoyed general approval in the English courts: see Joseph v Law Integrity Insurance Co Ltd [1912] 2 Ch 581 (CA); Flood v Irish Provident Assurance Co Ltd (Note) [1912] 2 Ch 597; Gould v Curtis [1913] 3 KB 84 (CA); Department of Trade and Industry v St Christopher Motorists’ Association Ltd [1974]

1 WLR 99; Medical Defence Union Ltd v Department of Trade [1979] 2 WLR 686; Fuji Finance Inc v Aetna Life Insurance Co Ltd [1997] Ch 173 (CA). Generally, R Hodgin, ‘Problems in Defining Insurance Contracts’ [1980] LMCLQ 14. 2. Uncertainty or risk has often been mentioned as an important indicator of the existence of an insurance contract; indeed, where the loss is known there can be no insurance — referred to as the ‘known loss’ rule in the USA. In Re Barrett; Ex parte Young v NM Superannuation Pty Ltd 106 ALR 549 (Fed Court of Australia, 1992), von Doussa J, referred with approval to Channell J’s judgment, adding that, ‘uncertainty [concerning the happening of the event] gives rise to uncertainty as to both profit and loss to the insurer which is a distinguishing characteristic of a contract of insurance…A contract of insurance is a contract upon speculation.’ However, there has been criticism of Channell J’s view that the uncertain event must be ‘primâ facie adverse to the interest of the assured’: see Gould v Curtis [1913] 3 KB 84 (CA), per Cozens-Hardy MR, in which case Buckley LJ remarked, concerning a life policy, ‘some people regard [death] as adverse, and some do not’. As has been seen, Channel J himself felt that reaching 65 years of age might be regarded as an adverse event for a poor person.

3. It has also been pointed out that central to insurance is an agreement to shift and distribute risk. In Metropolitan Life Insurance Co v State Board of Equalization 652 P2d 426 (Supreme Court of California, 1982), it was said of the definition of insurance in the California Insurance Code (above) that it required, ‘(1) a risk of loss to which one party is subject and a shifting of that risk to another party; (2) distribution of risk among similarly situated persons.’ In Truta v Avis Rent A Car System, Inc 193 Cal App 3d 802 (Court of Appeal, California, 1987) it was held that a collision damage waiver provision in a car rental contract did not amount to insurance because the company did not undertake to assume liability for third party risk but merely agreed not to insist that the person hiring the car make payments for certain types of damage which otherwise would be due to the company. See also, Re Commonwealth Homes & Investment Co Ltd [1943] SASR 211 (South Australia Supreme Court); The Motorcycle Specialists Ltd v Attorney-General (1988) 5 ANZ Insurance Cases 60–882. 4. A characteristic of insurance not mentioned by Channell J is that the contract must be such as would justify the parties being placed under a duty of utmost good faith. This was discussed by the Court of Appeal in Seaton v Heath [1899] 1 QB 782 (see below) and also In Re Denton’s Estate [1904] 2 Ch 178 (CA) where

Vaughan Williams LJ distinguished a contract of insurance from a contract of guarantee: ‘The distinction in substance, in cases in which the loss insured against is simply the event of the nonpayment of a debt, seems to be, as I read the judgment of Romer L.J. [in Seaton v Heath], between contracts in which the person desiring to be insured has means of knowledge as to the risk and the insurer has not the same means, and those cases in which the insurer has the same means.’

5. In one California case the court determined whether a subscriber medical contract for the poor was insurance or not by asking if ‘“service” rather than “indemnity” is its principal object and purpose’ (California Physicians’ Service v Garrison 172 P2d 4 (1946)). 6. ‘There is much to be said for the view that it is the relationship of indemnity that exists between insurer and insured, rather than the source of that relationship, that is the essence of the concept of insurance, so that it matters not whether the relationship arises by statute or by contract.’ (R v Cohen; Ex parte Motor Accidents Insurance Board (1979) 141 CLR 577 (High Court of Australia), per Mason J. In that case it was determined that there was no ‘insurance business’ where compensation was paid by a body under a statutory scheme irrespective of liability at common law. See also Australian Health Insurance Association Ltd v

Esso Australia Ltd 41 FCR 450 (Federal Court of Australia, 1993); Fortin v Li [1994] 1 WWR 709 (Supreme Court, British Columbia). 7. The premium can be a single payment or a series of payments. The level at which it is set is a matter for the insurers and need not be designed to produce a profit. Nicholls V-C made the suggestion in Fuji Finance Inc v Aetna Life Insurance Co Ltd [1995] Ch 122 that the payment should in some sense be related to the risk. This may cause some difficulties in relation to offers of ‘free insurance’ (J Lowry and P Rawlings, Insurance Law: Doctrines and Principles (Oxford, Hart Publishing, 1999) at 5– 7), but it is important to distinguish between a payment that amounts to a premium and one that is simply a fee. In Australian Health Insurance Association Ltd v Esso Australia Ltd (1993) 41 FCR 450 (Federal Court of Australia), an arrangement was held be insurance under which Esso’s employees were provided with health care. The employees paid a premium that covered about one-fifth of the cost of the scheme, with Esso paying the remainder. ‘suppose an insurance company decided, for the purpose of attracting custom in a particular segment of its insurance business, to lower its premiums so that they were less than an actuarial apportionment to the risk would require. It could not sensibly be suggested that the transaction in which lower premiums were charged did not involve undertaking liability by way of insurance,

and the reason why it could not be so suggested is that the essence of the relationship between insurer and insured would remain, namely the relationship of indemnity in the context of contingent loss.’ (per Black CJ. See also, R v Cohen; Ex parte Motor Accidents Insurance Board (1979) 141 CLR 577 (High Court of Australia), per Mason J)

The failure to set a premium in the contract is not necessarily fatal. The Marine Insurance Act 1906, s 31(1) acknowledges the common practice of effecting marine policies at a premium ‘to be arranged’ (or simply ‘TBA’), which means ‘a reasonable premium is payable’ calculated at the prevailing market rate (see also, s 31(2); Liberian Insurance Agency Inc v Mosse [1977] 2 Lloyd’s Rep 560). This statute also recognises mutual insurance arrangements, which involve no payment of a premium (s 85).

1.4 Life Assurance As has been seen (Medical Defence Union case, above), insurance contracts can be divided into indemnity and contingency. Life assurance comes within the second category and involves some different characteristics. [114] C J Bunyon, The Law of Life Assurance (4th Edn) (Ed JV Vesey Fitzgerald) (London: Charles and Edwin Layton, 1904) at 1

‘The contract of life insurance may be…defined to be that in which one party agrees to pay a given sum upon the happening of a particular event contingent upon the duration of human life, in consideration of the immediate payment of a smaller sum or certain equivalent periodical payments by another.’

Note: See also, F Blayney, A Practical Treatise on LifeAssurance (London: J & WT Clarke, 1826), p 1 [115] Insurance Act, RSA 1980, c 1–5 (Alberta), s 1 (m 1) [Life insurance is insurance] ‘whereby an insurer undertakes to pay insurance money (i) on death, (ii) on the happening of an event or contingency dependent on human life, (iii) at a fixed or determinable future time, or (iv) for a term dependent on human life’

Note: There are different types of life policies. First, whole life insurance provides cover until the death of the insured at which point a sum is paid to the specified beneficiary. Secondly, term insurance pays out if the death occurs within the specified term, but if the insured life is alive at the end of the term the policy lapses. A level term policy pays out the same amount whenever death occurs within the term; a decreasing term policy pays an amount that gradually reduces should death occur during the term; under an

increasing term policy the amount paid to the insured increases; a renewable term policy allows the insured to take out a new term policy at the expiry of the initial policy without providing fresh proof of good health; a convertible term policy allows the insured to convert the policy into whole life or endowment without providing evidence of good health; and a family income benefit policy provides an income to the beneficiary for the remainder of the term after the death of the insured. Third, an endowment policy combines aspects of life insurance with investment. Typically these policies promise a fixed sum where death occurs within a particular period of time, but if the insured life survives beyond that period the entitlement is to the accrued value of the investment part of the policy. The use of life insurance as a minor part of an investment package has become popular, and the following cases suggest that, even if the main purpose is investment, the agreement will still be insurance. [116] Fuji Finance Inc v Aetna Life Insurance Co Ltd [1997] Ch 173 (CA) [Insurers issued to Fuji what was referred to as a life assurance policy or a capital investment bond for which they received a single premium of £50,000. The life assured was Mr Tait, who was involved in the management of Fuji. Under condition 5 the benefit was due on Tait’s death, although condition 7 provided that it would be paid where the policy was surrendered before death. The premium was applied

to buy units in funds administered by the insurers and the policy’s value was calculated according to the value of those units. Fuji had the option to shift between the different funds. It was evident that Fuji’s principal aim was to increase the value of the policy, and, indeed, by exploiting the rules relating to shifting between the funds, Fuji did increase its value to over £2 million in just six years. In considering whether this was a life policy or merely an investment, Nicholls V-C, at first instance, proposed ‘the principal object test’ by which ‘only where the principal object is to insure can a contract as a whole be called a contract of insurance’. The Court of Appeal rejected this test and held that the contract was one of insurance]. Morritt LJ: ‘The essence of life assurance, as emphasised in all the cases, is that the right to the benefits is related to life or death. The obvious case, like condition (5), is where the benefit is payable on death or its notification. But over the years other less obviously life- or death-related events have been recognised as sufficient. Thus, survival to a given date, as in Joseph v Law Integrity Insurance Co Ltd [1912] 2 Ch 581, or the exercise of an option to determine given only to the personal representatives of the policyholder, as in In re National Standard Life Assurance Corporation [1918] 1 Ch 427, being alive and therefore able to retire or leave a specified employment, as in NM Superannuation Ply. Ltd v Young, 113 ALR 39, have all been recognised as being sufficiently related to life or death. In this case, as counsel for Fuji accepted, the policy came to an end on the death of Mr Tait so that, subject to notification in the prescribed manner, the benefits then crystallised. Thus the right to

surrender was related to the continuance of life for it could not be exercised by Fuji after the death of Mr Tait. I do not suggest that a policy which contained condition (7) without also including condition (5) would be a policy of life assurance. But I see no reason why a policy which contains both should be denied that character. If the event on which a benefit is payable is sufficiently life- or death-related then I can see no reason in principle why it should matter if that benefit is the same as that payable on another life- or death-related event. That is a matter for the insurer and it is well established that it is not necessary that the insurer should be exposed to any risk at all: Flood v Irish Provident Assurance Co Ltd (Note) [1912] 2 Ch NM Superannuation Pty v Young 113 ALR 39.’

[117] Marac Life Assurance Ltd v Commissioner of Inland Revenue [1986] 1 NZLR 694 (Court of Appeal, New Zealand) Richardson J: ‘The true nature of a transaction can only be ascertained by careful consideration of the legal arrangements actually entered into and carried out: not on an assessment of the broad substance of the transaction measured by the results intended and achieved or of the overall economic consequences. The nomenclature used by the parties is not decisive and what is crucial is the ascertainment of the legal rights and duties which are actually created by the transaction into which the parties entered. The surrounding circumstances may be taken into account in characterising the transaction. Not to deny or contradict the written agreement but in order to understand the setting in which it was made and to construe it against that factual background having regard to the genesis and objectively the aim of the transaction. Of course, the documentation

may be a sham hiding the true agreement or its implementation. Or there may be a statutory provision mandating a broader or different approach. But at common law there is no half-way house between sham and characterisation of the transaction according to the true nature of the legal arrangements actually entered into and carried out…On its face…each type of bond is in form a classic contract of endowment assurance. Each contains the essential distinguishing features of a policy of life insurance. Marac guarantees to pay from day one a sum in excess of the premium if the life assured dies prior to the maturity date. That guarantee provides a significant and measurable level of death cover capable of arithmetical measurement. For its part Marac bears from day one an insurance risk that is dependent upon human life inasmuch as it has contracted to pay both the sum guaranteed on death and the sum guaranteed on survival to the maturity date. The risk is readily capable of actuarial calculation and such calculations were made and taken into account in deciding on the premiums to be charged in return for the consideration to be provided by Marac.’

Notes: 1. The Financial Service Authority, in its Interim Prudential Sourcebook: Insurers (part of the FSA’s Handbook, see chapter 2), states: ‘3.5A(1) Before entering into a long-term insurance contract, a UK insurer must satisfy itself that the aggregate of — (a) the premiums payable under the contract and the income which will be derived from them; and

(b) any other resources of the UK insurer which are available for the purpose, will be sufficient, on reasonable actuarial assumptions, to meet all commitments arising under or in connection with the contract. (2) A UK insurer must not rely on other resources for the purposes of (1) in such a way as to jeopardise its solvency in the long term.’

This would seem to prohibit the type of contract used in Fuji where the size of the insurer’s commitment is not related to premiums or income derived from premiums. See R Merkin, ed, Colinvaux & Merkin’s Insurance Contract Law (London, Sweet & Maxwell, 2002). 2. Richardson J’s judgment was cited with approval in the Australian case NSM Superannuation Pty Ltd v Young (1993) 41 FCR 182 at 200–1, per Hill J. Securities and Exchange Commission v Variable Annuity Life Insurance Company of America 3 L ed 2d 640 (US Supreme Court, 1959) involved a contract that shared features with that in the Fuji case. Here the annuity continued until the death of the annuitant; payments were made periodically, the money was invested in stocks and the benefit due varied according to the success of those investments. Douglas J, for the majority, said that the contract was investment not insurance: ‘we conclude that the concept of “insurance” involves some investment risk-

taking on the part of the company. The risk of mortality, assumed here, gives these variable annuities an aspect of insurance. Yet it is apparent, not real; superficial not substantial. In hard reality the issuer of a variable annuity that has no element of a fixed return assumes no true risk in the insurance sense. It is no answer to say that the risk of declining returns in times of depression is the reciprocal of the fixed-dollar annuitant’s risk of loss of purchasing power when they are low. We deal with a more conventional concept of riskbearing when we speak of “insurance”. For in common understanding “insurance” involves a guarantee that at least some fraction of the benefits will be payable in fixed amounts.’ Harlan J (with whom three others joined) dissented, arguing that ‘the mortality aspect of these annuities — that is the assumption by the company of the entire risk of longevity — involves nothing other than classic insurance concepts and procedures’.

1.5 Gaming Contracts In the next few sections, contracts that share features with insurance will be considered and distinguished. The first of these are gaming contracts. Wagers are not in themselves unlawful at common law, so the need to distinguish between them and insurance only arose as Parliament began

to intervene in the mid-eighteenth century to make certain types of wagers unenforceable. The distinction between the two contracts was drawn around the issue of insurable interest. See, R Merkin, ‘Gambling by Insurance — A Study of the Life Assurance Act 1774’, [1981] Anglo-American Law Review 331. [118] Carlill v Carbolic Smoke Ball Co [1892] 2 QB 484 Hawkins J: ‘It is not easy to define with precision what amounts to a wagering contract, nor the narrow line of demarcation which separates a wagering from an ordinary contract, but, according to my view, a wagering contract is one by which two persons, professing to hold opposite views touching the issue of a future uncertain event, mutually agree that, dependent upon the determination of that event, one shall win from the other, and that other shall pay or hand over to him, a sum of money or other stake; neither of the contracting parties having any other interest in that contract than the sum or stake he will so win or lose, there being no other real consideration for the making of such contract by either of the parties. It is essential to a wagering contract that each party may under it either win or lose, whether he will win or lose being dependent on the issue of the event, and, therefore, remaining uncertain until that issue is known. If either of the parties may win but cannot lose, or may lose but cannot win, it is not a wagering contract.’

[119] Utah Code Ann § 76–10–1101:

‘Gambling” means risking anything of value for a return or risking anything of value upon the outcome of a contest, game, gaming scheme, or gaming device when the return or outcome is bound upon an element of chance and is in accord with an agreement or understanding that someone will receive something of value in the event of a certain outcome, and gambling includes a lottery; gambling does not include: a) a lawful business transaction, or (b) playing an amusement device that confers only an immediate and unrecorded right of replay not exchangeable for value’.

Note: Hawkins J’s definition was cited with approval in Australian Capital Territory Gaming and Liquor Authority v Andonaros (1991) 103 FLR 450 (Australian Capital Territory, Supreme Court), 460 per Miles CJ.

1.6 Contracts of Guarantee One of the key features of property insurance is that one party indemnifies the other against loss, but this is also an essential element in a contract of guarantee or suretyship. Both contracts also share other features such as rights of subrogation. As a result, as Harman LJ observed, the attempt to differentiate between these two types of contract ‘has raised many hair-splitting distinctions of exactly the kind which brings the law into hatred, ridicule and contempt by the public’ (Yeoman Credit Ltd v Latter [1961] 1 WLR 828, cited in J. Beatson, ed, Anson’s

Law of Contract (Oxford, Oxford University Press, 2002) at 79). Distinctions can be drawn, however. Most notable of these is that an insurance contract generally requires the insured to pay a premium, which is, broadly, determined by the level of risk run by the insurer, whereas a contract of guarantee can be (and usually is) entered without any payment. Moreover, at the time a contract of insurance is made it involves only two parties — the insured and the insurer — whereas with a guarantee there are three parties — the creditor, the debtor and the guarantor. [120] Seaton v Heath [1899] 1 QB 782 (CA) Romer LJ: ‘…I desire to make some remarks upon the question of general importance raised in this case with reference to the contract of insurance or guarantee. There are some contracts in which our Courts of law and equity require what is called “uberrima fides” to be shewn by the person obtaining them; and, as that phrase is short and convenient, I will continue to use it. Of these, ordinary contracts of marine, fire, and life insurance are examples, and in each of them the person desiring to be insured must, in setting forth the risk to be insured against, not conceal any material fact affecting the risk known to him. On the other hand, ordinary contracts of guarantee are not amongst those requiring “uberrima fides” on the part of the creditor towards the surety; and mere non-communication to the surety by the creditor of facts known to him affecting the risk to be undertaken by the surety will not vitiate the contract, unless there be fraud or misrepresentation, and misrepresentation undoubtedly might be made by concealment. But the difference between these two classes of contract does not

depend upon any essential difference between the word “insurance” and the word “guarantee.” There is no magic in the use of those words. The words, to a great extent, have the same meaning and effect; and many contracts, like the one in the case now before us, may with equal propriety be called contracts of insurance or contracts of guarantee. Whether the contract be one requiring “uberrima fides” or not must depend upon its substantial character and how it came to be effected. There is no hard and fast line to be drawn between contracts of insurance and contracts of guarantee for the purpose for which I am now considering them; and certainly the rule as to contracts of insurance is not limited, as contended, to the three forms of marine, life, and fire insurance: see the observations of Jessel MR in London Assurance v Mansel [11 Ch D 363]. Now when contracts of insurance are considered it will be seen that, speaking generally, they have in common several features in their character and the way they are effected which distinguish them from ordinary contracts of guarantee. Contracts of insurance are generally matters of speculation, where the person desiring to be insured has means of knowledge as to the risk, and the insurer has not the means or not the same means. The insured generally puts the risk before the insurer as a business transaction, and the insurer on the risk stated fixes a proper price to remunerate him for the risk to be undertaken; and the insurer engages to pay the loss incurred by the insured in the event of certain specified contingencies occurring. On the other hand, in general, contracts of guarantee are between persons who occupy, or ultimately assume, the positions of creditor, debtor, and surety, and thereby the surety becomes bound to pay the debt or make good the default of the debtor. In general, the creditor does not himself go to the surety, or represent, or explain to the surety, the risk to be run. The surety often takes the position from motives of friendship to the debtor, and generally not as the result of any direct

bargaining between him and the creditor, or in consideration of any remuneration passing to him from the creditor. The risk undertaken is generally known to the surety, and the circumstances generally point to the view that as between the creditor and surety it was contemplated and intended that the surety should take upon himself to ascertain exactly what risk he was taking upon himself. In all the reported cases of guarantees that I have been able to find, in which it has been held that the party guaranteed owed no duty to the guarantor as to disclosure of material facts, the contracts, when examined, are found to have in substance, though of course not in every detail, the characteristics which distinguish contracts of guarantee from contracts of insurance as above stated by me. Applying the above considerations to the contract in the case before us, it appears to me that the contract is one which required “uberrima fides” on the part of the insured.’

[121] United States v Tilleraas 709 F2d 1088 (US Court of Appeals, 6th cir, 1983) Wellford J: ‘Insurance is a contract where one undertakes to indemnify another against loss, damage or liability caused by an unknown or contingent event. Since the insured pays the insurer for the promise of indemnity, the insurer benefits to the extent that a contingency never occurs. Where a contingency does occur, the insurer can still be made whole, by virtue of subrogation, to the extent that the insured would be able to recover damages from a third party. Despite the presence of this right of subrogation it is clear that when the contract is formed all legal rights and obligations flow between the insurer and the insured. At this initial stage, there is no legal obligation owing from the third party to the insurer. In fact, it is unknown at that stage

whether such a third party obligation will ever arise and, if so, who that third party will be. A surety, on the other hand, promises to assume the responsibility for the payment of a debt incurred by another should he or she fail to repay the creditor. The arrangement is made to induce the creditor to deal with the borrower where there might otherwise be a reluctance to do so. Under this arrangement, the nature, size, and source of the possible loss to the creditor is known from the start. In addition, there is no payment from the creditor to the surety or guarantor for this “insured” payment. Rather, a kind of tripartite relationship is formed. The consideration running from the creditor to the debtor is deemed sufficient to support the surety’s promise to make the debt good. In turn, the benefit flowing to the debtor by virtue of the surety’s promise places that debtor under an implied legal obligation to make good any loss incurred by any payment the surety must ultimately make to the creditor. 74 AmJur2d Suretyship § 171 (1974). It is clear then that the two contracts are materially distinguishable, as are the rights and duties of the parties involved.’

Note: In an Irish case, International Commercial Bank plc v Insurance Corporation of Ireland plc and Meadows Indemnity Company Ltd (third party) [1991] ILRM 726 (High Court), Blayney J adopted the Romer test. The case involved what the parties called a ‘credit guarantee insurance agreement’, which had been taken out to secure a loan from a bank. It was held to be a contract of guarantee not of insurance because it had been obtained by the borrower as security for the bank rather than by the bank as protection

against a potential loss, because the agreement had a number of clauses which were only appropriate to a guarantee, and because it specified the consideration for the agreement as being the granting of the loan.

1.7 Contracts of Warranty In a contract for the sale of goods it is commonplace for the seller to promise to repair or replace faulty goods, and there seems no reason to suppose that this practice will disappear following the Sale and Supply of Goods to Consumers Regulations 2002, which, under certain circumstances, require the seller to repair goods. Some sellers extend this promise to faults not present at the time of purchase, or the buyer may enter a separate repair agreement with a third party — that is someone other than the seller — in exchange for a fee (see the comments of Megarry V-C in Medical Defence Union, above). The jurisprudence on the distinction between contracts of warranty and of insurance is fairly sparse in English law, and even in the USA, where there has been a good deal of case-law, confusion remains (see, generally, an old but instructive comment at (1938) 25 Va L Rev 238). [122] Ollendorf Watch Co v Pink 17 NE2d 676 (Court of Appeals, New York, 1938) [A promise by the seller of a watch to provide a replacement if it was lost or stolen within 12 months was held to be a

contract of insurance].

Crane CJ: ‘This goes further than a guarantee or warranty. For instance, a warranty would relate in some way to the nature or efficiency of the product sold — in this case, that the watch would work or was of a certain make and fineness. A warranty would not cover a hazard having nothing whatever to do with the make or quality of the watch…This contract goes much further. It has nothing whatever to do with the sale of the watch or the contract of sale. It is an extraneous inducement to procure sales. If the watch is stolen the seller will replace it. In other words, he takes a chance or a risk of theft from his customers; that is, he insures them for a year against such risk.’

[123] GAF Corp v County School Board of Washington County 629 F 2d 981 (US Court of Appeals, 4th Cir, 1980) [GAF fitted a roof and promised to repair any damage caused by faulty materials or faulty workmanship. At first instance, this was held to be insurance because the promise about workmanship was unrelated to defects present in the goods themselves. That ruling was reversed on appeal].

Phillips J: ‘Although…the guarantee here possesses some characteristics of insurance, we think that this does not sufficiently address the underlying question and that the guarantee must be viewed as a whole in determining whether it constitutes a contract of insurance or a warranty.’

Note:

In the GAF Corp case the agreement did not become insurance merely because it involved the transfer of risk since, in the words of Phillips J, this was ‘a relatively unimportant element of the transaction and is incidental to the essential character of the guarantee’, which was a warranty agreement accompanying a contract for the sale of goods. In Griffin Sys v Washburn 505 NE2d 1121 (Appellate Court of Illinois, 1987), Griffin offered motorists contracts under which, in exchange for a payment, the company would repair damage to the car caused by, among other things, weather, collision, vandalism, negligence or failure to perform service maintenance. This was held to be insurance. The court distinguished between the situation where a consumer purchased from the manufacturer or the retailer of the product a service contract that provided a warranty and the situation where the socalled ‘warranty’ was purchased from a third party. The court took the view that only the latter met the criteria for insurance in that there was a contract for a specific period of time between the third party and the buyer; that the buyer had an insurable interest; that consideration in the form of a premium had been paid by the buyer to the third party; and that the third party had assumed risk by agreeing to indemnify the buyer against any pecuniary loss resulting from the specified perils. The court pointed out that whereas in a warranty the retailer of a product was responsible for making good a defective product, in insurance the insurer indemnifies the consumer against loss. Linn J commented that,

‘Insurance is generally understood to be an arrangement for transferring and distributing risks. Unfortunately, this characterisation is neither very precise nor universally applicable as a definition of insurance because it describes many other arrangements and relationships which almost uniformly are not regarded or treated as insurance transaction.’ The same view was taken in Arizona where it was held in Guaranteed Warranty Corp Inc v State ex rel Humphrey 23 Ariz App 327 (1975) that a ‘warranty agreement’ was an insurance contract where it involved a firm, which neither made nor retailed television sets, promising to replace the tube if it failed as a result of a manufacturing defect manifesting itself after the expiration of the manufacturer’s warranty. However, a different conclusion was reached in Ohio in another case involving Griffin Systems: [124] Griffin Systems, Inc v Ohio Department of Insurance 575 NE 2d 803 (Ohio Supreme Court, 1991) Sweeney J: ‘In our view, the crucial factor in determining whether a contract is a warranty or something substantially amounting to insurance is not the status of the party offering or selling the warranty, but rather the type of coverage promised within the four corners of the contract itself. Under the rule of law announced in both Duffy [State, ex rel Duffy v Western Auto Supply Co (1938) 16 NE 2d 256] and Herbert [State, ex rel Herbert v Standard Oil Co (1941) 35 NE 2d 437], it is clear that warranties that cover only defects

within the product itself are properly characterised as warranties (as was the case in Herbert, above), whereas warranties promising to cover damages or losses unrelated to defects within the product itself are, by definition, contracts substantially amounting to insurance (as was the case in Duffy, above). The fact that appellant herein is not the manufacturer, supplier, or seller of the products it purports to warrant is, in our view, of little or no consequence in determining whether its protection plans are subject to RC Title 39 [the relevant regulatory provisions]. Common experience in today’s marketplace indicates that a large number of consumer products carry a short-term warranty, but that agreements that extend the warranty beyond the period of time offered by the manufacturer may often be purchased for additional consideration. Certainly, it can be safely surmised that most people are not induced to buy a specific product based upon an extended warranty agreements that may be purchased at an extra cost. Carrying ODI’s to their logical extreme, however, a seller of consumer products can offer such extended warranties to cover losses or damages, while independent third parties would be subject to insurance regulations even if the extended warranties specifically exclude losses or damages unrelated to defects in the product. Under such circumstances, we reject the statusdeterminative approach urged by ODI and adopted by the appellate court below, in favour of the substance-of-thecontract approach by appellant. Such a substance-of-thecontract approach was implemented by the court in Mein v United States Car Testing Co (1961), App 145, 20 O.O.2d 242, 184 NE2d 489, and is abundantly more consonant with the law and analysis set forth in both Duffy, above, and Herbert, above. Therefore, based on all the foregoing, we hold that a motor vehicle agreement which promises to compensate the promisee for repairs necessitated by mechanical breakdown

resulting exclusively from failure due to defects in the motor vehicle parts does not constitute a contract ‘substantially amounting to insurance’ within the purview of RC 3905.42. Accordingly, the judgment of the court of appeals is hereby reversed.’

Wright J: [dissenting from the view of the majority, argued that the status of the company providing the ‘warranty’ was relevant and that this distinguished the present case from the decision in cases like Herbert, where the manufacturer or the seller of a product gave the warranty.] ‘Griffin can hardly be likened to a manufacturer, supplier or seller offering an extended warranty on one of its products. As stated above, Griffin is clearly not involved in the manufacture or sale of automobiles, and has no control over the risk of defects in those products. It is an independent, for-profit entity offering a contract insuring against the risk of mechanical breakdown of a motor vehicle — an insurable interest. Griffin, for consideration of a stated premium from the policyholder, assumes the risk of certain specified losses and presumably distributes that risk among a larger group of persons bearing similar risks. This case does not involve a warranty because a warranty is a statement of representation made by the seller or manufacturer of goods contemporaneously with and as a part of the contract of sale.’

In R v Anderson & Teskey [1941] 1 DLR 346 (Alberta Supreme Court, Appellate Division) it was held that an automobile club was providing insurance when it contracted with motorists to provide their defence and obtain bail if charged with manslaughter, to provide counsel in a damage action by or against

them arising from motoring, and to indemnify them against certain towing and repair costs. The court decided that the members made payments in return for the right to assistance on the happening of an uncertain event. That this is also the position in England would follow from the decision in Department of Trade and Industry v St. Christopher Motorists’ Association Ltd [1974] 1 WLR 99, and, although the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, para 12, means those who provide such services are not subject to statutory regulation, the contracts they make are subject to the other incidences of insurance contracts, such as the duty of disclosure. Contrast these decisions with the ruling in Transportation Guarantee Co v Jellins 174 P2d 625 (California, 1946), where a truck maintenance contract, in which one party agreed to do whatever work was required to keep two trucks on the road, was held not to be insurance because, even though it involved a shifting of risk from the truck owner to the mechanic, at its root the contract was about the supply of labour; or, alternatively, the court saw the obligations as analogous to those undertaken by the lessor of vehicles and felt disinclined to see all such contracts as insurance for the purposes of regulation. [125] FSA, The Authorisation Manual: Consultation on Draft Guidance on the Identification of Contracts of Insurance,

Consultation 2002

Paper

150,

London:

FSA,

‘Example 3: manufacturers’ and retailers’ warranties. 1.7.6 Under a simple manufacturer’s or retailer’s warranty the purchase price of the goods includes an amount, in consideration of which the manufacturer undertakes to respond (without further expense to the purchaser) to specified defects in the product, that emerge within a defined time after purchase. Such arrangements may appear potentially to fall within the general description of a contract of insurance: 1.3.4 G. Repairs or replacement products are provided in response to a defined event (the emergence of a latent defect in the product), which is adverse to the interests of the purchaser and the occurrence of which is uncertain. 1.7.7 The FSA has concluded that certain contracts of this kind are nonetheless not insurance, where the warranty is a consequence of the contract of sale, under which the substance of the provider’s obligation is the sale of goods that meet the required (often statutory) quality standard, not the provision of insurance (1.5.2 G (2)). In this situation, the warranty does not involve a transfer of risk, but a recognition (and crystallisation) of an existing responsibility. Example 4: separate warranty transactions. 1.7.8 Sometimes, similar warranties (or warranties for an extended period) are not provided as an inherent part of the purchase, but as a separate transaction, usually with a separate consideration. 1.7.9 The FSA’s approach is to classify contracts of this kind as insurance if, in substance, in return for the customer’s payment, risk is transferred to the

provider. Whether there is a transfer of risk depends on the facts of the case. 1.7.10 In general, therefore, an extended warranty, sold as a separate product, for a separate premium, containing terms which would have constituted insurance if they had been agreed outside the context of the sale of goods, will constitute insurance even though it is agreed in the context of a sale. Here, it is harder to argue that the substance of the transaction is the sale of goods, rather than the provision of insurance. (1.5.2 G) 1.7.11 If the provider is a third party, this will usually be conclusive of the fact that there are different transactions and a transfer of risk. 1.7.12 These considerations apply where, for example, a car dealer provides a third party warranty along with a car. Such warranties generally are insurance based because there is a separate commitment undertaken by a third party provider who accepts the risk and receives a separate premium for it.’

1.8 Is There a Definition?

Need

for

a

General

It might be suggested that the reason why Channel J’s judgment dominates the discussion of the definition of insurance is that he has had the field to himself because other judges have recognised the impossibility of the task. One obvious difficulty with relying on his approach is that it depicts insurance law as a branch of contract law and this is problematic in view of the development of statutory welfare insurance schemes, compulsory insurance,

such as is required by motorists and employers, and schemes, such as the Motor Insurers’ Bureau agreements in England, designed to deal with the situation where the loss results from an uninsured or untraceable driver. Leaving aside the advance of social insurance, the effort to provide a general definition of an insurance contract seems ultimately doomed because it tends to be either too broad or too narrow. Often judges seem constricted by their obligation to acknowledge Channel J’s definition, but they are also reluctant to allow it to lead them to an unpalatable conclusion. The question of whether a particular agreement is insurance tends to arise only in the context of regulation, and then it is a matter of whether the alleged insurer should be subject to regulation as being someone who is engaged in insurance business. This is very different from determining whether a particular agreement is an insurance contract. In fact, parties to an insurance contract who are disputing their rights and obligations rarely put in issue whether the agreement does indeed amount to an insurance contract. This is because either none of the parties raises the matter or because the dispute can be settled according to the general rules of contract so there is no need to decide whether the special rules relating to insurance contracts apply. This means that a transaction could be insurance business for the purpose of regulation, but not an insurance contract for the application of rules such as the duty of disclosure and subrogation, or vice versa.

[126] RE Keeton and AI Widiss (Insurance Law: A Guide to Fundamental Principles, Legal Doctrines, and Commercial Practices (West Publishing, St Paul, Minn, 1988) at 3–5 ‘An insurance contract generally involves an agreement by which one party (usually identified as an insurer) is committed to do something which is of value for another party (usually identified as an insured or a beneficiary) upon the occurrence of some specified contingency. In most litigation involving this type of contractual arrangement, attorneys do not need to address issues that involve the definition of what constitutes insurance either (1) because there is a generally shared assumption that the transaction in question is insurance, or (2) because it makes no difference to the resolution of the dispute whether the contractual commitments involved in the litigation constitute an insurance transaction since the issue will be resolved in accordance with general principles of contracts, property, torts, or restitution. Occasionally, however, legal consequences either are determined or are influenced by whether a particular contractual relationship is an insurance transaction. When it is essential to decide whether a transaction involves insurance, neither the characterisations of the parties in the contract (that is, whether the parties are explicitly identified as insurer and insured, by some other comparable nomenclature, or by terms that bear no relationship to such designations) nor the fact that one party is committed to do something upon the occurrence of a specified contingency for the other party, will necessarily dictate the resolution of a dispute about the nature of the arrangement at issue. Similarly, recognition that a particular contractual arrangement involves the transfer and

distribution of risk generally is not sufficient to answer the question. Although risk transference and risk distribution are among the basic characteristics of almost all insurance transactions, the resolution of a dispute about what constitutes insurance usually is predicated on additional factors or considerations. It is, perhaps, quite natural to anticipate that a definition of insurance would be provided at the beginning of a text on insurance law. There are several reasons, in addition to the problems described in the preceding paragraphs, for not setting forth a definition in this section. First, the question “What is insurance?” arises in many different contexts. Not only are the purposes for which definitions of insurance are sought diverse, but the socio-economic and other factors that influence the definition often differ substantially from one situation to the next. Consequently, the appropriateness of a particular characterisation usually depends on the reason why a definition is needed. For example, the definition of insurance that is either explicit or implicit for purposes of the statutes regulating entities engaged in an insurance business may be quite different from the definition of insurance used in an estate tax law concerned with determining whether it is appropriate to tax payments made to a beneficiary. There is no single conception of insurance that is universally applicable for use in disputes involving questions of law. Furthermore, in a particular jurisdiction the applicable definition of insurance may also be significantly influenced by legislative actions and, in some instances, prior judicial decisions. Accordingly, in the process of selecting or framing an appropriate response to a definitional question, an essential first step for a lawyer is to ascertain both the reasons why the issue arises and the legislative provisions or judicial precedents which may be relevant to the resolution of the question.

Another reason for not attempting to provide a definition of insurance at the beginning of this text is that in order to understand fully the meaning of insurance in any particular context, it is very useful and perhaps necessary — both to be aware of several fundamental insurance principles and to appreciate the basic nature of the business of insurance. In other words, mastery of a certain amount of insurance law and familiarity with some insurance business practices is essential to a comprehension of the problems entailed in perceiving both the characteristics of and limitations on what may constitute appropriate definitions of either insurance or an insurance transaction for purposes of a matter being considered in connection with a question of law. It should also be recognised that the definitions of insurance employed to resolve disputes in various contexts may change as human ingenuity produces innovations which in turn may create a need to revise or modify then existing legal doctrines or definitions. Furthermore, such new concepts may then be applied to older types of transactions as well. In a complex commercial society, it is both appropriate and desirable that insurance concepts, including definitions of insurance, remain flexible enough to be adapted to changing and differing circumstances rather than being so rigid that they become shackles to thought, expression, or innovation. Accordingly, it is important to appreciate (1) that the concept of insurance for purposes of legal analysis is neither fixed nor universal, (2) that a definition of insurance often needs to be formulated for or adapted to the specific circumstances, (3) that a comprehensive understanding of the circumstances in which an issue arises is essential when addressing a definitional question, and (4) that an appreciation of the socio-economic significance of a particular transaction is often critical to determining what will constitute an appropriate definition of insurance. In

other words, a complete answer to the question “What is insurance?” would be, in Learned Hand’s phrase, “mythically prolix, and fantastically impractical.”(Sinram v Pennsylvania RR, 61 F2d 767 at p 771 (2d Cir 1932)).’

1.9 Compensation for Accidents In England, as is the case in most common law jurisdictions, the victim of an accident must seek redress through the law of tort. Indeed, the underlying rationale of tort and of negligence in particular is to compensate victims of wrongs. This is achieved through loss shifting whereby the defendant bears the whole loss that foreseeably flows from his or her wrongful act which has resulted in harm to the claimant (or, in cases of contributory negligence, he or she shares the loss). As its name suggests, negligence is fault based and the claimant will recover to the full extent of his or her loss if it is proved that the defendant’s conduct fell below the requisite standard of care. The compensatory objective of tort is reinforced by legislation that requires certain types of activity to be underwritten by insurance so that in the event of an accident causing harm to a claimant there are sufficient funds available to satisfy a judgment. Thus, it is compulsory for employers and drivers of motor vehicles to have liability insurance covering certain risks arising from their activities. In effect insurance operates to distribute or spread losses amongst those engaged in similar classes of activity who pay premiums to

insurers. An insured defendant thus has the guarantee of his or her insurers to meet any award made by a court for insured losses. The benefit to the victim is that he or she does not run the risk of having a damage award frustrated through the impecuniosity of a defendant. As will be seen in chapter 12, insurance also has a significant impact on litigation because of the insurers’ right of subrogation whereby an insurer can assume control over the proceedings in the insured’s name. It should also be borne in mind that losses are distributed through the social security system. The accident victim may be supported by the state where, for example, the injuries suffered are such as to render him or her unable to work. In broad terms about 50 per cent of the total sum awarded for personal injury or death comes from social security and around 25 per cent from the tort system (see Hazel Genn, Paths to Justice: What People Do and Think About Going to Law (Oxford, Hart Publishing, 1999); and Donald Harris et al, Compensation and Support for Illness and Injury (Oxford, Clarendon Press, 1984)). Tort as the basic means for accident compensation has been criticised as being expensive to administer, inefficient, particularly in terms of the time litigation takes and the toll it takes on the parties, and unfair (see further, DR Howarth and JA Sullivan, Hepple, Howarth & Matthews Tort: Cases & Materials (London, Butterworths, 2000) chapters 1 and 19, and the sources extracted therein). Some of those who have called for reform have questioned whether the tort-

based system should be replaced with a social security scheme whereby the state, in effect, operates as insurer. Of particular note in this regard is Atiyah and Cane who argue that a single comprehensive social security system should replace tort as the basis of compensation. [127] Peter Cane, Atiyah’s Accidents, Compensation and the Law (London, Butterworths, 1999), ch 19 THE WAY AHEAD A social welfare solution In the third edition of this book it was argued that what was needed was a single comprehensive system for assisting the disabled, based on the existing social security system, but with benefits as large as society can afford. In particular, it was suggested that the most practicable and desirable direction of movement was the progressive abolition of tort actions for personal injury accompanied by a gradual extension of the industrial injuries scheme, with any necessary modifications, first to all accidents, and ultimately to disease and illness, whether caused by human action or the result of natural causes. The main argument in favour of such a comprehensive scheme lies in the unfairness produced by lack of integration of the various presently existing schemes for assisting the disabled. Not only is the element of overcompensation which overlap of systems creates a waste of resources, but it is indefensible to compensate some people twice over while others go without any compensation at all. For example, how can we justify paying compensation twice over to a person who loses an eye in an industrial accident merely for the disability itself, while we refuse any

compensation for the disability itself to a person who is blinded by a disease resulting from natural causes? How can we justify giving social security benefits to people who continue to receive full wages while they are off sick when the level of long-term sickness benefits is still so low? Then there is the difficulty of justifying payments made under one system but refused by another. How can we justify giving damages for loss of support to a young childless widow, for example, when the social security system provides no assistance at all to a childless widow under 45 unless she is destitute or incapable of work. Surely society must decide whether it thinks a widow is entitled to support irrespective of her capacity for work, and regulate its compensation systems accordingly. Finally, there is the whole problem of justifying the various preferences in favour of particular groups of disabled people embodied in the present set-up. On the other hand, it must be admitted that t here are very considerable difficulties facing the sort of comprehensive reform being suggested. In the first place, it has been argued that the adoption by the EC of the Directive on Product Liability, which requires Member States to provide citizens ns with a remedy in tort, and which was implemented in Part 1 of the Consumer Protection Act 1987, would prevent a UK government introducing any personal it injuries compensation scheme which involved the abolition of tort actions for victims of injuries falling within the terms of the Directive; or even a scheme which provided victims of such injuries with an entitlement to non-tort compensation in addition to the remedy required by the Directive If the argument is correct, then the more tort-based remedies which the EC requires Members States to provide for their citizens, the more difficult it becomes for any Member State to reform its law of personal injuries in a comprehensive way.

Secondly, the sort of proposal made in the third edition of this book assumes that the disabled should be treated as a separate group within the social security system not only in respect of the special needs of the disabled as contrasted with the able bodied, but more generally. This assumption may not go unchallenged. Even if it were universally accepted, it remains the fact that the disability income system is extraordinarily complex, and the project of reforming it in a comprehensive way would he very difficult, time-consuming and expensive. The fragmented nature of the proposals made by the Pearson Commission perhaps provides a warning against being too optimistic about the prospects for cot comprehensive reform. Nevertheless, the fact that a comprehensive accident scheme has been in operation in New Zealand since 1974, and that a national scheme covering disease and illness as well as accidents reached the stage of draft legislation in Australia before being shelved after a change of government, shows that given vision and energy, plus a determination that broad principles should not he swamped by a mass of detail, a comprehensive scheme of assistance for the disabled need not be unattainable. Another major obstacle in the way of comprehensive reform is the inevitable opposition from special interest groups which, naturally, seek the preservation of schemes, arrangements and preferences which benefit them. One of the important arguments in favour of comprehensive reform is that justice requires that people with similar needs should receive similar assistance. But justice is a very slippery concept, and it is possible to make an argument based on a more or less plausible concept of justice, in favour of many of the preferences for particular groups embodied in the present law. So comprehensive reform requires a firm adherence to a particular notion of social justice, and the political will to disregard the pleas of those who receive special treatment under present arrangements. Recent

history does not give much cause for optimism on this score. But the importance of standing firm is clear when one remembers that only a very small proportion of disabled people benefits from especially generous schemes. A related difficulty is that experience suggests that in a democratic system, large scale reform is, on the whole, harder to effect than small-scale or incremental change. This is no doubt one reason why, in the past, pressure groups have been able to secure the enactment of specific preferential schemes (such as those to compensate vaccinedamaged children and people infected with HIV from contaminated blood products). Since any reformer must accept the realities of the political process, there may be an argument for aiming at comprehensive reform via limited reform — the development of more and more special schemes might generate pressure for rationalisation into a comprehensive scheme; or, alternatively, special schemes might eventually cover virtually the whole field of disablement. A major argument made against proposals for large-scale reform is that of cost. In the case of some limited reforms, such as no-fault road accident schemes, this objection can be met simply by designing a system which, by effecting various savings and trimming certain benefits slightly, costs no more than the scheme being replaced. Comprehensive reform will almost certainly require some new money because it would involve compensating many disabled persons who receive little or nothing under present arrangements. One of the advantages of reform by extension of a currently existing scheme is that by choosing a scheme (the US) with relatively generous benefits, the end result might be a general upgrading of provision for the disabled. The danger in this course is that the objection of cost might lead to a general downgrading of benefits in the existing scheme before its coverage is extended. There is, then, a basic dilemma facing the comprehensive reformer —

is it better to compensate more people at lower levels, or fewer people at more generous levels? In the end, a compromise is most likely which involves, for example, compensating the more seriously disabled quite generously at the cost of relatively low benefits for those with only minor or short-term disabilities — in this way a large number of the disabled receive some assistance, but the more seriously disabled are relatively better catered for. Crucial to the issue of cost is that of whether the income replacement element of benefits (as opposed to the element designed to meet the special needs of the disabled arising out of their physical condition) is to be flat-rate and means-tested — that is, designed to provide a level of reasonable subsistence; or earnings-related and regardless of means — that is, designed to compensate for income loss. We have seen that income-relation is a basic principle of the New Zealand accident compensation scheme, and those who support special schemes for disabilities identified by cause (eg industrial disabilities) usually argue that those whose disabilities arise from a particular source deserve compensatory benefits, even if social security benefits generally are flat-rate and means-tested. Clearly the cost of an income-related scheme would be much greater than that of a flat-rate scheme, and as a matter of principle it is justifiable to ask to what extent it is the obligation of the state to maintain people in their accustomed way of life, as opposed to providing them with a reasonable floor level of support. It is clear that very few would argue that a staterun system should compensate relative to income, however high that income is. But some reformers would argue that, up to a certain maximum, benefits ought to be incomerelated, at least if the income loss lasts for more than a relatively short time (a qualifying period for income-related benefits would save money, and might encourage rehabilitation).

On the other hand, if the demand for income-relatedness were seen as a major obstacle to comprehensive reform, it might be worthwhile giving more thought to some sort of dual system under which flat-rate means-tested benefits at a reasonable level would be available through the social security system, leaving it to individuals to take out private insurance if they wanted benefits above the state-provided level. A related question concerns the future of tort law. One of the factors which has led reformers to propose earningsrelated benefits is that the tort system provides such benefits (in theory at least) whatever the income of the injured person; and in order to defuse opposition to the abolition of tort it has seemed expedient to provide benefits under the new system broadly comparable to those available under tort. This might suggest that at least some, if not most of the opposition to the introduction of a scheme under which all the disabled received flat-rate income replacement, plus provision for special needs, could be defused by leaving the tort system in existence so as to provide a source of earnings-related benefits for those who wanted them. Such a proposal would avoid some of the criticisms of dual systems noted earlier. Since all the special needs of the disabled would be met by social security, it could not he argued that those most in need (ie the severely disabled) were being relegated to an inferior remedy — their basic needs would be met by the State. It is true that such a dual system would be administratively expensive, but one might expect that the tort system would not be heavily used if the State benefits were reasonable in amount (ideally based on average weekly earnings). On the other hand, such a dual system suffers from what is really a fatal disadvantage. The tort system would provide earnings-related benefits for only a proportion of the disabled, as indeed at the rnoment it only covers a small proportion of the disabled. It would be difficult to justify

special treatment for some of the highearning disabled, when the removal of special treatment is a major justification for comprehensive flat-rate benefits. A much more satisfactory solution would be to abolish tort and leave all high earners to insure themselves for income-related benefits if they wished. Finally, it might be argued that the model for any comprehensive reform should be the non-industrial incapacity benefits scheme rather than the industrial injuries scheme on the basis that provision for compensation for permanent disability, regardless of income loss, is unjustified while so many are without adequate income. Even if there is a genuine public demand for disablement benefits over and above adequate income replacement benefits, there is a strong case for restricting these benefits to serious cases in which the disability threatens to destroy a person’s normal mode of life. The emphasis in a comprehensive disability benefits scheme should be firmly on income replacement and provision for the special needs of the disabled. On the other hand, the fact that the IIS is in some respects more generous than the non-industrial incapacity scheme makes it a desirable starting-point with a view to encouraging the setting of benefits for all the disabled at higher rather than lower levels. Whatever scheme provides the basis for development, better provision should be made than under present arrangements for those who suffer partial loss of earnings, especially in cases of long-term disability. Disability working allowance is not an adequate response to this problem. Given that the present political and economic climate is uncongenial to comprehensive reform, should lawyers support and press for whatever limited reform (such as a road accident scheme or a drug injuries scheme) seems politically feasible? The answer must he ‘yes’. The waste and inefficiencies of the tort system are continuing realities,

and there is only so much that tinkering with the tort system can achieve. Even if all we can realistically hope for is that the funds currently tied up in the tort system as it now operates will be better used, this is enough to justify a limited reform, even at the cost of creating or perpetuating anomalies between road accident victims and other social welfare recipients. And in the process the public mind might be sufficiently weaned off the idea of tort rights and on to the notion of no-fault welfare rights, to lead eventually to more comprehensive reform. A private insurance solution The approach we have been discussing might be thought, at the turn of the twenty-first century, to be anachronistic and unrealistic. Surely there is simply no prospect of reforms which would involve increases in public expenditure and expansion of the social security system. If this is true, what should be done to meet the undeniably strong case for radical reform of die way we as a society deal with compensation for injury and disability? Patrick Atiyah has recently argued that the way ahead lies in ‘the spread of more first party insurance’ [PS Atiyah, The Damages Lottery (Oxford, 1997), ch 8]. As a first move, he would abolish the tort-cum-liability-insurance system in relation to road accidents and replace it with compulsory “first party” insurance paid for by car owners. The insurance would cover not only the car owner but, for instance, passengers in the car and pedestrians injured by it. Coverage would, of course, be on a no-fault basis. The element of compulsion would only extend to coverage for medical expenses and a basic level of income replacement, plus (perhaps) some compensation for non-pecuniary loss in cases of very serious injuries. In relation to all other injuries and diseases theoretically covered by the tort system, Atiyah favours the abolition of

tort liability, and leaving people to buy such insurance as they want to provide protection against risks of personal injury and illness over and above that already provided by the social security and social welfare systems. Given the limited coverage of the tort system (largely confined in practice to injuries suffered on the roads, at work and in hospital), the only context in which this proposal would represent a radical reform are those of medical mishaps and work-related injuries. In the longer term, however, the logic of Atiyah’s position seems to contemplate a possible, gradual replacement of the social security and social welfare system with private, first party insurance arrangements. Those interested in understanding Atiyah’s ideas better are encouraged to read The Damages Lottery. Here I will make just a few comments so as to indicate the differences of opinion between us. First, Atiyah’s reason for dealing with road accidents in a special way seems to be the pragmatic one that the amounts currently spent on compulsory third party liability insurance could easily be switched to first party loss insurance. Even in the case of the other major areas of the practical operation of the tort system — work injuries and medical mishaps — the mechanism of change would not be so obvious or straightforward because at present, neither workers nor patients generally take out insurance to cover work injuries or medical mishaps respectively. However, there is no good reason of principle why injuries caused in road accidents should receive different treatment from injuries caused in any other way. A second reservation about Atiyah’s approach concerns its voluntary nature. It is only in the context of road accidents that Atiyah proposes that insurance should be compulsory. But the reason he gives for compulsion — that otherwise “too many people would probably end up without any cover” — applies as much to other contexts as well. Under a voluntary system, the people least likely to be adequately insured are the poor, the ill-educated and the vulnerable.

The protection of such people provides one of the strongest arguments for state provision of social services and social security benefits according to need. Compulsory redistribution of income and wealth from those who are strong, rich and well-educated to those who are less well-off is one of the marks of a humane society. The freedom to be inadequately insured against personal injury and disability is no freedom at all. I certainly support a two-tier system in which cover for losses and expenses above a certain minimum would be voluntary. But up to that minimum level, people should not be left to the vagaries of the “free market”. In my view, there is a strong case for abolishing tort law and the tort system as a mechanism for compensating victims of personal injuries, illness and disability. However, I also believe that the State has an obligation to guarantee an agreed minimum level of support for those in need as a result of suffering injury, illness and disability. This will inevitably involve a certain amount of wealth-redistribution, and probably the simplest way of achieving this is through the tax system. Whether the provision of minimum support is administered by government agencies or private organisation should be decided in terms of who can do the job most efficiently. A final comment: Atiyah says that proposals to replace the tort system by expanding the social security system “now seem hopelessly dated” and politically unrealistic. This may be true; although if it is, there is hardly cause for celebration. What seems equally true to me, at least, is that proposals to abolish the tort system and to replace it and much of the welfare system with voluntary private loss insurance are politically naive and ethically problematic.’

Note:

1. As pointed out by Atiyah, a model for a no-fault regime can be found in New Zealand which has replaced the mixed system of common law damages, social security, workers compensation schemes, and third party liability insurance with a comprehensive accident compensation scheme. The New Zealand reforms came about as a result of a Royal Commission under the chairmanship of Mr Justice Woodhouse (The Woodhouse Report on Compensation for Personal Injury (December 1967)) which recommended no-fault benefits for accidental injury covering: — all motor vehicle injuries, funded by a levy on owners of motor vehicles and drivers — all injuries to earners whether occurring at work or not, funded by a flat-rate levy on employers for the cost of all injuries to their employees and a levy on selfemployed persons to pay for injuries occurring at work or outside of work 2. Thus, the right to sue for injuries resulting from motor vehicle accidents would be removed. Employers would have to pay a compulsory levy for injuries to employees but in return they would also be protected from being sued for damages. The right to sue for non-work injuries to earners would also be removed. The Woodhouse Report recommended that the scheme should be based on five principles:

(i) community responsibility (ii) comprehensive entitlement (iii) complete rehabilitation (iv) real compensation (v) administrative efficiency 3.

The Accident Compensation Act 1972 implemented the Report’s recommendations. An amending statute passed in 1973, following a change of government, provided for a supplementary scheme, funded by the Government, covering students, non-earners and visitors to New Zealand. The scheme came into effect on 1 April 1974 and is administered by the Accident Compensation Commission (ACC). Benefits include: — — — — —

hospital and medical expenses rehabilitation costs associated transport costs earnings related compensation lump sum payments for permanent loss or impairment — lump sum payments for pain and mental suffering — funeral costs and lump sum payments to surviving spouses and children in cases of accidental death In return people do not have the right to sue for personal injury other than for exemplary damages. In essence, the scheme amounts to state

comprehensive insurance given that all New Zealanders pay premiums for ACC cover, the levels of which are set by the government. In total the ACC spends around NZ$1.4 billion each year on rehabilitation, treatment and weekly compensation. Over the years various changes to the scheme were made in an attempt to rein in costs and in 1992 lump sum payments were abolished (see the Accident Rehabilitation and Compensation Insurance Act 1992). However, the Injury Prevention Rehabilitation and Compensation Act 2001 reintroduced lump sum payments and provided for greater focus on accident prevention as the primary function of the ACC.

2 Regulation of Insurers This chapter does not seek to provide detailed coverage of the authorisation and supervision of insurers in the UK. Instead, the aim is to look at regulation in terms of its objectives and of the broad approach taken by the regulator, the Financial Services Authority.

2.1 Objectives of Regulation The regulation of financial institutions began in most developed economies in the nineteenth century, typically in response to particular crises in particular parts of the industry. That pattern continued in most countries until relatively recently when multifunctional financial institutions (eg insurance companies opening banks) made it increasingly difficult to sustain regulatory structures that divided along functional lines (insurance, banking, securities and so forth). This has led some countries, such as the UK, to adopt unified regulatory structures. In addition, the growth of financial institutions that conduct business in countries other than the one in which they are established and the interconnection of

national financial markets has posed problems for a regulatory approach directed by national regulators. However, recently there have been efforts, both within regions (eg the European Union) and globally (eg the International Association of Insurance Supervisors) to develop common approaches. There remain the problems of why regulation of insurance is needed and what it should seek to achieve. [201] S L Kimball, “The Purpose of Insurance Regulation: A Preliminary Inquiry into the Theory of Insurance Law” [1961] 45 Minnesota Law Review 471 ‘In the United States and Germany, and to a lesser but considerable extent in many other countries, insurance is subject to close regulation. Interference with free activity in the insurance market is especially noteworthy in a business which is highly competitive, which is generally well-run along conservative lines, and which presents no striking problems of domination of economic life or subversion of political processes. It is perhaps not easy to justify such extensive regulation, at least in comparison with the freedom enjoyed by most other businesses of similar importance. If one seeks reasons, he is told that the parties to an insurance contract are not negotiators of equal weight in the marketplace, that insurance is an exceedingly complicated business selling a product which is difficult for its votaries to understand and impossible for most of its buyers, that the contract has long duration in many instances, that the uncertain payment coming at the end of the long delay is likely to be of crucial importance in the life of the policyholder. Although all of these things are true, it

must be conceded that each of them is true of some other businesses as well. However, there is probably no other business to which so many of these characteristics apply in such large measure, and perhaps in the aggregate these factors justify the deep-probing supervisory activities of the modern insurance department. All of these factors are in reality variations of the first, the disparity in bargaining power. This suggests that regulation exists to protect the weaker contracting party. It is not surprising, therefore, that marine and transport insurance and reinsurance have generally been subjected to much less control than other lines of insurance, for here the insurance buyer is likely to be as large as the seller, as expert, and as adept in the market-place. While protection of the weaker of two contracting parties explains the intervention of the state in the insurance transaction, it does not explain the myriad forms taken by that intervention. Beginning with the most obvious, the requirement of solidity [by which is meant, broadly, solvency] is imposed because without it the business does not work at all, does not insure. This purpose is the first to be perceived after the decision has been made for government intervention; indeed, threats to solidity were the raison-d’être of the early insurance departments. Once intervention has begun, new purposes begin to emerge, and the goals of reasonableness, equity, and fairness become explicit. Finally, as the insurance enterprise becomes more and more crucial to the social fabric and as regulation acquires more sophistication, the manifold purposes of society at large come to have more and more implications for the processes of insurance regulation. There is nothing inevitable about the growth of insurance regulation from a simple focus on the solidity of the enterprise to a wide-ranging concern for many purposes. English regulation, for example, seems to have gone little beyond the purpose of solidity. Clearly, in the case of

England this reflects neither an undeveloped state of the insurance enterprise nor an undeveloped sense of responsibility for the welfare of the people. In part it reflects a greater emphasis than we place on certain of the objectives we have described, for the objectives are not all consistent with one another. In part it may reflect also an entirely different pattern of solutions which seek and achieve roughly the same ends. Thus the ease of access of new entrepreneurs into the American insurance market presents the American insurance departments with difficult problems of control — problems that do not exist in the English market, where few new companies are formed. Moreover, there is said to be a quality of sober restraint in English economic life that may make various kinds of regulation less necessary than here. Another relevant factor is the degree of self-regulation of the business. One may justifiably suggest as a hypothesis that the English pattern of regulation seeks the same goals as the American, but that the English social and governmental structure permits it to achieve the same goals with a lesser expenditure of effort than does ours. This would not be the first time that English society had managed to do a large job with a small investment in central government machinery. In its early centuries, the royal judicial machinery in England operated quite successfully with an investment in judicial manpower that was a mere tithe of that used on the continent of Europe. Before one concludes that the English are less effective in achieving most of the goals we have described, or are uninterested in some of them, one needs to make a close comparison between the English insurance system and the American or German systems — and in considerable depth. The differences one thinks he perceives between the purposes of English insurance supervision and those of either American or German supervision may be more apparent than real. The difference may instead be a difference in the extent of the need for particular

governmental controls. But this question requires much exploration before one can venture an answer. It is usually assumed that the purpose of insurance regulation is single and simple. In reality it is neither. There are many purposes, and they are in considerable conflict with one another. Insurance is a small world that reflects the purposes of the larger world outside it. It is not easy, therefore, to state a theory of insurance regulation in which every activity will neatly fit. Perhaps it is even impossible. It seems likely, however, that more attention directed to the purposes of insurance regulation would illuminate the field and render it more meaningful, not by making it simple but by explaining the objectives in all of their complex interaction and in all of their conflict. Only thus can a theory of insurance regulation be developed as a meaningful guide to practical, everyday activities in the insurance departments of the world.’

Note: Kimball goes on to suggest that the objectives of insurance can be divided into those that ‘relate to the internal working of the insurance business and those that derive primarily from its relationships to the world outside.’ He emphasises solidity or solvency within the first category, but also includes what he terms ‘aequum et bonum’. This latter ‘has many facets: It is equity. It is morality. It is fairness, equality, reasonableness. It may even be efficiency, economy, parsimony.’ More particularly, he refers to issues, which have been a feature of regulation in the US, such as reasonable premium rates and policy terms for all policyholders, no discrimination against particular groups of policyholders and fairness in the

treatment of individual policyholders. Among the objectives that Kimball identifies as not inherent in the insurance business, he mentions corporate governance, controls over the regulatory authorities and policies that subject foreign insurers to disadvantages in relation to domestic insurers. Objectives in this second category are drawn from the fact that, ‘Insurance does not exist in a vacuum, but in a complex modern society with a developed and dynamic economy.’ There is, for instance, pressure to broaden coverage as exemplified by the emergence of workmen’s compensation, compulsory motor insurance and so forth. He also points out that the free market principle means there is pressure to allow new insurers. Finally, there are moral considerations, such as have led to laws on gaming. [202] J Hellner, “The Scope of Insurance Regulation: What is Insurance for the Purposes of Regulation” (1963) 12 American Journal of Comparative Law 494 ‘At the opposite extreme from using the definitions as a guide in delimiting the scope of regulation, there is the possibility of simply asking whether there is need for regulation or not…The reasons for submitting certain activity to regulation coincide mainly with the general reasons for supervising insurance. Although these reasons are not identical for all countries, as appears from fact that the rules and facts of supervision differ considerably one country to another, some main reasons can be stated. They include the need for protection against fraud, the need for technical skill and caution in conducting a sound insurance

business, the need to collect and protect adequate funds (most conspicuous in long-term insurance, such as life insurance), the general desire to assure a fair and equitable treatment of the insured, the need to protect the insured against his own inability to understand the value of what he gets in exchange for the premium, and the great social importance of insurance that has as a principal object the task of providing assistance in time of need. If we accept these reasons for supervising insurance as our primary guide for delimiting regulation, the outcome would differ considerably from that reached by starting from the definitions of insurance. Instead of examining whether there is assumption and distribution of risks, we should ask whether there is a need for a complicated technique which calls for a special skill. Instead of asking whether the promisee gives any special consideration for the promise, corresponding to a premium, we have the question whether the value of the promise is difficult to estimate. Instead of asking whether the risk attaches to a fortuitous event, we should rather ask whether there is a need to collect and maintain special funds. Furthermore, we should ask whether there is any need for protection against fraud and for ensuring fair and equal treatment of the promises, and whether the promise has less social importance. Against using the need for regulation as a test it can, however, be argued that general policy objectives are not suitable means for deciding questions of applicability of law. If we should ask simply whether an activity is in need of regulating, we might conclude that a certain enterprise does not need to be supervised, because it is well managed without supervision. But this would be inconsistent with the policy which imposes regulation even on the best-managed insurance companies. At the other extreme we might impose regulation on any enterprise whose activity calls for accumulation of funds and where the value of the benefits is

hard to estimate. It is necessary to find some more concrete and limited circumstances on which to base the decisions. A more rational use of the idea that regulation should be imposed where there is a need for it consists in deducing from the rules of insurance law those particular dangers to the public an enterprise must create in order to be a legitimate subject for regulation. The decisive factor is not whether the business is well managed in the particular instance but whether the activity is of a type which requires regulation as insurance. If an enterprise operates on the basis of such risk-taking as requires the accumulation of funds, careful rate-making, and holding safe and liquid assets, it presents those dangers that are contemplated and counteracted in the rules of insurance law. If the dangers to the public are only those of usury or of unfair competition, or of deficient performance of professional services, there is no reason for imposing regulation as insurance, even if it may be assumed that as a secondary result of such regulation these deficiencies would also be eliminated. However, this is certainly not the whole solution of the problem. The fact that an enterprise offers dangers that are typical of insurance and counteracted by rules of insurance law does not imply that it must be regulated. To comply in all respects with the rules of regulation — whether these are stated in a statute or depend on the discretion of the supervising authorities — will often be so great a burden that useful activity might be suppressed. We must therefore take into account also those considerations that argue against regulation. We are now back at the same result as was implied in the criticism of the approach through a formal definition; we should examine whether an activity is of such a type that it should conform to well managed insurance. We then do not look at each single feature of the activity separately but consider the whole structure of the business as an entity. This view is also justified by the fact that there is often a

close connection between the relevant aspects of an activity. If an enterprise is simple, unbusinesslike, and provides services in kind rather than in money, there is generally (but not always) little need for the collection and preservation of funds. Instead of comparing the details of the activity one by one with the elements of a definition, we should therefore examine the whole of it on the basis indicated by the insurance laws.’

Note: For other aspects of this problem of defining insurance for the purposes of regulation, see chapter 1.

2.2 Financial Services and Markets Act 2000 Those engaged in insurance business in the UK have been subject to regulation since the Life Assurance Companies Act 1870, which, as its title indicates, was confined to the life assurance industry. Regulation gradually spread to other parts of the industry so that by 1946 the whole sector was covered. However, regulation was limited in its ambition. It addressed concern about the ability of insurers to meet claims as they fell due by requiring them to place money on deposit with the court to ensure the availability of funds should problems over solvency arise. At the same time, the relationship between the insurer and the insured was left to the principles of insurance contract law developed by the courts.

[203] Re North & South Insurance Corp Ltd [1933] 47 Ll L R 346 Maugham J: ‘An insurance company differs in its nature from almost every other trading concern. It starts, in the first instance, without liabilities. It obtains premiums sometimes to very large amounts, and, as risks mature and its debts begin to figure in its balance sheet, premiums which are received ought in general to be set aside for the purposes of paying not only the not unsubstantial costs of carrying on an insurance company business but also the claims which are inevitable. The solvency or insolvency of an insurance company has to be ascertained, as everybody knows, by, among other things, a most careful scrutiny of the funds which have been set aside out of premium income for the purpose of meeting claims. Inasmuch as the claims come in in every case after the premiums have been secured, there is always a risk that an insurance company may, by offering what look like very advantageous terms to the public, obtain a very large premium income which, as the result of the practical working of the company, proves to be an insufficient income for the purpose of meeting claims.’

Note: The Insurance Companies Act 1982 emerged against a background of scandals in the insurance industry and progress towards the creation of the European single market in financial services. The UK sought to establish a more comprehensive system of prudential supervision under which the financial health of insurers would be monitored by the Secretary of State for Trade and Industry. In addition, from 1975

insureds were given some financial protection against the consequences of an insurer failing. The marketing of those insurance contracts that involved investment was regulated under the Financial Services Act 1986, and there was also regulation of brokers (see chapter 3). On the eve of the election of the Labour Government in 1997 there remained much cause for anxiety about insurance regulation. Major insurers were being punished for the actions of their agents in misselling private pensions and there were also problems over the performance of endowment insurance policies that had been sold to homeowners as a means of repaying mortgages. More generally, the supervision of the financial sector was regarded as too complex. As has been mentioned, the method employed was to divide the industry according to the function of the firms being supervised: banking, insurance, investment advisors, fund managers and so forth. Each of these sub-sectors had its own supervisor. One problem was that the major financial institutions were rapidly spreading their business across these sectors: insurance companies were moving into retail banking and banks were selling insurance. This meant that a single firm could be policed by several regulators. After the 1997 election the Labour Government announced that supervision of most of the financial sector, which had been conducted by ten regulators, would be transferred to the Financial Services Authority (‘the FSA’). The Financial Services and Markets Act 2000 (‘FSMA’), which came into effect in

the following year, provides the legal framework within which this new system operates, but that framework was deliberately made fairly loose to allow the FSA flexibility. The FSA took on responsibility for both prudential supervision, which, broadly, relates to the stability of firms and the financial system, and conduct of business, which concerns the way authorised firms deal with customers. Although the wisdom of combining these two issues was questioned, its value seemed to be confirmed by the problems with a major life insurance company, Equitable Life. Under the system that prevailed when the company got into difficulties over promises it had made to investors, prudential supervision and conduct of business were handled by different regulators and, as the Parliamentary Commissioner for Administration pointed out, the supervisors saw the same set of facts in completely different ways (see Parliamentary Commissioner for Administration, The Prudential Regulation of Equitable Life, 4th Report, HC 809 (sess 2002–03)). The Commissioner’s report also highlighted another, more intractable problem in the mismatch between the powers of the regulators and the expectations of investors. As will be seen, since FSMA the FSA has emphasised that it does not seek to ensure that no companies fail and that it has a statutory obligation to educate investors about, among other things, the risks involved in investment. The approach taken by the Act was radical in another way. Instead of focusing on the risk exposures of individual firms, the Act laid down

objectives (s 2(2)) which the FSA was required to achieve, subject to the principles of good regulation set out in section 2(3). The FSA, therefore, developed what it has called the ‘risk-to-our objectives’ approach. In essence, this focuses on the risk posed to the statutory objectives by a firm. At the same time, all firms are expected to be soundly managed and well resourced. The approach taken by the FSA is elaborated in its Handbook, which, although a vast document, at least has the merit of being clearly written. [204] Financial Services Authority, The Future Regulation of Insurance: A Progress Report (London, FSA, 2002) ‘1.1 In order to place the regulatory reforms into context, this chapter describes the economic, social and strategic importance of the insurance industry and the present challenges it faces. It then sets out what might be the key characteristics of the insurance market in the future and, finally, it explains the influence our reforms will have in that context. 1.2 The insurance sector is a key part of the UK financial services industry. It is important, both from an economic and a social perspective, that the UK has an insurance market that operates effectively, remains competitive in European and world markets, and in which all participants have confidence. The insurance industry allows consumers, both retail and commercial, to transfer risk, to buy protection and to save (for example, for retirement). An effective savings industry has become all the more important given both the public policy objective to shift

responsibility for retirement provision away from the public purse, and trends in the occupational pensions market towards defined contribution schemes. 1.3 In addition to providing an important service to individual consumers, the insurance industry underpins almost all forms of economic activity and contributes directly and indirectly to wealth generation and social wellbeing. For example, the insurance industry: — enables businesses to pool risks associated with future uncertainties, and to sustain higher levels of activity than they could otherwise. This increases levels of economic activity and reduces costs, assisting UK firms in competing both in domestic and international markets; — allows organisations, both public and private, to ensure that their employees, those who use their products or services and other third parties who may be adversely affected by their operations are protected financially in the event that they suffer injury or loss. In some cases, such protection is required by law; — is a major means through which savings are channelled into investment in industry (the life industry accounts for about 20 per cent of shareholdings in UK industry). Through these investments, the industry helps drive growth across the whole economy; and — is a major direct contributor to UK GDP and foreign earnings and is a major source of employment.’

[205] Howard Davies (Chair of the FSA), “Speech to the Annual Meeting of the Financial Services Authority” (London, FSA, 2003)

‘In the UK market the boundaries between financial services are becoming increasingly blurred. This is particularly evident in relation to life insurance, but in non-life insurance alternative forms of risk transfer and securitisation of risk are also developing. Add to this the formation of complex groups and conglomerates — amongst other things to exploit market opportunities for cross selling — and the interactions between insurance and other financial services are clearly growing. The establishment of the FSA was not a case of the regulators leading the market, but of the Government recognising that developments in the market required a more co-ordinated approach to supervision across financial services.’

[206] International Monetary Fund, United Kingdom: Financial System Stability Assessment, Country Report 03/46 (Washington DC, IMF, 2003) ‘VII. IAIS INSURANCE CORE PRINCIPLES Institutional and macroprudential setting 157. The British insurance industry is venerable and large, contributing importantly to UK employment and overseas earnings. With net premium income in 2000 of £174 billion or approximately 10 per cent of the world market, it is the third largest after the US and Japan (although considerably smaller than either). It includes the most important cross border non-life insurance markets in Lloyds and the London Market, which together account for 65 per cent of approximately US $20 billion of annual global cross border general insurance premium flows…and is a significant source of life insurance product for people resident in other EU countries. Insurance penetration at 15.8 per cent is the

highest in the world, South Africa excepted. UK insurers are also well represented in foreign markets. 158. UK based insurers are, with self-administered pension funds, the most important repositories of individual financial sector wealth. Of total FY2000 financial assets of households and related non-profits of £3 trillion, more than 50 per cent is represented by insurance policyholder-related liabilities…Total investment assets under management at the end of 1999 amounted to slightly over £I trillion and the life and pensions sectors were easily the major providers of finance to government and private borrowers. 159. An analysis of the long term (life) insurers by capital strength shows a distinct bimodal distribution, with a large number of insurers having 100 per cent to 300 per cent of minimum required statutory solvency and a smaller, but significant group of very well capitalised insurers. From a stability and efficiency point of view the main danger is that if investment returns remain depressed, some long term players under stress will engage in risky business and investment strategies and tactics in an attempt to improve their market positions. This has already been observed in a number of other leading industrial markets, and FSA management has advised that they are aware of and monitoring this trend. 160. The general insurance industry does not face fundamental questions of the type facing the long term sector; however it does have its own challenges. These relate largely to operating in a world of low investment returns, much fatter and less tractable claims tails than were previously thought to exist and, in the near future, a more demanding recognition of liabilities and capital allocation under a risk based prudential regime. 161. Overall the assessors did not identify any immediate systemic risks arising from the insurance sector.

However the linkages between insurance and banking appear to be growing and warrant close monitoring. Broader risks arising from the potential rationing of insurance classes essential to the operation of key sections of the economy also appear to be low, but the assessors were advised that if the general insurance sector suffers additional severe shocks, this could become an issue. General preconditions for effective insurance supervision 162. The UK…has a well-developed judicial system with a reputation for probity and professionalism. The professions important to the financial sector are also well developed in the UK and are subject to full liability for breach of duty. There is no insurance accounting standard aside from the regulatory reporting requirements, which serve a different role to published accounts. Instead there is a Statement of Reporting Principles (SORP), largely worked out by the insurance sector on a modified regulatory reporting basis, but informed by general company reporting requirements, and “negatively approved” (not objected to) by the Accounting Standards Board (ASB). The assessors were advised that the imposition of IAS [International Accounting Standards] in the EU in 2005 will to a large extent supplant the ASB role. Main findings 163. The UK is developing a very advanced, indeed leading edge, approach to financial sector supervision. The FSA’s approach for the future appears to be to build on existing strengths, but with more focus on risk level and likely macro impact, and further emphasising the responsibilities of management’s and boards of entities which come within its remit. To some extent the

approach cuts across the Core Principles, which incorporate a range of supervisory styles. Nevertheless, the FSA and its supporting regulatory infrastructure comfortably accommodate most requirements of the IAIS assessment methodology. When the importance and special features of the UK market are considered, and appropriately more demanding standards are applied, a number of opportunities for further refinement become apparent. In particular, under the UK risk-based approach, not all financial intermediaries will be inspected (unless they are selected for a thematic investigation), and even in the larger institutions, the more routine supervisory visits will generally operate at a high level, although skilled persons may be utilized when required. The assessors judged that there is scope for a more handson approach to inspection, using specialist skills where appropriate while still not threatening the risk-based model. 164. Insurance supervision in the UK is in a transition phase, and the assessors strongly agree that greater emphasis will need to be placed on staff training and development as the new risk-based methodology is rolled out. In addition, the disposition, quantity and quality of actuarial, non-lifelong tail claims assessment, and reinsurance skills needs to be carefully reviewed with a view to further strengthening. 165. The UK is a world leader in corporate governance; however the assessors recommend that the FSA require firms to strengthen or formally adopt the risk manager function. In addition, there is a general perception that on site inspections by the supervisor could be more testing. The modalities currently being developed should largely deal with these concerns. 166. The assessors believe that there is scope for a more explicit statement of solvency requirements. Regulatory

minimum solvency levels are officially set at EU levels or somewhat higher, which tend to be less demanding than risk based capital methodologies. While the assessors acknowledge that more demanding standards apply in practice in the UK through the informal rules that have been applied, these ideally should be codified…’

Note: By way of contrast, it may be noted that in the USA the McCarran-Ferguson Act 1945 placed regulation of insurance in the hands of the states, although the establishment of multistate and multifunctional financial institutions has provided problems for this regime. As well as being concerned with issues such as capital standards and liquidity, the powers of the regulators stretch beyond those of the FSA into regulating premium rates and policy provisions. See KS Abraham, Cases and Materials: Insurance Law and Regulation (New York, Foundation Press, 2000), ch 3; RW Klein, “Insurance Regulation in Transition” (1995) 62 Journal of Risk and Insurance 363; S Randall, “Insurance Regulation in the United States: Regulatory Federalism and the National Association of Insurance Commissioners” [1999] Florida State University Law Review 626.

2.3 The Roles and Powers of the FSA The FSA has wide-ranging powers and functions:

(i) as a legislator it makes rules, statements of principle, codes of practice, gives directions and issues general guidance (eg see sections 64, 69, 119, 124, 138(1), 141–42, 158(5), 210, 316, 318, 328); (ii) as an investigator it has powers to gather and demand the information required to undertake its work (see, for example, sections 165–77, 284, 340, schedule 15); (ii) as a judicial and enforcement authority it rules on breaches and imposes penalties in the form of fines and the refusal, variation, suspension or withdrawal of authorisation (see, for example, sections 205–11 and below, and Part XXVI); (iii) as a prosecutor with respect to an offence under the Act or subordinate legislation (eg sections 401–02); (v) as a compensatory mechanism it has established a scheme, funded by the industry, to compensate those who have suffered loss in the event of an authorised person being unable to meet claims (sections 212–24). The FSA set up Financial Compensation Scheme, which replaces the Policyholders Protection Fund.

One theme running through the structure of the Act and the FSA’s own procedures is the need for regulatory transparency and accountability. The mechanisms include an independent Complaints Commissioner (FSMA, Sch 1, para 7), the Financial Services Ombudsman Service (FSMA, section 225 and Sch 17, Parts I and II), Practitioner and Consumer Panels, with whom the FSA must consult (FSMA, sections 8–11). There also elaborate provisions for public consultation, which the FSA must undertake before issuing rules, statements or codes (see sections 65, 155). These have led to criticism about delays and paperwork. Moreover, while a person or firm that has been

disciplined by the FSA may seek a fresh hearing before the independent Financial Services and Markets Tribunal, the publicity that may be generated is not likely to be welcomed by the industry. The paucity of hearings before the Tribunal seem to confirm the view expressed by Lord Hodgson during the progress of the bill through the House of Lords: ‘Regulated firms, knowing that there will be publicity whatever the outcome, will inevitably be reluctant to avail themselves of their full legal rights…Even if the defendant is found not guilty, the aura of being so referred will take a long time to dispel…Such recollections would make a significant dent on any firm’s operations for a long time.’ (quoted in A Hayes, “Open Justice at the Tribunal?” [2002] Butterworths Journal of Banking and Financial Law 427)

See R Merkin, ed, Colinvaux & Merkin’s Insurance Contract Law (London, Sweet & Maxwell, 2002). [207] Financial Services and Markets Act 2000 19 (1) No person may carry on a regulated activity in the United Kingdom, or purport to do so, unless he is— (a) an authorised person; or (b) an exempt person

Note: The penalties for breach of this provision (the ‘general prohibition’) are set out in sections 23–24; see also sections 26–28 on the consequences for the enforcement of agreements made with unauthorised

persons. Under section 31(1) an authorised person is one who has ‘a Part IV permission to carry on one or more regulated activities’. Part IV (sections 40–54) provides the broad framework for granting, suspending, varying or withdrawing authorisation, and sets out the rights of those applicants or authorised persons aggrieved by a decision on these matters (section 55). Prudential supervision involves both licensing persons to enter the market and monitoring those who have been authorised. The supervision of Lloyd’s is left in the hands of the Council subject to oversight by the FSA (see sections 314–24 and below, part V). [208] Financial Services and Markets Act 2000 2 (2) The regulatory objectives are— (a) market confidence; (b) public awareness; (c) the protection of consumers; and (d) the reduction of financial crime. (3) In discharging its general functions the Authority must have regard to— (a) the need to use its resources in the most efficient and economic way; (b) the responsibilities of those who manage the affairs of authorised persons; (c) the principle that a burden or restriction which is imposed on a person, or on the carrying on of an activity, should be proportionate to the benefits, considered in general terms, which are expected to result from the imposition of that burden or restriction;

(d)

the desirability of facilitating innovation in connection with regulated activities; (e) the international character of financial services and markets and the desirability of maintaining the competitive position of the United Kingdom; (f) the need to minimise the adverse effects on competition that may arise from anything done in the discharge of those functions; (g) the desirability of facilitating competition between those who are subject to any form of regulation by the Authority. 3 (1) The market confidence objective is: maintaining confidence in the financial system. (2) “The financial system” means the financial system operating in the United Kingdom and includes— (a) financial markets and exchanges; (b) regulated activities; and (c) other activities connected with financial markets and exchanges. 4 (1) The public awareness objective is: promoting public understanding of the financial system. (2) It includes, in particular— (a) promoting awareness of the benefits and risks associated with different kinds of investment or other financial dealing; and (b) the provision of appropriate information and advice. (3) “The financial system” has the same meaning as in section 3. 5 (1) The protection of consumers objective is: securing the appropriate degree of protection for consumers. (2) In considering what degree of protection may be appropriate, the Authority must have regard to— (a) the differing degrees of risk involved in different kinds of investment or other transaction;

(b) the differing degrees of experience and expertise that different consumers may have in relation to different kinds of regulated activity; (c) the needs that consumers may have for advice and accurate information; and (d) the general principle that consumers should take responsibility for their decisions. (3) “Consumers” means persons— (a) who are consumers for the purposes of section 138; or (b) who, in relation to regulated activities carried on otherwise than by authorised persons, would be consumers for those purposes if the activities were carried on by authorised persons. 6 (1) The reduction of financial crime objective is: reducing the extent to which it is possible for a business carried on— (a) by a regulated person, or (b) in contravention of the general prohibition, to be used for a purpose connected with financial crime. (2) In considering that objective the Authority must, in particular, have regard to the desirability of— (a) regulated persons being aware of the risk of their businesses being used in connection with the commission of financial crime; (b) regulated persons taking appropriate measures (in relation to their administration and employment practices, the conduct of transactions by them and otherwise) to prevent financial crime, facilitate its detection and monitor its incidence; (c) regulated persons devoting adequate resources to the matters mentioned in paragraph (b). (3) “Financial crime” includes any offence involving— (a) fraud or dishonesty; (b) misconduct in, or misuse of information relating to, a financial market; or

(c) handling the proceeds of crime. (4) “Offence” includes an act or omission which would be an offence if it had taken place in the United Kingdom. (5) “Regulated person” means an authorised person, a recognised investment exchange or a recognised clearing house. … Part IV Permission to Carry on Regulated Activities 40 (1) An application for permission to carry on one or more regulated activities may be made to the Authority by — (a) an individual; (b) a body corporate; (c) a partnership; or (d) an unincorporated association. (2) An authorised person may not apply for permission under this section if he has a permission— (a) given to him by the Authority under this Part, or (b) having effect as if so given, which is in force. (3) An EEA firm may not apply for permission under this section to carry on a regulated activity which it is, or would be, entitled to carry on in exercise of an EEA right, whether through a United Kingdom branch or by providing services in the United Kingdom. (4) A permission given by the Authority under this Part or having effect as if so given is referred to in this Act as “a Part IV permission”. 41 (1) “The threshold conditions”, in relation to a regulated activity, means the conditions set out in Schedule 6. (2) In giving or varying permission, or imposing or varying any requirement, under this Part the Authority must ensure that the person concerned will satisfy, and continue to satisfy, the threshold conditions in relation to all of the regulated activities for which he has or will have permission.

(3) But the duty imposed by subsection (2) does not prevent the Authority, having due regard to that duty, from taking such steps as it considers are necessary, in relation to a particular authorised person, in order to secure its regulatory objective of the protection of consumers … Schedule 6 Threshold Conditions Part I Part IV Permission Legal status 1 (1) If the regulated activity concerned is the effecting or carrying out of contracts of insurance the authorised person must be a body corporate, a registered friendly society or a member of Lloyd’s. (2) If the person concerned appears to the Authority to be seeking to carry on, or to be carrying on, a regulated activity constituting accepting deposits, it must be— (a) a body corporate; or (b) a partnership.

Location of offices 2(1) If the person concerned is a body corporate constituted under the law of any part of the United Kingdom— (a) its head office, and (b) if it has a registered office, that office, must be in the United Kingdom. (2) If the person concerned has its head office in the United Kingdom but is not a body corporate, it must carry on business in the United Kingdom. Close links 3(1) If the person concerned (“A”) has close links with another person (“CL”) the Authority must be satisfied —

(a) that those links are not likely to prevent the Authority’s effective supervision of A; and (b) if it appears to the Authority that CL is subject to the laws, regulations or administrative provisions of a territory which is not an EEA State (“the foreign provisions”), that neither the foreign provisions, nor any deficiency in their enforcement, would prevent the Authority’s effective supervision of A. (2) A has close links with CL if— (a) CL is a parent undertaking of A; (b) CL is a subsidiary undertaking of A; (c) CL is a parent undertaking of a subsidiary undertaking of A; (d) CL is a subsidiary undertaking of a parent undertaking of A; (e) CL owns or controls 20% or more of the voting rights or capital of A; or (f) A owns or controls 20% or more of the voting rights or capital of CL. (3) “Subsidiary undertaking” includes all the instances mentioned in Article 1(1) and (2) of the Seventh Company Law Directive in which an entity may be a subsidiary of an undertaking.

Adequate resources 4(1) The resources of the person concerned must, in the opinion of the Authority, be adequate in relation to the regulated activities that he seeks to carry on, or carries on. (2) In reaching that opinion, the Authority may— (a) take into account the person’s membership of a group and any effect which that membership may have; and (b) have regard to—

(i) the provision he makes and, if he is a member of a group, which other members of the group make in respect of liabilities (including contingent and future liabilities); and (ii) the means by which he manages and, if he is a member of a group, which other members of the group manage the incidence of risk in connection with his business.

Suitability 5 The person concerned must satisfy the Authority that he is a fit and proper person having regard to all the circumstances, including(a) his connection with any person; (b) the nature of any regulated activity that he carries on or seeks to carry on; and (c) the need to ensure that his affairs are conducted soundly and prudently.

2.4

Financial Approach

Services

Authority’s

[209] The Observer, 7 October 2001 ‘[Howard] Davies [chair, FSA], at least, is happy with the progress. Others are less certain. The FSA was supposed to replace the box-ticking, legalistic approach that dogged predecessors like the Personal Investment Authority with a more flexible approach based on high-level principles. Many question whether that aim is being achieved. “There can be a tendency for lawyers to get involved in a major way in drafting the legislation so that the commonsense of the policymakers is sometimes obscured

by the legality of the text,” said Peter Beales of the London Investment Banking Association. Davies’ answer is typically robust: “That is what they asked for. We began with a regime that was based more on principles, less on detail. At every point, we were pressed for more detail, more detail. Sometimes industry practitioners will say they want something else but the compliance officers and legal people want total clarity.” Davies believes that the system can still be made to work flexibly: “I think we can square the circle. Also, we will operate the system in a risk-based way — we will focus on the areas of structural risk.”

[210] FSA, “Authorisation” in Handbook of Rules and Guidance (London, FSA, 2003) ‘AUTH 1.4.4 The FSA’s approach to applications for Part IV permission: an overview (1) Alongside the assessment of the threshold conditions… the FSA will operate its risk assessment process. This process enables the FSA to be proportional in its procedures, both in terms of the information which it seeks from an applicant and in the allocation of its own resources. The outcome of this process will help determine the relationship the FSA will seek to have with the applicant if it gives it Part IV permission. (2) The process will include assessing the risks posed by the applicant against a number of probability and impact factors. The probability factors relate to the likelihood of an event happening, and the impact factors indicate the scale and significance of the problem if it occurred….’

Note:

The Handbook contains detailed regulations and guidance on the authorisation and continuing supervision of authorised firms and approved persons (that is, those who undertake ‘controlled functions’, which are defined in the Supervision module of the Handbook at SUP 10.4). On risk assessment, see also, Handbook: Supervision SUP 1.3, and FSA, The Firm Risk Assessment Framework (London, FSA, 2003). [211] Howard Davies (Chair, FSA), “‘Rational Expectations’ — What Should the Market, and Policyholders, Expect from Insurance Regulation?” Airmic Annual Lecture, 29 January 2002 (www.fsa.gov.uk) ‘The biggest decision of principle is just how safe one wishes to make the industry. Let me put the point starkly in relation to the life sector. It would be possible to reduce the risk of failure in the life insurance industry to approaching zero by requiring all life companies to keep their assets in the form of cash and short-dated government obligations. In those circumstances there would be next to no liquidity risk and almost total certainty about future returns. Those returns, however, would be unexciting, limited to the risk-free lending rate, with a reduction for the costs of marketing selling and portfolio management. In real terms, it is unlikely that life insurance companies would be able to show a positive return to investors. So as soon as one moves away from this unexciting, but certainly safe model, one is allowing risk to enter the system. For quite a long period customers have benefited from the fact that life insurance companies have been able to keep a large proportion of their assets in equities. Just at

the moment, that does not look such a brilliant idea, and bonus rates are being cut across the market in response to depressed equity market conditions after two years of market falls, the first such period for 25 years. But allowing the possibility of higher returns inevitably brings in its train the possibility of failure. In the case of general insurance, too, an attempt to eliminate failure could have other damaging consequences. There would possibly be greater industry concentration, reduced product choice, less innovation and higher costs. A dynamic industry cannot be one in which all win prizes. So we have said, from the moment I assumed responsibility as Chairman of FSA, that we are not aiming at a zero failure régime, which would be undesirable in theory and unachievable in practice. It is a depressing, perhaps inevitable feature of my life that while I can secure broad theoretical agreement across the political spectrum for this general proposition, whenever there is an actual company failure, that consensus seems to fade away, and the immediate assumption is that there must have been some inadequacy in the regulatory régime itself, or in the way that régime was administered. I recognise that this comes with the territory. And I would certainly not argue that failures should simply be accepted without any assessment of why they occur. That is why we carried out, promptly and transparently, our own assessment of the circumstances surrounding the closure of Equitable Life to new business. But I hope it is recognised that a corporate failure is not necessarily a failure of regulation. It may simply be a sign that market forces are working. As Gore Vidal once observed, “it is not enough to succeed: others must fail”. We have already said that we would like to move to a régime which is closer to that being developed for banks by the Basel Committee [Basel Committee on Banking Supervision]. In other words one which is more forward

looking and involves firms themselves making their own specific assessment of the overall level of financial resources they need to meet their liabilities, and regular stress and scenario testing. We would envisage setting individual capital requirements for higher risk firms in future, and providing a consistent set of guidance on systems and controls, covering all sectors. All of these changes must be undertaken bearing in mind, as I have said, our principles of good regulation, and also taking into account developments under way in the European Union and the wider world. We have to recognise that UK companies face global competition and that we should not tie their hands behind their back in that contest. But success in the insurance market is certainly heavily related to a reputation for safety and soundness, and for maintaining reliability in paying out claims. So a more robust prudential environment can be a competitive advantage. That is one rational expectation you may have of the regulatory régime. We normally think of the prudential régime as something which sits under our market confidence objective. But it is clear from what I have said about losses over the last 10 years that prudential failure has been an important source of consumer detriment. So a robust prudential régime is part of the consumer protection work of the Authority, too.’

[212] John Tiner (Managing Director, FSA), “The FSA’s Radical New Approach to Insurance Regulation”, Central & Eastern European Regulators Seminar, Wroclaw, Poland, 27 June 2003 (www.fsa.gov.uk) ‘Crucially, the Act [FSMA] sets out four objectives which the FSA is required to work towards and to report publicly each year on its achievements against those objectives…These

objectives are: to maintain market confidence to secure an appropriate degree of protection for consumers, to promote public understanding of the financial system and to reduce financial crime. In making our regulatory judgements about policy decisions, sector wide issues or individual company problems we are required to have regard to what the Act describes as principles of good regulation. These principles cover the need to be efficient in our use of resources, emphasise the importance of the responsibilities of the senior management of firms as the first line of defence in respect of our statutory objectives, require us to consider the implications of our decisions on competition, innovation and the competitiveness of the UK market and the need for our actions to be justified on the grounds that they are proportionate to the risks to the objectives I have just referred to. We have worked very hard to operationalise these objectives and principles of good regulation so that day in day out they are the benchmark against which we consider all of our key decisions, such as where we prioritise resources and the possible actions we may take against individual firms. The FSA is sometimes referred to as an integrated regulator. Many people think of this as a single regulator across the various sectors of the financial markets — banking, insurance, securities, exchanges, advice — and indeed that is true — with one qualification that I shall refer to in a moment — but, importantly, it also represents the integration of prudential supervision and conduct of business regulation. Some commentators suggest that there is an inherent conflict between the market confidence aspects of prudential supervision and the consumer protection aspects of conduct of business regulation. My view on this is that it is true there are times when there is a tension between them, although in a market economy it is by no means inherent in the system and I believe that any such tensions are best resolved within a single regulatory

body than between multiple bodies who can only deal with the tension in a way which damages the very objectives the regulatory systems should be working towards. …Before I go on to talk about this agenda of reform, I think it is important that I mention five key principles that are at the heart of the FSA’s regulatory regime. — The first is that we are risk-based regulators. This means that in respect of consumer and industry-wide issues and for each individual firm, we make an assessment of the risks they present to our four statutory objectives. We then allocate our resources according to that analysis and, therefore, determine the intensity of our regulatory effort at a firm level. We analyse on a quantitative basis, the impact that each firm could have on our ability to meet our statutory objectives and then we do a qualitative assessment of the probability of risks arising, which may threaten that ability. I would note, that our risk-based approach also encompasses enforcement, where we plan to take cases forward which have a significant market impact. — The second key plank to our approach is the “principles of business” that we require all regulated firms to meet. Essentially, these set standards for the way in which we expect firms to operate and include such things as: — A firm must conduct its business with integrity. — A firm must maintain adequate financial resources. — A firm must deal with its regulators in an open and co-operative way. — A firm must treat its customers fairly. — The third principle concerns senior management responsibilities. Here, we look to senior management to satisfy themselves that their firm is operating in a way which meets our requirements. It is not something that can be delegated to a compliance department or, in the case of insurance, to an appointed actuary. It is senior

management and not the regulator who is engaged in their business day in day out and it is right that they should accept the regulatory responsibility which comes with managing their business. — My fourth principle is that the FSA does not aim to operate a zero failure regime. That means that firms will fail and consumers will be mis-sold, but neither can necessarily be regarded as a failure of regulation. We believe strongly that operating a zero failure system would operate contrary to the principle of caveat emptor, would have seriously damaging effects on market competition and innovation and would incur undue and unreasonable cost. — The last point of principle I would like to mention to you is to do with consultation and cost benefit analysis. Under the Financial Services and Markets Act the FSA has rule making powers, but only following a process of comprehensive public consultation. In most cases, therefore, we consult on our ideas for new policy initiatives to address a particular concern, issue a public feedback statement on that consultation and then consult once again on the draft rules to be included in our rulebook. This can slow down the process of improving the regulatory framework and places an onerous burden on firms, their trade associations and consumer representatives in reading and commenting on the consultation documents. But I am quite sure that this kind of transparency in policy-making is an essential element in building confidence in the regulatory system and in minimising unintended consequences of such decisions… Moving on then to the question of insurance. I think it is fair to say that the role of insurance companies within our economies, and indeed in the global economy is becoming increasingly noticeable, if not increasingly important. We are

all aware of the demographic challenges facing Governments around the world and the implications for the funding of an ageing population. Falling equity markets and lower long-term interest rates have further underlined how important a well capitalised and thriving life insurance sector is to the long term savings of hundreds of millions of people. The general insurance industry continues to be an essential mechanism in the transfer of risk from individuals, corporations and governments who do not have the knowledge, appetite or finances to take certain risks, to institutions that do. So, claims as diverse as the victims of the severe floods in the Eastern parts of Germany in 2002, to workplace diseases which may have incubation periods of several decades, to claims emerging from the terrorist attack on 11 September have all tested the resilience of the general insurance industry. Similarly, the re-insurance industry, which is unregulated in many countries, has come to the fore in the light of its crucial role in supporting catastrophe risk and in maintaining financial stability. It is probably true to say that, in the past, insurance regulation has been more focussed at the national level than, say, banking, although the work of the International Association of Insurance Supervisors has recently been more pro-active in working up standards on solvency, reinsurance and financial instruments such as securitisation and credit derivatives. We very much support this stronger co-ordination at an international level and, within the European Union the establishment of the Committee of European Insurance and Occupational Pension Supervisors (CEIOPS)… The insurance market in the UK comprises some 600 life and general insurers plus 200 small mutuals that we call Friendly Societies. Of course the UK also hosts the Lloyd’s of London Insurance Market, which has an underwriting capacity of some £15 billion.

When the FSA took over banking supervision from the Bank of England and insurance regulation from the Department of Trade and Industry, we took over two very different kinds of business. One very simple point is that the resourcing levels were very different indeed. We inherited almost 400 people for nearly 600 banks and just 70 people for over 800 insurance companies. There were some reasons to explain this remarkable difference. The insurance supervisors’ efforts were supplemented by the work of around 20 actuaries in the Government Actuaries Department, who have since also moved to the FSA. But the differences the staffing numbers, and the intensity of work, were nonetheless very striking. To simplify somewhat, the relationship between insurers and their supervisors was less close than was the case with banks. Insurance supervisors rarely visited the firms they oversaw. They typically did not know the senior management well, if at all. And the relationship was based more on lengthy statistical returns, analysed by actuaries, than on an understanding of business strategy and risk management, which is the foundation stone of banking supervision, at least its practice in the UK post BCCI and Barings [two banking failures in the early 1990s] era. The problems of Equitable Life and the lessons for the regulators are identified in a public report by the FSA’s internal auditor, Ronnie Baird. This report highlighted a number of deficiencies with the system of insurance regulation that we inherited. Under the auspices of the Tiner Project we have looked under the stone of almost every aspect of how we regulate insurance companies and our proposals for change are set out in our report on the future regulation of insurance of October 2002 and the several consultation papers we have published both before and after that report. Today, I would like to touch on three of these:

— risk assessments of insurers; — governance in life insurance companies, including the role of actuaries; — and risk-based capital for insurers. We have now completed risk assessments of the largest 200 life and general insurance companies. These risk assessments are conducted by both on-site visits to firms, including interviews with all levels of management, and desk-based analysis of information, both quantitative and qualitative, that we have gathered from firms and other sources. Our risk assessment focuses on both business risks and control risks. On business risks, we want to understand firms’ strategies and their process for developing and approving strategy. We will want to assess how they manage their underwriting risk, including pricing, excesses, terms and conditions and exclusions and how they manage their net underwriting risk through the re-insurance market. We will also want to understand how they identify and manage investment and credit risk. So for example what are their investment strategies about asset mix, duration, concentration and what risk parameters do they set for credit exposures for example on their bond portfolio and, importantly, in respect of their re-insurance protection. In the area of control risks, we look at the governance arrangements of the company — the decision-making structure, independent oversight and, ultimately, how the Board exercises its responsibilities for the proper management of the institution. We then assess the firms’ systems and controls and management of operational risk, such as legal risk, systems failure risk and so on. Once we have completed this risk assessment we write to the governing body of the company, usually the Board of Directors, setting out our assessment and the areas where we think the firm or the FSA needs to take further actions to mitigate the extent of the risks identified. These actions

may include firms agreeing to tighten procedures, say over the management of their outsourcing arrangements with third parties who process claims, or the FSA asking a firm of accountants to review the underwriting process where we may have concluded that controls may not be adequate and that a more detailed diagnostic assessment with recommendations for improvements needed to be made. Consistent with our focus on senior management responsibilities, we look to the Board to respond to us on all the points we make. Generally speaking, we have found this risk assessment process to be an effective way of understanding the extent to which individual firms may pose risks to market confidence, consumer protection or financial crime and that it provides a forum for an effective two-way dialogue with the firm and, for the 20 largest insurance firms, what we call a close and continuous relationship. …[Another] area of perhaps the most significant reform is in the field of solvency or what we might in the future refer to as risk-based capital. The drivers for change here are international accounting standards, the Solvency 1 and Solvency 2 EU Directives and the new Basel Accord for banks. Work on international accounting standards for insurance contracts and for financial instruments more generally, including progress towards fair value accounting will have a profound effect, especially for life insurance firms. The main effect is likely to be a shift away from creating reserves through a conservative valuation of liabilities, and away from the use of limits on the admissibility of assets as a means of making up for deficiencies in valuation. This will then require greater emphasis on capital to meet unexpected claims or losses and this in turn should create: greater clarity in assessing the true financial condition of an insurer; greater convergence between the accounting and regulatory treatments of balance sheet items, closing the gap between

accounting and economic reality; and greater cross-sector harmonisation and international convergence. …You might be surprised to hear me include a proposed international banking standard in the list of key international drivers towards modernising insurance regulation. But we do think that the framework provided by the Basle accord, consisting of three mutually reinforcing pillars — minimum capital requirements: supervisory review of a firms own internal capital assessment: and market discipline is one which has clear application in the insurance sector. That is not to say, I should emphasise, that we think the prudential system for banking should simply be transported across to insurance. Insurance is a different business to banking and we need a fit for purpose risk sensitive system of prudential regulation consistent with the three-pillar framework. In the life insurance sector, we have observed during the recent equity market volatility that the way in which the statutory basis of solvency works in falling equity markets can force perverse decisions on asset allocation. Indeed, given the relatively inelastic relationship between asset prices and mathematical reserves, and the materiality of life insurers as investors in the equity market, that the current rules can push the market to overshoot at both the top end and the bottom end of a cycle. We, therefore, plan to introduce a new approach to measuring the solvency of life insurers based on “realistic” assessment of assets and liabilities together with a “safety margin” or “capital buffer” to cover adverse market developments. The key factors in the realistic approach are: — Stating liabilities at the amount a firm expects to have to pay, discounted to a present value. Importantly, for with-profits business, this means quantifying both guaranteed and discretionary benefits, the latter being more sensitive to movements in asset values, including equity prices.

— Using capital markets techniques to quantify the value of options and guarantees that maybe embedded in policyholder contracts. This would mean taking into account the time value, intrinsic value and volatility relevant to the policyholders contractual rights. Firms are developing their valuation and risk management techniques in this area and the more advanced firms are now able to assess and value these commitments on the basis of stochastic models. Life insurance firms must also be able to demonstrate that it has sufficient financial resources to meet its realistic liabilities under stressed circumstances, as well as under normal conditions. This is why a safety margin is needed in excess of normal realistic liabilities. We expect to require firms to assess a range of factors including key market risks such as equity values, property values and movements in the yield curve, as well as credit risk shocks in the asset portfolio. …I have referred previously to the controls we expect firms to have in place in managing credit risk and our proposal to include a credit risk shock in the assessment of the capital buffer. Recently, we have conducted the first ever detailed study on some key aspects of credit risks among UK life insurers and, if I may, I would look to take a minute or two to summarise the results of the study. Credit risk is one of the many risks run by life insurance firms. It is the risk that a counterparty that owes them money will not pay the full amount promptly when it falls due. This risk exposure does not come from their direct customers; they pay premiums in advance to insure their benefits. Credit risk comes mainly from the investment operations of insurers, for example in investing reserves in bonds and other assets to build up a fund to meet future claims, or through hedging via derivative contracts. Credit

risk exposure also arises through the placing of reinsurance contracts and cash management operations. The nature of UK Life Insurers credit risk exposures has changed significantly over the last few years as they have switched out of equities during the bear market, mainly into bonds. From information gathered by FSA we estimate that life insurance firms sold about £30 billion of equities from their with-profits funds during 2002. We anticipate that most of this was reinvested in bonds. Detailed information on credit risk exposures from holdings of bonds and similar securities has not been routinely gathered through the annual returns so a survey of firms with large exposures in corporate bonds has recently been conducted. The survey covered about 50 of the larger life insurers in UK with bond portfolios in excess of £120 billion in total. The results of this survey indicate that the industry in the UK has generally adopted investment policies that set appropriate limits for credit risk appetite and for exposures to individual counterparties. The investment portfolios generally comprise good quality credit risks consistent with the stated investment policies, and the reserves set up for credit risk are, on average, what we would expect, given the loss experience that they have suffered. The survey was conducted by sending questionnaires to the larger life insurers in the UK and analysing the data contained in the completed questionnaires. Information was requested on investment policies with specific focus on the appetite for credit risk, exposures to individual counterparties, and exposures to market sectors. Clearly defined limits were set by most companies for the maximum exposure to credit risk, and about half also set a target level for the credit exposure that they wanted to take on, within the maximum set. Clear limits were also set for exposure to any one counterparty, although only in the investment portfolio. Some firms had defined rules for exposures to

market sectors, though most firms said only that they maintained well-diversified portfolios. …Information was also gathered on reserving. This is a very technical area. Assets are brought in to the balance sheet at market value, a valuation basis that should make appropriate provision for all risks, including credit risk. Firms must make a deduction for risk from the redemption yield on the asset in setting the basis for calculating technical provisions for statutory purposes. The bases described for making these deductions would produce, on average, deductions at a reasonably prudent level. Some firms also had procedures for limiting the risk-adjusted yields on bonds where these would otherwise be unusually high. On the non-life side we will be publishing a consultation paper in the next week or two on a risk-based enhanced regulatory capital requirement. We intend to decompose risk into three main components: insurance risk, counter party risk and market risk. Within these, different capital charges will be applied to different types or classes of business to reflect the different risk in each case. So, for example, within insurance risk, household, motor and travel insurance might be subject to a lower risk weighting than long term liability insurance. Similarly, asset risk charges will aim to capture, at least to some extent, counter-party risk and market risk — including interest rate risk — by applying different risk weightings to different types of assets. We are not, as I have said earlier, aiming for a zero failure regime but we do want the minimum requirement to reflect a reasonably high level of confidence that an insurer will remain solvent even if subject to a plausible range of adverse shocks. We also think our proposed approach introduces much greater risk sensitivity into the requirement, aligns regulatory capital more closely to economic capital and allows for a more transparent measure of capital adequacy. At this stage, we are simply consulting on an approach to the calculation of enhanced regulatory

capital and we will work closely with the industry to determine whether our proposed calibrations are appropriate, what impact the new tests have on the level of insurance company capital and when the new tests should be introduced and in what form. Looking forward, we will afford insurers the opportunity to use internal models and stress and scenario tests to determine their own level of capital required to support their business. We will take into account this internal capital assessment in considering whether we should grant waivers to allow firms to operate at a level of capital lower than that determined by our rules. All of this presents both the regulator and the industry with significant challenges. There is an urgent need to deepen and broaden the pool of resources within the insurance industry who are able to lead the development and implementation of these new concepts.’

Note: For the Tiner Report, see Financial Services Authority, The Future Regulation of Insurance: A Progress Report (‘The Tiner Report’) (London, FSA, 2002). [213] Howard Davies (chair, FSA), “A New Approach to Insurance Regulation”, The Geneva Association 30th General Assembly, London, 12 June 2003 (www.fsa.gov) ‘To simplify somewhat, the relationship between insurers and their supervisors were less close than was the case with banks. Supervisors very rarely visited the firms they oversaw. They typically did not know the senior

management well, if at all. And the relationship was based more on lengthy statistical returns, analysed by actuaries, than on an understanding of business strategy and risk management, which is the foundation stone of banking supervision, at least as practised in the UK post BCCI and Barings. To simplify, once again, our approach at the FSA is to work towards some degree of convergence between these two dramatically different styles of supervision. Over the last five years we have, in net terms, reduced the resources devoted to banking supervision, and banks have paid lower fees to us, as a result. By contrast, we have increased the numbers of insurance supervisors quite considerably…Also, we have broken down the barriers between the two groups. We now supervise the largest companies, whatever their principal line of business, on a group basis, so the major British insurance groups are now handled by our Major Financial Groups Division, rather than by our Insurance Division. …I think it is fair to say that, in different ways and different places, other integrated regulators around the world are moving in a similar way, though perhaps none — so far — have gone quite as far as we have in integrating different disciplines. Why have we done this? Is a reasonable question to ask. What was wrong with the old approach? Had it not served the industry well over a number of years? It may be that the old approach was appropriate at the time it was devised. Though I note that there have been a surprising number of general insurance failures over the years. I do not subscribe to the view that regulators should seek to prevent all failures — far from it. We have explicitly said that we do not plan to oversee a zero failure regime. But in the last five years, the Financial Services Compensation Scheme has paid £312mn to policyholders,

and is dealing with claims arising from the failure of 25 general insurers, and one small life assurer. More importantly, the role insurance companies play in the financial system, and the impact of their activities on financial stability, has changed significantly. In the first place, insurers have been moving into other types of business, notably into banking itself. Insurers have been large players in the derivatives market, particularly taking on sizeable volumes of credit risk from the banking sector through credit derivatives… And on the life insurance side, highly volatile and bearish equity markets have revealed unexpected vulnerabilities, and have starkly demonstrated that elements of the prudential regime we inherited could in certain circumstances add additional downward pressure to markets, and create perverse incentives. This is true elsewhere, too. Indeed some other countries have additional problems — such as legislated guaranteed rates of return — which have put additional pressure on their companies’ solvency. These general trends, and the specific difficulties of Equitable Life and Independent Insurance, have caused us to undertake an extensive rethink of our approach to insurance supervision in the UK. There is not time today for a comprehensive review of those changes. And, in any event, we have set out the details in a number of published papers. So let me confine myself to two general points, which I hope will be of interest to others here who are not subject to the tender care of the FSA. I will talk briefly about the character of the relationship we want to have with insurers, and then say something about the broad lines of the changes to the prudential regime which we envisage. …When we moved to full integration of the different regulatory bodies which came together in the FSA, we decided that we needed a single risk model to determine

our allocation of resources. We have now developed such a model, whose architecture is built around our four statutory objectives: maintaining confidence in the financial system, protecting consumers, promoting public understanding of the financial system and fighting financial crime. Using that model we have classified all 12,000 firms we oversee according to the risks they pose to those objectives. And we have then put them into categories, which are used to determine the amount of effort we think it appropriate to put in. Though the procedure is somewhat complex the outcome is straightforward. There are A firms, B firms, C firms and — wait for it — D firms. D firms are small, and we generally supervise them on a remote basis, monitoring their financial returns, but not visiting them in a systematic way. Many of the friendly societies — small mutual insurers — are in this category. At the other extreme there are A firms, with which we think we need a close, continuous, and upfront and personal relationship. It sounds fun — and sometimes it even is. The net result of this categorisation, which is only just complete, is that we have 70 firms in the A box, and of them 22 are insurers. Wild horses would not drag the names of these firms out of me… I think it is fair to say that, initially, there was some nervousness in the lodges and covens in which insurers meet, about the consequences of this new approach. But I hope it is also now true to say that both sides see the advantage of a closer relationship. In a volatile and risky market environment, in particular, it is crucial for the regulators and the regulated to understand each other well. And within that relationship we think it important for us to reach a view on the quality of management, and also on the quality of risk management and control systems. Furthermore, we think it important that firms themselves know how we see them, and how they compare with best of breed in each case. So the risk assessment is sent to the full

Board, and our supervisors now often make a presentation to the Board. That follows a practice we introduced in banking supervision in the late 1990s. We think Boards should know how the regulators see them.’

Note: In another speech Howard Davies said, ‘When the Authority was established there was some concern about the way in which it would interact with the Bank of England, which retains responsibility for the stability of the financial system as a whole. Those concerns have proved groundless. That is partly attributable to the structured relationship established under the Tripartite Standing Committee, which allows the Treasury, the Bank and the FSA to monitor trends in financial markets, and potential threats to their stability.’ (“Speech to FSA Annual Meeting, London”, 17 July 2003 (www.fsa.gov.uk))

2.5 Lloyd’s Insurance Market The Society of Lloyd’s is not an insurer, but provides the environment — both physical, in terms of buildings, and legal, in terms of bye-laws by which business is regulated and members controlled — within which the Lloyd’s insurance market operates. Under legislation in 1871 its bye-laws acquired legislative status. An act of 1911 set up a guarantee fund to ensure that all liabilities under policies taken out at Lloyd’s would be met. The principal legislation

is the Lloyd’s Act 1982, which established a new constitutional structure. Under this Lloyd’s is governed by a Council, whose working members form the Committee of Lloyd’s. In practice, the Committee undertakes the key roles of making bye-laws and issuing codes of practice relating to the market. Disciplinary functions are in the hands of the Disciplinary Committee and the Appeal Tribunal, both of which were also constituted under the 1982 Act. Since the 1970s Lloyd’s has been beset with a serious of problems, which came to a head in the 1980s. There were a number of catastrophes involved risks underwritten at Lloyd’s, such as the Exxon Valdez disaster and the massive claims in the USA for injuries related to asbestos. In addition, the market’s internal organisation threw up some problems: the London Market Excess of Loss Spiral, under which risks were underwritten and then reinsured within a small number of Lloyd’s syndicates, placed pressure on the Members who constituted those syndicates and who provided their financial backing; and large calls on Members, whose liability was unlimited, forced many into bankruptcy. There were a series of actions alleging negligence in the underwriting practices employed in the market. During the 1990s major reforms were introduced to reorganise the market, deal with past liabilities and settle litigation brought by Members. For discussion of the law on the formation of insurance contracts at Lloyd’s, see chapter 5, Part 5.6.

[214] FSA and Society of Lloyd’s, Supervision Arrangements for Underwriting Agents: Enforcement Co-operation Arrangements (London, FSA, 2003) (www.fsa.gov) ‘Under Lloyd’s Act 1982 the Council of Lloyd’s has power to regulate and direct the business of insurance at Lloyd’s. The 1997 Regulatory Review Group stated that the objective of Lloyd’s regulation was to provide reasonable safeguards for Lloyd’s policyholders, members and component businesses in order to establish a basis for confidence that Lloyd’s is a solvent and soundly managed market in which to do business. To that end, Lloyd’s regulation seeks to set and enforce standards designed to ensure that: — the market and those trading in it are solvent; — those doing business in the market are competent and honest; — all market users are fairly and impartially treated; — the market is as transparent as possible; and — the market is not misled, manipulated or abused.’

Since the FSMA, although the FSA is responsible for ensuring compliance, much of the work of supervision has been left to the Society of Lloyd’s, (see, FSA, Lloyd’s Sourcebook (London, FSA, 2001); FSA and Society of Lloyd’s, Supervision Arrangements for Underwriting Agents: Enforcement Co-operation Arrangements (London, FSA, 2003) (www.fsa.gov). Nevertheless, the FSA retains the power to subject Lloyd’s to direct regulation.

2.6 International Harmonisation

Competition, innovation and technology have meant that insurers are increasingly looking outside their domestic markets and their traditional lines of business. Multifunctionalism (insurers engaging in non-insurance financial business, such as banking), multinationalism (insurers operating in different countries through branches, subsidiaries and crossborder selling) and globalisation (the interconnectedness of financial markets across the world) has posed problems for regulators. The first is that insurers may be entering markets and businesses with which they are unfamiliar and this may expose them to additional risks. In addition, regulators are confined by territorial boundaries, and, in many countries, they are tasked to deal with just one aspect of the financial services industry. These issues were first confronted in the banking sector by the Basel Committee on Banking Supervision, which was set up by the G10 countries in 1974 when the collapse of Bankhaus Herstatt exposed the problems of supervising international banks. The Basel Committee has no legal powers, but its proposals have acquired a powerful weight among supervisors. The Committee developed the idea that the supervisor in the state in which a bank is authorised (the home state) should undertake supervise the bank’s entire operation (consolidated supervision). This rested a good deal of responsibility on supervisors and the concern was that if home supervision was not adequate that might affect other countries in which the bank operated. The Committee, therefore, proposed that host states

should assess the competence of a bank’s home supervisor and, if dissatisfied, they could restrict the operations of the bank. This also sought to address the problem of the so-called ‘race to the bottom’ whereby states sought to attract banks by offering a low level of regulation. Basel also emphasised the importance of information exchange between supervisors. Another facet of the Committee’s work has been to set minimum standards in the area of capital adequacy and encourage countries to adopt these as a means of facilitating the supervision of international financial firms. The Basel Committee prompted the establishment of the International Association of Insurance Supervisors (the IAIS). This was set up in 1994, but, while Basel has a limited membership, the IAIS draws its members from around one hundred jurisdictions and welcomes about 60 observers from the industry and professional associations to its meetings. The Basel Committee, the IAIS and the International Organisation of Securities Commissions have established the Joint Forum for dealing with issues of mutual concern, including the issue of multinational firms (the papers of the Joint Forum are available at www.iaisweb.org; see also papers from the Executive Seminar on Insurance Regulation and Supervison held under the auspices of the Organisation for Economic Co-operation and Development, Tokyo, 1999, www.oecd.org). Following the example of the Basel Committee, the IAIS has created 28 core principles, which are intended to provide benchmarks for an effective

supervisory system and for assessing the effectiveness of an existing system (Insurance Core Principles and Methodology, October 2003, www.iaisweb.org). These core principles are supplemented by further principles, supervisory standards, guidance notes and discussion papers: so, for instance, the IALS has issued sets of principles on the minimum supervisory requirements for reinsurers (2003), on capital adequacy and solvency (2002), on the supervision of insurance provision through the internet (2000) and on the supervision of international insurers and insurance groups and their cross-border operations (1997, amended 1999). The expectation is that member national supervisors will meet these standards, and they are also used by the International Monetary Fund in conducting its Financial System Stability Assessments of individual countries (see [206]). [215] C Mayer, ‘Regulatory Principles and the Financial Services and Markets Act 2000’ in E Ferran and C Goodhart, eds, Regulating Financial Services and Markets in the Twenty First Century (Oxford, Hart, 2001) ‘If institutions are mobile between markets then they will seek the regulatory and tax regimes that impose lowest burdens. If investors are mobile between markets then they will select the regimes that provide their preferred combination of investor protection and cost of investment. They will not necessarily select lowest cost regimes any

more than they automatically choose highest risk investments. Where there are systemic risks then there are spillovers from one institution and market to another. Individual regulatory agencies will not take adequate account of the international repercussions of failures in their domestic markets. The protection of financial and monetary systems therefore requires international harmonisation of regulations. In the absence of such harmonisation, competition creates a run to the bottom. However, where systemic risks are not present, regulation need not and should not be harmonised. Competition between institutions and between financial centres in selecting different standards encourages product variety and efficiency in the delivery of financial services.’

Note: Although Mayer’s essay is concerned primarily with issues relating to banking where the effect that a wholesale collapse (that is, systemic risk) would have on a national economy is greater than a collapse among insurers, similar considerations can be applied to the discussion of insurance, particularly in view of the spread of multifunctional financial firms. [216] Clive Briault (Director, Prudential Standards, FSA), “New Prudential Regime for Insurers”, City & Financial Conference on the FSA’s Proposed Capital Adequacy and Reporting Standards for Insurance Companies’, London, 17 October 2002 (www.fsa.gov.uk)

‘[One of the drivers] for change in prudential insurance regulation is international developments. Three of these are of particular importance. Work on international accounting standards for insurance contracts, and for financial instruments more generally, including progress towards fair value accounting, will have a profound effect, especially for life insurance firms. The main effect is likely to be a shift away from creating reserves through a conservative valuation of liabilities, and away from the use of admissibility limits on assets as a means of making up for deficiencies in valuation. This will then require greater emphasis on capital to meet unexpected claims or losses. And this in turn should create: — Greater clarity in assessing the true financial condition of an insurer; — Greater convergence between the accounting and regulatory treatments of balance sheet items, closing the gap between accounting and economic reality; and — Greater cross-sector harmonisation and international convergence. Next, progress in the EU towards the Solvency 2 Directive. The current minimum EU standards are certainly out of date and seriously flawed. As is generally accepted by the nonlife industry, the current required margin of solvency is set too low. It therefore provides an inadequate buffer to absorb unexpected losses. Even for a low-risk non-life insurer, past experience has demonstrated that there are plausible loss scenarios in which the capital cost would be a multiple of two or more times the current required solvency margin. Most non-life firms therefore choose voluntarily to hold well in excess of this required minimum. Moreover, the current EU minimum solvency margin for non-life insurers is calculated by reference to volume, not

risk, measures. We even have the perverse outcome that a decline in premium income will generate a lower solvency requirement, just at the time when the profitability of an insurer may be under strain. This absence of risk-sensitivity also means that the current standard provides no incentive for non-life insurers to exercise good risk management. And it provides no basis on which either firms or their regulators can track actual capital relative to the capital required by the risks that the insurer is facing. As yet, Solvency 2 remains on the drawing board and is unlikely to be implemented until 2007 at the earliest. But we hope — and are actively engaged in trying to ensure — that the new Solvency 2 Directive will be a major step in the direction of a genuinely risk-sensitive and properly calibrated approach to solvency requirements for both life and non-life insurers. We would also like to see a much greater role for scenario and stress tests in the prudential framework. But at this stage it is impossible to be certain about what the Solvency 2 Directive will contain. The final strand of the key international developments is the proposed new Basel Accord for internationally active banks. Some of you might be surprised to hear me include a proposed international banking standard in the list of key international drivers towards modernising the insurance regime. But this shows how significantly things have changed in recent years. The proposed new Basel Accord consists of three mutually reinforcing pillars — minimum capital requirements; supervisory review of a firm’s own internal capital assessment; and market discipline. It recognises, in particular, that ultimate responsibility for managing risk and ensuring that capital is held at a level consistent with a bank’s risk portfolio rests with the bank’s management. The Accord reflects the view that regulation needs to move beyond exclusive reliance on the external imposition of formula-based capital requirements.

Pillar one of the Accord updates the capital formula but also encourages the alternative use of internal modelling for credit and operational risks, in addition to the market risk models that banks can already use if they meet the challenging entry criteria. Pillar two requires banks to have adequate processes for assessing their overall capital adequacy in relation to their risk portfolio and a strategy for maintaining their capital levels. Supervisors are tasked with reviewing and evaluating banks’ internal capital adequacy assessments and strategies. One key purpose of Pillar two is to ensure that firms hold adequate capital against risks that are not captured — or are captured inadequately — under Pillar one. Pillar three recommends minimum levels of public disclosure of capital, risk exposures and capital adequacy. We believe that this three-pillar framework is no less relevant to the prudential regulation of insurance firms. While many of the details of the Accord cannot transfer directly to the insurance sector, the underlying philosophy has informed our own proposals for the reform of the insurance prudential regime.’

[217] International Association of Insurance Supervisors: Bye-laws, 1999 (www.iais.web.org) ‘1. Preamble THE INSURANCE SUPERVISORS referred to in PART 2 of these bye-laws RECOGNIZE that the insurance industries and markets are of fundamental economic and social importance, nationally and internationally; RECOGNIZE that most domestic insurance markets are increasingly being integrated into a global market; WISH TO

— formally establish an independent forum for meetings of insurance supervisors for their mutual benefit; — engender awareness of common interests and concerns among such insurance supervisors; — encourage wide international personal and official contacts among insurance supervisors; — enhance the ability of insurance supervisors to better protect insurance policyholders and to better promote and secure efficient insurance markets. RESOLVE — to co-operate together to ensure improved supervision of the insurance industry on the domestic as well as on an international level in order to maintain efficient, fair, safe and stable insurance markets for the benefit and protection of policyholders; — to unite their efforts to develop practical standards for supervision of insurance that members may choose to apply; to liase or co-operate with other relevant international entities; to provide mutual assistance to safeguard the integrity of markets; — to exchange information on their respective experiences in order to promote the development of domestic insurance markets.’

2.7 European Harmonisation A key feature of the European Union is the creation of a single market in goods and services. In the context of the financial services industry, the idea is to provide a common framework that allows insurers, which are established within a member state, to operate freely throughout the EU, either by setting up branches in other countries or by selling across

borders, without having to seek authorisation in each country. The first problem was to decide which country should regulate a firm: where, for example, a French insurer sets up an insurance business in the United Kingdom, should regulation be undertaken by France as the home state or the UK as the host? In line with the approach taken by the Basel Committee on Banking Supervision, the choice has fallen on the home state, that is the country where the insurer is authorised, subject to limited powers given to the host to restrict entry. This required measures to ensure that each member state operated a regulatory regime with which the other member states were content. The approach has been to introduce a measure of harmonisation so that all member states authorise and supervise insurers according to the same minimum standards. The reforms have been achieved in three stages: the first generation of directives required member states to allow insurers to become established without discrimination on grounds of nationality, but retained host state control; the second generation entitled an insurer established in one member state to engage in insurance business in another member state without further authorisation requirements; the third generation merged the first two by removing the right of the host to insist on an insurer obtaining authorisation if it was already authorised in another member state. Significantly for the UK, which has always countenanced insurers engaging in both nonlife and life business, the EU regime requires a strict separation between these types of business. No new

companies may offer both types and existing companies are required to maintain a strict separation between them. See FSA, Interim Prudential Sourcebook: Insurers (London, FSA, 2002), chapter 3; A McGee, The Single Market in Insurance: Breaking Down the Barriers (Dartmouth, Ashgate, 1998); R Merkin and A Rodger, EC Insurance Law (London, Longman, 1998); R Merkin, ed, Colinvaux & Merkin’s Insurance Contract Law (London, Sweet & Maxwell, 2002). Concern that the single market project was not progressing rapidly enough led to the establishment of the Financial Services Action Plan (Commission, Financial Services: Implementing the Framework for Financial Markets: Action Plan, COM (1999) 232). A recent Commission document on the internal market acknowledged, ‘Considerable differences in regulation from one Member State to the next — and the lack of confidence in each others regulatory systems — are the main reason why free movement of services has so far been more a legal concept than a practical reality. Because of the complex and intangible nature of many services — and the importance of the know-how and qualifications of the service provider — they are generally subject to more wide-ranging and complex legal rules than goods.’ (EC Commission, Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions, COM (2003) 238 final)

The paper does, however, go on to assert that the Action Plan has meant that, at least in the area of financial services, good progress is being achieved. Nevertheless, in the enthusiasm for the single market it is important not to lose sight of the consumer; indeed, the Action Plan has flagged this as a key issue. The EU has also sought to deal with multifunctional firms or financial conglomerates, which pose problems for a system that is based on an assumption of separation between these markets: so, for instance, there are separate directives on insurance and on credit institutions (banks and similar firms). The EU directive on supplementary supervision (see [214]) seeks to tackle this issue, but problems remain both in maintaining proper lines of communication where a regulatory system has separate supervisors for different sectors and in dealing with a firm whose activities spread outside the EU. Finally, the EU has eschewed the idea of harmonising insurance contract law: for instance, in Council Directive 92/49/EEC of 18 June 1992, which is one of the third generation of insurance directives, it is declared: ‘(18) Whereas the harmonisation of insurance contract law is not a prior condition for the achievement of the internal market in insurance; whereas, therefore, the opportunity afforded to the Member States of imposing the application of their law to insurance contracts covering risks situated within their territories is likely to provide adequate safeguards for policyholders who require special protection;’

[218] Directive on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate (2002/87/EC) ‘Whereas: (1) The current Community legislation provides for a comprehensive set of rules on the prudential supervision of credit institutions, insurance undertakings and investment firms on a stand alone basis and credit institutions, insurance undertakings and investment firms which are part of respectively a banking/investment firm group or an insurance group, ie groups with homogeneous financial activities. (2) New developments in financial markets have led to the creation of financial groups which provide services and products in different sectors of the financial markets, called financial conglomerates. Until now, there has been no form of prudential supervision on a group-wide basis of credit institutions, insurance undertakings and investment firms which are part of such a conglomerate, in particular as regards the solvency position and risk concentration at the level of the conglomerate, the intra-group transactions, the internal risk management processes at conglomerate level, and the fit and proper character of the management. Some of these conglomerates are among the biggest financial groups which are active in the financial markets and provide services on a global basis. If such conglomerates, and in particular credit institutions, insurance undertakings and investment firms which are part of such a conglomerate, were to face financial difficulties, these could seriously destabilise the financial system and affect individual depositors, insurance policy-holders and investors.

(3) The Commission Action Plan for Financial Services identifies a series of actions which are needed to complete the Single Market in Financial Services, and announces the development of supplementary prudential legislation for financial conglomerates which will address loopholes in the present sectoral legislation and additional prudential risks to ensure sound supervisory arrangements with regard to financial groups with cross-sectoral financial activities. Such an ambitious objective can only be attained in stages. The establishment of the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate is one such stage. (4) Other international forums have also identified the need for the development of appropriate supervisory concepts with regard to financial conglomerates. (5) In order to be effective, the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate should be applied to all such conglomerates, the cross-sectoral financial activities of which are significant, which is the case when certain thresholds are reached, no matter how they are structured. Supplementary supervision should cover all financial activities identified by the sectoral financial legislation and all entities principally engaged in such activities should be included in the scope of the supplementary supervision, including asset management companies. (6) Decisions not to include a particular entity in the scope of supplementary supervision should be taken, bearing in mind inter alia whether or not such entity is included in the group-wide supervision under sectoral rules. (7) The competent authorities should be able to assess at a group-wide level the financial situation of credit institutions, insurance undertakings and investment

firms which are part of a financial conglomerate, in particular as regards solvency (including the elimination of multiple gearing of own funds instruments), risk concentration and intra-group transactions. (8) Financial conglomerates are often managed on a business-line basis which does not fully coincide with the conglomerate’s legal structures. In order to take account of this trend, the requirements for management should be further extended, in particular as regards the management of the mixed financial holding company. (9) All financial conglomerates subject to supplementary supervision should have a coordinator appointed from among the competent authorities involved. (10) The tasks of the coordinator should not affect the tasks and responsibilities of the competent authorities as provided for by the sectoral rules. (11) The competent authorities involved, and especially the coordinator, should have the means of obtaining from the entities within a financial conglomerate, or from other competent authorities, the information necessary for the performance of their supplementary supervision. (12) There is a pressing need for increased collaboration between authorities responsible for the supervision of credit institutions, insurance undertakings and investment firms, including the development of ad hoc cooperation arrangements between the authorities involved in the supervision of entities belonging to the same financial conglomerate. (13) Credit institutions, insurance undertakings and investment firms which have their head office in the Community can be part of a financial conglomerate, the head of which is outside the Community. These regulated entities should also be subject to equivalent and appropriate supplementary supervisory arrangements which achieve objectives and results similar to those pursued by the provisions of this

Directive. To this end, transparency of rules and exchange of information with third-country authorities on all relevant circumstances are of great importance. (14) Equivalent and appropriate supplementary supervisory arrangements can only be assumed to exist if the thirdcountry supervisory authorities have agreed to cooperate with the competent authorities concerned on the means and objectives of exercising supplementary supervision of the regulated entities of a financial conglomerate.’

3 Insurance Intermediaries Insurance products are sold through intermediaries often termed agents or brokers. Even where an insured purchases insurance from an insurance company directly, as is frequently done nowadays via the internet or telephone, issues of agency still arise because the company as a metaphysical entity has to conclude business through the medium of its human agents. The circumstances surrounding the conclusion of the insurance contract will become critical should the parties become involved in a dispute and, as will be seen, an intermediary’s authority to bind his or her principal together with the duties owed to the principal will be central questions. This chapter is divided into five parts: (3.1) types of insurance intermediary and the regulatory regimes; (3.2) the authority of intermediaries; (3.3) identifying an intermediary’s principal and the imputation of knowledge; (3.4) the duties owed by an intermediary to the principal; and (3.5) reform.

3.1 Types of Intermediary and Regulation

Perhaps surprisingly given the well-documented scope for abuse by commission hungry insurance agents, it was not until relatively recently that those who sell insurance products were subjected to any form of systematic regulation. Following a Consumer Council’s report in 1970, the Insurance Brokers (Registration) Act 1977 introduced for the first time a system of formal registration and conferred upon the profession the power to regulate itself. This was followed by the Financial Services Act 1986 which, in accordance with the ideals of the government of the day, sought to reinforce the notion of self-regulation across the financial services industry. The 1986 Act was restricted to long term insurance contracts (ie investment contracts). General insurance was regulated by the Insurance Companies Act 1982. But to complicate matters the 1982 Act also applied to long term insurance as well and so there were a complex set of provisions aimed at preventing overlap between the two statutes. Shortly after the present Labour Government came to power in 1997 the Treasury announced a root and branch reform programme for the regulation of the financial services industry. The backdrop to this initiative was the scandal surrounding the mis-selling of insurance that surfaced in the late 1980s particularly in relation to pensions products and endowment policies linked to mortgages. This reform process culminated in the Financial Services and Markets Act 2000 (hereafter, FSMA 2000) which repealed the Financial Services Act 1986. A new body, the Financial Services Authority (FSA), was

established to take over the role of the Securities Investment Board (the body that was charged with overall responsibility for ensuring compliance with the Financial Services Act 1986). When the FSMA 2000 came fully into force on 1 December 2000, the FSA was placed centre stage as the primary supervisory organ for financial services. Although the new Act preserves the notion of self-regulation for general insurance business, the supervision of life business remains stricter, as it was under the 1986 Act, in that intermediaries are required to obtain authorisation by the FSA to conduct ‘regulated activities’ which includes dealing in or arranging deals for others in ‘contractually based investments’ (ie long term insurance). Many of the provisions found in the Insurance Companies Act 1982 together with the marketing rules that applied to investment businesses developed under the 1986 Act are replicated in the FSMA 2000. In essence, there are two types of insurance intermediary: independent intermediaries and tied agents. The latter type may sell life policies with only one insurance group, or, in the case of general insurance products, with up to six insurers. Independent intermediaries, on the other hand, are free to deal with any insurer. Prior to the FSMA 2000 only independent agents who chose to register as ‘insurance brokers’ under the Insurance Brokers (Registration) Act 1977 (repealed by the FSMA 2000 on 30 April 2001) were subject to a statutory regulatory regime in the form of the Code of Conduct promulgated by the Insurance Brokers Registration

Council. Registered insurance brokers had to satisfy financial, accounting and business requirements and maintain professional indemnity insurance (see John Lowry and Philip Rawlings, Insurance Law: Doctrines and Principles (Oxford, Hart Publishing, 1999) 337 et seq). The Code continues to be applicable to those who are members of the Institute of Insurance Brokers and subject to the Insurance Brokers Regulatory Council, an alternative regulatory body (and competitor) to the General Insurance Standards Council (see below). Independent intermediaries who did not call themselves ‘insurance brokers’, opting instead for titles such as ‘insurance advisers’, ‘insurance agent’ or ‘insurance consultants’, were outwith the 1977 Act. Such agents were subject to a self-regulatory scheme issued by the Association of British Insurers: General Insurance Business — Code of Practice for all Intermediaries (Including Employees of Insurance Companies) other than Registered Insurance Brokers (the revised version took effect in January 1989). The ABI Code also applied to tied agents and, as its title suggests, to employees of particular insurers. It also encompassed incidental intermediaries such as building societies, banks, travel agents, car dealers, utility companies, retailers (note that ‘incidental’ should not be equated with some minor activity: Dixons plc’s practice of selling extended warranties to customers purchasing electrical products from its stores generates approximately £100 million in profits and is currently the subject of a Competition Commission inquiry), and others who sold insurance

incidentally to carrying on their principal business. Further, incidental agents such as solicitors and accountants who sold investment products were required by the Financial Services Act 1986 to be independent or linked only to one insurer or marketing group. They could gain authorisation by a Recognised Professional Body provided their investment business did not exceed a certain threshold figure based on a percentage of their total business. The FSMA 2000 (Designated Professional Bodies) Order 2001 recognises, among others, the Law Society, the Institute of Chartered Accountants and the Association of Chartered Certified Accountants as designated professional bodies. For the government’s current thinking on such intermediaries, see the Treasury’s consultation paper, para 15 (below, [315]). Accredited Lloyd’s brokers, who enjoy a monopoly of placing business at Lloyd’s and placing reinsurance, were also regulated by the 1977 Act and therefore subject to the Insurance Brokers Registration Council’s Code of Conduct (albeit subject to stricter financial, accounting and indemnity insurance cover than was the case with registered insurance brokers). Additionally, Lloyd’s brokers are subject to the Lloyd’s Act 1982 (which is now supplemented by the FSMA 2000) and to the byelaws issued by the Council of Lloyd’s. The focus of the 1982 Act is on ensuring the independence of brokers from the managing agents of the syndicates with whom they place business.

3.1.1 General Council

Insurance

Standards

The initial approach of the Treasury was that the selling of general insurance, as opposed to life products, should not be subject to the FSA’s supervisory powers but rather the regulation of brokers and insurers dealing in general insurance would be overseen by a single, independent nonstatutory body namely, the General Insurance Standards Council (GISC). Membership is, for the time being, voluntary although Lloyd’s required all Lloyd’s brokers to become members with effect from 3 July 2000. Membership Rule F42 was fundamental to the cohesiveness of the new regime. It was drafted so as to prohibit a broker who was not a member of the GISC from transacting business with insurance companies that were members. The rule provided: ‘Subject to any Rule waiver issued by GISC, Members shall not, and shall ensure that their Appointed Agents and Appointed Sub-Agents shall not, in the course of their General Insurance Activities, deal directly with any person in circumstances which would involve that person in engaging in General Insurance Activities as an Intermediary where that person is not a Member.’

However, this rule was abandoned by the GISC when the Institute of Independent Insurance Brokers and the Association of British Travel Agents successfully challenged it as anti-competitive. In September 2001 the Competition Commission Appeal Tribunal,

reversing the Director General of Fair Trading, ruled that it was an undertaking that had the effect of distorting competition in the general insurance business market in the UK. In the wake of this finding the Government announced in December 2001 that it would impose a statutory regime for regulating brokers. It now seems that as from the 14 January 2005 the work of the GISC will be taken over by the FSA so that both general and long term insurance selling will be ‘regulated activitities’ (Treasury Press Notice 18, 11/02/03).

3.1.2 Self-Regulation under the GISC Rules The current scheme of self-regulation is based on the GISC Rules that are incorporated in the Membership Contract between the member and the GISC. They are summarised in the following extract from the Journal of Business Law (the full text of the two GISC Codes follows below, see [303] and [304]): [301] Julian Burling, “The Impact of the GISC” [2001] JBL 646 — Two codes setting out minimum standards in General Insurance Activities, from advice, through placing, to claims — one code for Private Customers and a less prescriptive code for Commercial Customers.

— E-commerce practice requirements and guidance on the provision of information or services to Private Customers through the internet. — Financial requirements for Intermediaries, comprising — insurance money segregation requirements, under which premiums and claims received on behalf of Customers (“Insurance Monies”) are to be paid into Insurance Bank Accounts, similar to the insurance broking accounts previously required by the IBRC and by Lloyd’s (but there is no requirement to segregate insurance moneys where the Intermediary is regulated by a recognised regulatory or professional body whose requirements provide an equivalent level of protection for Insurance Monies, or where the GISC is satisfied that the General Insurance Activities of the Intermediary are secondary to the main business activity of the Intermediary, or in certain other exceptional cases); professional indemnity insurance covering the General Insurance Activities of the Intermediary and its Appointed Agents and Appointed Sub-Agents; and solvency requirements for those Intermediaries required to segregate Insurance Monies. — Requirements as to the handling by Members of Customers’ complaints and, where necessary, the referral of such complaints to an “Approved Dispute Resolution Facility”, ie the Insurance Ombudsman Scheme, Financial Ombudsman Service, GISC Dispute Resolution Scheme or other approved dispute resolution schemes. — Competence and training requirements applicable to the employees of Members or of their Appointed Agents or Appointed Sub-Agents where they are acting on behalf of the Member. The Chartered Insurance Institute has been appointed as an accredited training provider; and

—

the new hundred multiple choice question “Foundation Insurance Test” will cover all insurance sellers from exhaust fitters to full-time insurance salesmen. Monitoring investigation and enforcement rules monitoring will be carried out by PwC and Ernst & Young on behalf of GISC. For the time being the emphasis will be on correction rather than punishment. GISC say that monitoring has so far been quite successful, cordial and constructive. Disciplinary action can be taken by the Enforcement Committee. No disciplinary proceedings have yet been instituted, although some warnings have been given. A Member may be ordered to pay compensation to a Private Customer, not exceeding £100,000 for any single act of misconduct. The Enforcement Committee may also intervene by means of Intervention Orders specifying steps which a Member is required or forbidden to take as to entering into specified transactions or disposing of or dealing with specified assets.

Note: The scope of the General Insurance Code and the role of the GISC are described in a leaflet published by the Council in 2000: [302] General Insurance Standards Council: New Insurance Watchdog (Leaflet Issued by the GISC 08/2000/COM008) ‘What is general insurance? General insurance covers products such as: — insurance for your home (buildings and contents), vehicles, caravans, boats and pets; — travel insurance;

—

private medical, dental and personal accident insurance; — extended warranty and breakdown insurance., — legal expenses insurance; and — payment protection for mortgages and other loans., but does not include life assurance and pensions. Important protection for you The GISC code sets out standards of good practice which all our members must follow when they deal with you. It gives you important protection and should help you to understand: — how our members must deal with you; — what information you should receive before you commit yourself to buying any insurance; and — how your insurance should be dealt with once you are covered. If the member fails to meet the standards of the code, and you suffer as a result, you have the right to complain under an independent complaints scheme which all our members must follow. Our members are monitored independently of GISC to make sure they follow the standards in the GISC code. What you should expect from GISC members Our members will: — act fairly and reasonably when they deal with you; — make sure that all their services meet our standards; — give you clear information on services and products before you buy, and after they confirm, your insurance; — make sure you have all the documents you need; — protect any personal information, money and property that they hold or handle for you., — handle claims fairly and quickly;

— give you advice on how to complain, if you need to; and — correct mistakes and handle complaints quickly. The full code explains these standards. If you would like a copy of the full code, please ask your insurer or anyone dealing with your insurance… The General Insurance Standards Council (GISC) is an independent organisation which regulates the sales, advisory and service standards of members (insurers and anyone dealing with your insurance). Its main purpose is to make sure that general insurance customers are treated fairly and properly.’

Notes: 1. As commented above, the GISC Rules encompass two Codes that lay down minimum standards for all insurers and intermediaries engaged in ‘General Insurance Activities’. 2. There is one code for private customers, the General Insurance Code, and one for nonconsumers, the Commercial Code. [303] The GISC General Insurance Code for Private Customers ‘The General Insurance Standards Council (GISC) The General Insurance Standards Council (GISC) is an independent organisation which was set up to regulate the sales, advisory and service standards of members (insurers, intermediaries (including brokers) and agents and anyone acting for them). Its main purpose is to make sure that general insurance customers are treated fairly. The Private Customer Code

This Private Customer Code sets the minimum standards of good practice which all members of GISC must follow when they deal with private customers. It gives you important protection and should help you to understand: — how insurers, intermediaries and agents, and anyone acting for them, must deal with you; — what information you should receive before you commit yourself to buying any insurance; and — how your insurance should be dealt with once it is in place. Insurance products and services covered by the Private Customer Code The Private Customer Code covers all types of general insurance products and services that are sold to private customers, including: — motor insurance; — home insurance — buildings and contents; — insurance for caravans, boats, pets and other property; — travel insurance; — private medical and dental insurance; — personal accident insurance; — extended warranty and breakdown insurance; — legal expenses insurance; and — payment protection insurance for mortgages and other loans. Understanding the Private Customer Code Within the Private Customer Code, ‘you’ means the private customer and ‘we’ and ‘us’ means the member of GISC (an insurer, intermediary or agent), and anyone acting for them, who you deal with… 1 OUR COMMITMENTS 1.1 As members of GISC, we promise that we will: — act fairly and reasonably when we deal with you;

— make sure that all our general insurance services satisfy the requirements of this Private Customer Code; — make sure all the information we give you is clear, fair and not misleading; — avoid conflicts of interest or, if we cannot avoid this, explain the position fully to you; — give you enough information and help so you can make an informed decision before you make a final commitment to buy your insurance policy; — confirm your insurance arrangements; — make sure that our service meets GISC’s standards; — handle claims fairly and promptly; — make sure you receive all the documentation you need; — protect any personal information, money and property that we hold or handle for you; and — handle complaints fairly and promptly. 2 MARKETING Advertising 2.1 We will make sure that all our advertising and promotional material is clear, fair and not misleading. 3 HELPING YOU FIND INSURANCE TO MEET YOUR NEEDS We will give you enough information and help so you can make an informed decision before you make a final commitment to buy your insurance policy. Explaining our service 3.1 We will explain the service we can offer and our relationship with you, including: — the type of service we offer; — whether we act for an insurer or act independently for you as an intermediary;

— whether we act as an agent of another intermediary or agent; and — the choice of products and services we can offer you. Matching your requirements 3.2 We will make sure, as far as possible, that the products and services we offer you will match your requirements: — If it is practical, we will identify your needs by getting relevant information from you. — We will offer you products and services to meet your needs, and match any requirements you have. — If we cannot match your requirements, we will explain the differences in the product or service that we can offer you. — If it is not practical to match all your requirements, we will give you enough information so you can make an informed decision about your insurance. Information about products and services 3.3 We will explain all the main features of the products and services that we offer, including: — who the insurer is; — all the important details of cover and benefits; — any significant or unusual restrictions or exclusions; — any significant conditions or obligations which you must meet; and — the period of cover. Information on costs 3.4 We will give you full details of the costs of your insurance, including: — separate insurance premiums for each of the individual products or services we are offering; — details of any fees and charges other than the insurance premium, and the purpose of each fee or charge (this will include any possible future fees or

charges, such as for changing or cancelling the policy or handling claims); — when you need to pay the premiums, fees and charges, and an explanation of how you can pay; and — if we are acting on your behalf in arranging your insurance, if you ask us to, we will tell you what our commission is and any other amounts we receive for arranging your insurance or providing you with any other services. Advice and recommendations 3.5 If we give you any advice or recommendations, we will: — only discuss or advise on matters that we have knowledge of, — make sure that any advice we give you or recommendations we make are aimed at meeting your interests; and — not make any misleading claims for the products or services we offer or make any unfair criticisms about products and services that are offered by anyone else. Customer protection information 3.6 We will explain the customer protection benefits under our GISC membership, including: — our complaints procedures, together with details of who you should contact first if you want to make a complaint; and — whether any of the products or services we are offering you are not covered by this Private Customer Code. Your duty to give information 3.7 We will explain your duty to give insurers information before cover begins and during the policy, and what may happen if you do not.

Quotes 3.8 If you want to consider the products or services we have offered you, we will: — confirm how long you have to take up your insurance on the terms we have quoted to you; — give you a written quote if you ask for one, including all the information you need to make an informed decision; and — give you a sample policy if you ask for one. Cooling-off period 3.9 Under the Private Customer Code, we have to give you certain information before you make your decision. If we have not given you this information when you buy your insurance (and you have not told us you do not want it), we will allow you a ‘cooling-off period’ of at least 14 days from the time you receive the information. If you do not want to continue with the insurance, you may cancel your cover within this period and get all your money back (as long as you have not made any claims). Choosing to receive limited information 3.10 If you want to buy your insurance without receiving all the information about the products and services that the Private Customer Code requires, we will keep a record of your agreement to this and there will not be a ‘coolingoff’ period. 4 CONFIRMING YOUR COVER We will confirm your insurance arrangements and provide you with full policy documentation. Confirming your cover 4.1 When we put your insurance arrangements in place, we will give you written confirmation of cover, including: — enough information so you can check the details of your cover;

— the date when your cover starts and the period of cover; — any certificates or documents which you need to have by law and — details of any ‘cooling-off’ period. Proof of payment 4.2 We will make sure that you have proof that you have paid the premiums, fees and charges. Full policy documents 4.3 We will send you full policy documentation promptly. 5 PROVIDING OUR SERVICE TO YOU We will make sure that our service meets the GISC’s standards. Questions 5.1 We will answer any questions promptly and give you help and advice if you need it. Changes to your policy 5.2 We will deal with any changes to your insurance policy promptly. We will: — give you written confirmation of any changes to your policy; — give you full details of any premiums or charges that you must pay or we must return to you; — give you any certificates or documents that you need to have by law; — make sure that you have proof that you have paid extra premiums, fees and charges; and — send you any refunds of the premiums, fees or charges that are due to you. Notice of renewal 5.3 We will tell you when you need to renew your policy, or that it will end, in time to allow you to consider and

arrange any continuing cover you may need. We will: — explain the renewal terms (if offered); — tell you about any changes to the cover, service or insurer being offered; — explain your continuing duty to give insurers information; and — send you any certificates or documents that you need to have by law. Expiry or cancellation 5.4 When your policy ends or is cancelled, we will send you all the documentation and information that you are entitled to, if you ask for it. 6 CLAIMS We will handle claims fairly and promptly. Information on claims procedures 6.1 When you first become a customer, we will give you details of how you can make a claim and tell you what your responsibilities are in relation to making claims. If you make a claim 6.2 If you make a claim: — we will respond promptly, explain how we will handle your claim and tell you what you need to do; — we will give you reasonable guidance to help you make a claim under your policy; — we will consider and handle your claim fairly and promptly, and tell you how your claim is progressing; — we will tell you, in writing, and explain why, if we cannot deal with all or any part of your claim; and — once we have agreed to settle your claim, we will do so promptly. 7 DOCUMENTATION

We will make sure you documentation you need.

receive

all

the

correct

Information in writing 7.1 We will give you information in writing, especially if there is a lot of information or if it is very complicated. Standards of written information 7.2 We will make sure that all the written information and documents we send you are clear, fair and not misleading. Sending you documentation 7.3 We will send you all the documentation you need promptly. Withholding documentation 7.4 We will not withhold any insurance documentation from you without your permission, unless we are allowed to do so by law. If we do withhold any documents, we will make sure that you receive full details of your insurance cover and any documents that you need to have by law. 8 CONFIDENTIALITY AND SECURITY We will protect your personal information, money and property. Confidentiality 8.1 We will treat all your personal information as private and confidential to us and anyone else involved in providing your insurance, even when you are no longer a customer. We will not give anyone else any personal information about you, except: — when you ask us to or give us permission; — if we have to because we are a member of GISC; or — if we have to by law. Security

8.2 We will take appropriate steps to make sure that any money, documents, other property or information that we handle or hold for you is secure. 9 COMPLAINTS We will handle complaints fairly and promptly. Information on complaints procedures 9.1 When you first become a customer, we will give you details of our complaints procedures in our policy or service documentation. If you make a complaint 9.2 If you make a complaint: — we will acknowledge it promptly, explain how we will handle your complaint and tell you what you need to do; and — we will consider and handle your complaint fairly and promptly, and tell you how your complaint is progressing. Dispute resolution scheme 9.3 We are a member of a recognised independent dispute resolution scheme. If you are not happy with our final response to your complaint, we will tell you how you can contact this scheme. 10 OTHER INFORMATION GISC monitoring 10.1 We are monitored independently by GISC to make sure that we meet the standards of this Private Customer Code. If we do not satisfy the requirements of the Private Customer Code, we may face a penalty. The Private Customer Code and your legal rights 10.2 The Private Customer Code forms part of the Membership Contract (which is governed by English law)

between GISC and us. Nothing in the Private Customer Code or in our Membership Contract with GISC will give any person any right to enforce any term of our Membership Contract which they would otherwise have under the Contracts (Rights of Third Parties) Act 1999. Copies of the Private Customer Code 10.3 You can get a free a copy of the Private Customer Code if you ask any GISC member, or from GISC at the address below. More information 10.4 If you want to check that we are members of GISC, or if you have any questions about the Private Customer Code, you can contact GISC at the address below. General Insurance Standards Council 110 Cannon Street London EC4N 6EU Telephone: 020 7648 7810 Fax: 020 7648 7808 Email (general enquiries): [email protected] Or, you can access the GISC website at: www.gisc.co.uk’

Notes: 1. The Private Customer Code is drafted in the second person, addressed to the insured, taking the form of a series of promises (para 10.2 excepted). As such, it is possible that the Code will be incorporated into the contract between the intermediary and the insured person. 2. Just as the Insurance Ombudsman took account of the ABI code in his deliberations, no doubt he will be similarly aware of the content of the

GISC Code and ‘equally influenced’ by its content’ (J Burling, (above, [301]). 3. The Commercial Code contains similar principles to the General Insurance Code but is directed towards the non-consumer insured. [304] The GISC Commercial Code (Effective from 3 July 2000) ‘Words in italics are defined terms, in accordance with the GISC Rules. INTRODUCTION Within this Commercial Code ‘Member’ means a Member of GISC (an Insurer, Intermediary (including broker) or agent), and anyone acting on its behalf, with whom the Commercial Customer deals. CORE PRINCIPLES In the course of their General Insurance Activities Members should: 1.1 act with due skill, care and diligence; 1.2 observe high standards of integrity and deal openly and fairly with their Commercial Customers; 1.3 seek from Commercial Customers such information about their circumstances and objectives as might reasonably be expected to be relevant in enabling the Member to fulfil their responsibilities to them; 1.4 take reasonable steps to give Commercial Customers sufficient information in a comprehensible and timely way to enable them to make balanced and informed decisions about their insurance; 1.5 take appropriate steps to safeguard information, money and property held or handled on behalf of Commercial Customers;

1.6 conduct their business and organise their affairs in a prudent manner; 1.7 seek to avoid conflicts of interest, but where a conflict is unavoidable or does arise, manage it in such a way as to avoid prejudice to any party. Members will not unfairly put their own interests above their duty to any Commercial Customer for whom they act; and 1.8 handle complaints fairly and promptly. PRACTICE NOTES 1 It is GISC’s intention to promote standards of professional conduct for Members. These Practice Notes represent statements of reasonable practice which Members will be expected to follow generally in adhering to the Core Principles. 2 A failure on the part of a Member to observe the standards set out in these Practice Notes shall not of itself constitute a breach of the Rules but any such failure may in disciplinary proceedings be relied upon by GISC or any party to the proceedings as tending to establish or to negate any liability which is in question in those proceedings. MARKETING 3 Members will ensure that all their advertising and promotional material is clear, fair and not misleading. ARRANGING THE INSURANCE Commercial Customer relationship 4 Members will advise their Commercial Customers of the nature of their service and their relationship with them, in particular, whether they act on behalf of an Insurer or act independently on behalf of the Commercial Customer as an Intermediary. They will also make it clear if they operate as an agent of another Intermediary.

5 Members will, where it is reasonably practical, confirm in writing instructions to act on behalf of a Commercial Customer and this will include appropriate reference to any recommendations made by the Member but declined by the Commercial Customer. Commercial Customer requirements 6 Members will take appropriate steps to understand the types of Commercial Customers they are dealing with and the extent of their Commercial Customers’ awareness of risk and General Insurance Products and take that knowledge into account in their dealings with them. 7 Members will seek from Commercial Customers such information about their circumstances and objectives as might reasonably be expected to be relevant in enabling them to identify the Commercial Customer’s requirements and fulfil their responsibilities to their Commercial Customers. Information about proposed insurance 8 Members will provide adequate information in a comprehensive and timely way to enable Commercial Customers to make an informed decision about the General Insurance Products or General Insurance Activity-related services being proposed. 9 If they are acting on behalf of the Commercial Customer, Members will explain the differences in, and the relative costs of, the types of insurance, which in the opinion of the Member, would suit the Commercial Customer’s needs. In so doing, Members will take into consideration the knowledge held by their Commercial Customers when deciding to what extent it is appropriate for their Commercial Customers to have the terms and conditions of a particular insurance explained to them.

10 Members will advise Commercial Customers of the key features of the significant or unusual restrictions, exclusions, conditions or obligations, and the period of cover. In so doing, Members will take into consideration the knowledge held by their Commercial Customers when deciding to what extent it is appropriate for Commercial Customers to have the terms and conditions of a particular insurance explained to them. 11 If Members are unable to match Commercial Customers’ requirements they will explain the differences in the insurance proposed. Advice and recommendations 12 Members should only discuss with or advise Commercial Customers on matters in which they are knowledgeable and seek or recommend other specialist advice when necessary. 13 Members will take reasonable steps to advise Commercial Customers if any General Insurance Products or General Insurance Activity related services being offered or requested are not covered by this Commercial Code and any possible risks involved. In so doing, Members will take into consideration the knowledge held by their Commercial Customers in deciding to what extent such advice may be necessary. Information about costs and remuneration 14 Members will provide details of the costs of each General Insurance Product or General Insurance Activity — related service offered. 15 Members will not impose any fees or charges in addition to the premium required by the Insurer without first disclosing the amount and purpose of the charge. This will include charges for policy amendments, claims handling or cancellation.

16 Members who are acting on behalf of a Commercial Customer in arranging their insurance will, on request, or where they are legally obliged to do so, disclose the amount of commission and any other remuneration received for arranging the insurance. 17 Members will disclose to Commercial Customers any payment they receive for providing to, or securing on behalf of, their Commercial Customers any additional General Insurance. Duty of disclosure 18 Members will explain to Commercial Customers their duty to disclose all circumstances material to the insurance and the consequences of any failure to make such disclosures, both before the insurance commences and during the policy. 19 Members will make it clear to Commercial Customers that all answers or statements given on a proposal form, claim form, or any other material document, are the Commercial Customer’s own responsibility. Commercial Customers should always be asked to check the accuracy of information provided. 20 If Members believe that any disclosure of material facts by their Commercial Customers is not true, fair or complete, they will request their Commercial Customers to make the necessary true, fair or complete disclosure, and if this is not forthcoming must consider declining to continue acting on their Commercial Customer’s behalf. Quotations 21 When giving a quotation, Members will take due care to ensure its accuracy and their ability to place the insurance at the quoted terms. Placement 22 Members who act on behalf of Commercial Customers when arranging their insurance will use their skill

objectively in the best interests of their Commercial Customers when choosing Insurers. 23 Where two or more Members are acting jointly for a Commercial Customer when placing an insurance, Members will take appropriate steps to see that they and their Commercial Customers know their individual responsibilities and duties. 24 Members will inform and seek from their Commercial Customers written acknowledgement where they are instructed to place an insurance which is contrary to the advice that has been given by the Member. CONFIRMING COVER 25 Members will provide Commercial Customers with prompt written confirmation and details of the insurance which has been effected on their behalf. 26 Members will identify the Insurer(s) and advise any changes once the contract has commenced at the earliest opportunity. 27 Members will forward full policy documentation without avoidable delay where this is not included with the confirmation of cover. 28 29

30 31 32

PROVIDING ONGOING SERVICE Members will respond promptly to Commercial Customers’ queries and correspondence. Members will deal promptly with Commercial Customers’ requests for amendments to cover and provide them with full details of any premium or charges to be paid or returned. Members will provide written confirmation when amendments are made. Members will remit any return premium and charges due to Commercial Customers without avoidable delay. Members will notify Commercial Customers of the renewal or expiry of their policy in time to allow them to

consider and arrange any continuing cover they may need. 33 Members will remind Commercial Customers at renewal of their duty to disclose all circumstances material to the insurance. 34 On expiry or cancellation of the insurance, at the written request of the Commercial Customer, Members will promptly make available all documentation and information to which the Commercial Customer is entitled.

35 36 37 38

CLAIMS Where Members handle claims: Members will, on request, give their Commercial Customers reasonable guidance in pursuing a claim under their policy. Members will handle claims fairly and promptly and keep their Commercial Customers informed of progress. Members will inform Commercial Customers in writing, with an explanation, if they are unable to deal with any part of a claim. Members will forward settlement of a claim, without avoidable delay, once it has been agreed.

DOCUMENTATION 39 Members will reply promptly or use their best endeavours to obtain a prompt reply to all correspondence. 40 Members will forward documentation without avoidable delay. 41 Members should not withhold from their Commercial Customers any written evidence or documentation relating to their contracts of insurance without their consent or adequate and justifiable reasons being disclosed in writing and without delay. If Members withhold a document from their Commercial Customers

by way of a lien for monies due from those Commercial Customers they should provide advice of this to those Commercial Customers in writing at the time that the documents are withheld. If any documentation is withheld Members will ensure that Commercial Customers receive full details of the insurance cover and any documents to which they are legally entitled. CONFLICTS OF INTEREST 42 Members will seek to avoid conflicts of interest, but where this is unavoidable, they will explain the position fully and manage the situation in such a way as to avoid prejudice to any party. 43 Members will not put their own interests above their duty to any Commercial Customer on whose behalf they act. CONFIDENTIALITY AND SECURITY 44 Members will ensure that any information obtained from a Commercial Customer will not be used or disclosed except in the normal course of negotiating, maintaining or renewing insurance for that Commercial Customer, unless they have their Commercial Customer’s consent, or disclosure is made to enable GISC to fulfil its regulatory function, or where the Member is legally obliged to disclose the information. 45 Members will take appropriate steps to ensure the security of any money, documents, other property or information handled or held on behalf of Commercial Customers. COMPLAINTS 46 Members will provide details of their complaints procedures to Commercial Customers, and details, if appropriate, of any dispute resolution facility which is available to them. 47 Members will handle complaints fairly and promptly.

COMMERCIAL CODE 48 Members will provide, on request, a copy of this Commercial Code to Commercial Customers or anyone acting on their behalf. 49 The Commercial Code forms part of the Membership Contract between Members and GISC which is governed by English law. Nothing in the Commercial Code or in the Membership Contract between Members and GISC will give any person any right to enforce any term of the Membership Contract between Members and GISC (including the Commercial Code) which that person would not have had but for the Contracts (Rights of Third Parties) Act 1999.’

3.1.3 The Proposed 2005 Statutory Structure The EC Commission, as part of its 1992 Single Market programme, indicated in a Recommendation, Professional Requirements and Registration of Insurance Intermediaries (92/48/EEC, 18 Dec 1991, OJL 28.1.92), that it was considering EU-wide legislation designed to harmonise the regulation of insurance intermediaries. In 1997 the Commission announced that it was considering a draft directive on the matters covered by its Recommendation and a consultation process was launched. This culminated in the Insurance Mediation Directive, European Parliament and Council Directive 2002/92/EC being adopted on 9 December 2002. Because of the delay in the publication of the Directive (it was not published until January 2003, [2003] OJ L9/3)), the

Treasury announced that the new statutory scheme for regulation would not come into force until 14 January 2005 (see the Treasury Press Notice 18, above). The implementing statutory instruments are the Insurance Mediation Directive (Miscellaneous Amendments) Regulations 2003 (SI 2003 No 1473) and the FSMA 2000 (Regulated Activities) Amendment (No 2) Order 2002 (SI 2003 No 1476). The new regime that will implement the Mediation Directive will place general insurance under the supervision of the FSA. All insurance intermediaries conducting business in the EU will have to be registered by a competent authority (subject to certain exceptions, for example, employees of insurance companies: Article 2.2 (insurance companies, as employers, must be authorised and accept responsibility for the acts of their employees). Further, those who sell travel insurance as part of a package with a holiday are also excluded: Article 1.2. The position relating to extended warranties will not be determined until after Competition Commission completes its investigation into this market, (late 2003). Obtaining registration will be subject to meeting certain requirements relating to (i) professional knowledge and skill (determined by national law), (ii) character and (iii) maintaining professional indemnity insurance for at least Euro1,000,000 per claim: Article 4. A registered insurance intermediary will be permitted to pursue his or her activities anywhere in the EU either through establishment in a member state or by providing cross-border services: Article 3.

The government’s proposals for implementing the Directive into UK law were set out in its consultation paper published on 21 October 2002. The intention was to give the FSA responsibility for regulating the following activities: introducing, proposing or carrying out other work preparatory to the conclusion of contracts of insurance; concluding contracts of insurance; and assisting in the administration and performance of such contracts, in particular in the event of a claim (see the Executive Summary, para 9 (below, [305])). As indicated above, the Insurance Mediation Directive (Miscellaneous Amendments) Regulations 2003 (SI 2003 No 1473) and the FSMA 2000 (Regulated Activities) Amendment (No 2) Order 2002 (SI 2003 No 1476) now implements these proposals. [305] HM Treasury, Regulating Insurance Mediation, Consultation Document ‘EXECUTIVE APPROACH

SUMMARY

THE

GOVERNMENT’S

Background 1. This consultation document sets out the Government’s intended approach to regulating the sale of general insurance products. FSA regulation will enhance consumer protection in an important sector of financial business. The UK has the largest insurance industry in Europe. In 2000 over £150 billion of general and long term premiums were written. 2. These measures will in some cases simplify and streamline regulation. The FSA will be given

responsibility for regulating both mortgage business and the mediation of general insurance from the same date, October 2004, (although this may be reviewed if there is a significant delay in publication of the Insurance Mediation Directive in the Official Journal of the European Communities) [see above, the proposed date is 14 January 2005]. Intermediaries selling a range of products — general insurance, pensions, or mortgages — will come under the FSA as single regulator, minimising compliance costs. The measures in this document, together with forthcoming FSA rules, will also implement the European Union’s Insurance Mediation Directive. This is a key step in completing the single market in financial services. 3. The consultation document sets out the Government’s proposals on a range of issues: — Chapter 1 gives further background to the Government’s intended approach and sets out the principal steps towards the introduction of regulation. A detailed timetable is included at Annex B; — Chapter 2 sets out which contracts of insurance will be regulated and where the Directive provides exclusions; — Chapter 3 details the activities the Treasury intends to regulate. Annex C contains decision trees which will help readers determine whether they are likely to be carrying on activities to be regulated; — Chapter 4 explains how the Treasury intends to modify the regulatory regime for appointed representatives and members of certain professional bodies and also covers a range of other issues including Lloyd’s and issues of territorial scope; — Chapter 5 summarises the requirements of regulation for those authorised by the FSA.

Which contracts of insurance will be regulated? 4. The Directive requires the regulation of mediation activities in relation to all contracts of insurance. However the Directive provides certain exemptions for insurance sold as part of a package. 5. Sales of travel insurance as a stand alone product will be regulated. But the Directive does not require regulation of travel insurance sold as part of a package with a holiday. The Government is considering whether to extend regulation to these sales of travel insurance, and is seeking views on three options: — no statutory regulation of sales of travel insurance sold as part of a package; — FSA regulation to cover these sales in the same way as stand alone sales of travel insurance; — industry specific regulation, requiring sellers of these products to be authorised by the FSA unless they are subject to an ABTA code which would be certified by the FSA. Sellers who were subject to the ABTA code but who also carried on other FSMA regulated activity, including selling any insurance other than packaged travel insurance, would be subject to FSA authorisation in relation to all of their regulated activities (including the activities to which the ABTA code applied). 6. The Directive similarly provides an exclusion for extended warranties provided certain conditions are met, including that the warranty is for less than Euro 500 (about £300) per annum. Whilst most extended warranties for motor vehicles will be covered by the Directive, those with a value of less than Euro 500 are excluded. However the Government intends that the new regime should cover all extended warranties for motor vehicles, including those which fall below the exemption threshold of E500. This is to avoid market

distortions which might occur if some warranties for motor vehicles were regulated and some were not. 7. Various concerns about extended warranties of domestic electrical appliances have resulted in the Office of Fair Trading (OFT) asking the Competition Commission to investigate this market. The Commission expects to report in the second half of 2003. The Government intends to postpone a decision as to whether extended warranties for electrical goods and other goods such as jewellery and carpets should be subject to regulation by the FSA until after the Competition Commission reports. 8. For more details on the scope of regulation, see Chapter 2 of this document. Which activities will be regulated? 9. The Government intends to give the FSA responsibility for regulating the following activities: — introducing, proposing or carrying out other work preparatory to the conclusion of contracts of insurance; — concluding contracts of insurance; and — assisting in the administration and performance of such contracts, in particular in the event of a claim; 10. However claims handling on behalf of insurance companies, expert appraisal and loss adjusting are excluded from the activities the Directive requires us to regulate. The Government does not intend to bring these activities within the scope of FSA regulation. 11. For more details on the activities to be regulated see Chapter 3. Who will be regulated? 12. Individuals, partnerships or companies who want to carry on insurance mediation activity “by way of business” will have to apply to the FSA in order to be “authorized” to do so. The FSA will be consulting on the

13.

14.

15.

16.

requirements for authorisation shortly. Firms already authorised by the FSA for other regulated activities who want to carry on insurance mediation activity “by way of business” will need to apply to the FSA for a variation of their permission. The Directive does not require regulation of direct sales by employees of insurance companies. However the Government intends to regulate mediation activities carried on by employees of insurers in order to ensure clarity for the consumer and to avoid creating an unlevel playing field between insurers and intermediaries. Appointed representatives of FSA authorised persons can carry on regulated activities without being authorised provided the authorised person has accepted responsibility for the conduct of those regulated activities. The Government intends to apply the appointed representatives regime to insurance mediation with the necessary modifications to make it compatible with the requirements of the Directive. Members of Designated Professional Bodies (DPBs), such as accountants and solicitors can carry on certain regulated activities where those activities are incidental to their main profession, without being authorised by the FSA. Such persons must comply with the rules of their DPB. The Government intends to apply this regime to insurance mediation activities with the necessary modifications to make it compatible with the requirements of the Directive. For more details on who will be regulated and how, see Chapter 4.

What will the requirements of regulation be? 17. Most individuals or companies who want to carry on insurance mediation activity by way of business will have to apply to the FSA in order to be “authorised” to

18.

19.

20.

21.

carry on such business. In order to become an “authorised person” various requirements have to be met including being a “fit and proper person”. The FSA will require those carrying on insurance mediation activities to disclose to the customer certain information prior to concluding, amending or renewing a contract of insurance. The Directive imposes certain minimum pre-sale information requirements but it will be open to the FSA to adopt additional safeguards. The Directive requires the UK to set up procedures allowing customers and other interested parties (including consumer associations) to register complaints about insurance and reinsurance intermediaries. The Directive also requires the UK to take measures to protect customers against the inability of the insurance intermediary to transfer the premium to the insurance undertaking, or to transfer the amount of claim or return premium to the insured. It will be for the FSA to implement these provisions. The Government intends to make insurance mediation activities regulated activities under FSMA, which means that a person who carries on these activities without being authorised or exempt would commit a criminal offence’ [see section 19 of the FSMA 2000]. The FSA has a range of sanctions against authorised persons including the ability to issue fines, and statements of public censure. Authorised persons can challenge the decisions of the FSA in the Financial Services and Markets Tribunal (“the Tribunal”). For more details on the requirements of regulation, see Chapter 5.

Note: The effect of the proposed statutory scheme of regulation will, therefore, place the regulation of

general insurance intermediaries on the same footing as that for life intermediaries. The current regime for life intermediaries is regarded by the Treasury as satisfying the requirements of the Directive.

3.2 The Authority of Intermediaries The general law of agency applies to insurance intermediaries. Thus, a principal will be bound by an agent’s acts carried out within the scope of his or her actual or apparent authority.

3.2.1 Actual Authority The extent of an intermediary’s actual authority can be ascertained from the express agreement between him or her and the principal. Actual authority is supplemented by an agent’s implied authority to do what is reasonably incidental to the carrying out of those acts which are expressly authorised: a common example is the implied authority of an agent to enter into interim insurance contracts by issuing cover notes on behalf of the insurer. [306] Stockton v Mason and the Vehicle and General Insurance Co Ltd [1978] 2 Lloyd’s Rep 430 (CA) [The facts appear from Diplock LJ’s judgment]. Diplock LJ:

‘This appeal arises out of a motor accident which took place at 3 30 p.m. — the time is of importance — upon 18 April 1968, when an MG Midget motor car driven by the defendant had an accident in which the plaintiff, who was a passenger, sustained very serious physical injuries. It is not disputed that that was as a result of the driver’s negligence. The driver was the defendant in this action. The damages were assessed at £46,000. The only question in this appeal is one which raises a point of insurance law. The car was the property of the defendant’s father, a Mr Mason. He had previously had policies of insurance for cars which he had owned earlier. Those insurance policies were issued by the first third party as insurers. The negotiations for the previous policies had been conducted through the second third party as insurance brokers for Mr Mason, the father. The point of insurance law on which this appeal turns arises out of the tripartite legal relationship between an insurance broker, the insurer and the assured in the field of non-marine insurance. The principle of law involved in this relationship is one which is well established so far as the brokers’ agency on behalf of the insurers is concerned. A broker in non-marine insurance has implied authority to issue on behalf of the insurer or enter into as agent for the insurer contracts of interim insurance, which are normally recorded in cover notes. The essential nature of the contract of interim insurance is that it is for a temporary period, generally a maximum of 30 days or so, but is terminable by notice by the insurer at any time during that period. The implied authority of the broker does not extend to entering into the complete policy of insurance which is substituted for the temporary one and is for a fixed period. The facts of this case that I have necessarily to recount for the purposes of deciding the issues in this appeal can be stated shortly. I have already stated the date of the accident

and the time of it, 3 30 p.m. on 18 April 1968. Mr Mason, as I have said, had had previous policies of insurance for various cars which he had owned. They were all comprehensive policies. They covered passenger liability, and they also covered the liability of any authorised driver of the motor car concerned. In April — the exact date does not matter — Mr Mason exchanged a car which he had previously owned, a Ford Anglia, which was the subject of one of these policies of insurance, for an MG Midget; and on 8 April there was a conversation between Mr Mason’s wife, Mrs Mason, who acted on his behalf in these matters, with the brokers, the second third party. There was some dispute as to what the conversation was. The learned Judge found that it took this form: Mrs Mason explained that they had exchanged the Ford Anglia for the MG Midget, Mr Mason wished the MG Midget to be substituted for the Anglia as the car insured under the current policy of insurance; she gave all the necessary details from the log book of the MG Midget and explained that she wanted it substituted; and the employee of the brokers said to her — these are the exact words found by the learned Judge after an interval of getting on for seven or eight years: “Yes, that will be all right. We will see to that, Mrs. Mason.” That was all that happened on that occasion. Mrs Mason regarded that conversation as meaning that the insurance had been transferred to the new car in the same terms as before, covering both passenger liability and the driving of the car by any authorised driver. On 17 April the second third party wrote to Mr Mason a letter in the following terms:

“…With reference to your recent substitution to the M.G. Midget, we would advise you that before a cover note can be released to you we must be in receipt of: 1. The obsolete insurance certificate for the Ford Anglia. 2. Your remittance in the amount of £…2. 3. The attached additional drivers form duly completed as driving must be on a named and approved basis. We would therefore advise you that we have restricted driving to yourself only, and we now await your advices.” That is a plain departure from the cover given by the previous policy on the Anglia in that the letter excluded the driving by any authorised driver and was at the time limited to driving by Mr Mason himself. That letter was received, as the learned Judge found, by Mr and Mrs Mason at 5 15 p.m on 18 April; that is to say, after the accident had already occurred… In this appeal really the only question is whether there was in law established as a result of that conversation a contract of interim insurance between the insurers and Mr Mason. If there was, then the remedy of young Mr Mason, the defendant here, is against the insurers; if there was not, it is conceded that the brokers were negligent, and that the judgment of the learned Judge must stand. So it comes down to a very short point — whether those words, in reply to a request for substitution of the Midget for the Ford Anglia, “Yes, that will be all right. We will see to that, Mrs Mason”, were said as agent for the insurance company, or simply meant that the brokers, as agents for Mr Mason, would try and get the cover. Bearing in mind the ordinary relationship between brokers and insurance companies in non-marine insurance as respects the implied authority to enter into contracts of interim insurance and to issue cover notes, it seems to me to be quite unarguable that in saying “Yes, that will be all right. We will see to that, Mrs Mason” the brokers were

acting as agents for the insurance company and not merely acknowledging an order or a request by Mr Mason to negotiate a contract with the insurance company on his behalf. There must be every day thousands of cases, not only in motor insurance but in other forms of non-marine insurance, where persons wishing to become insured or wishing to transfer an insurance ring up their brokers and ask for cover or ask for fresh cover or ask to transfer the cover from an existing vehicle to another. In every case they rely upon the broker’s statement that they are covered as constituting a contract binding upon the insurance company. In that sort of conversation they are speaking, in the absence of any special circumstances, to the broker as agent for the insurance company, and the broker, in dealing with the matter, is acting as agent for the insurance company and not as agent for the person wishing to have insurance. Of course, there may be exceptional cases. There was nothing exceptional about this. A contract of insurance of this kind can be made orally, it can be made in informal, colloquial language, and this, in my view, is a very simple and clear example of that kind of legal situation. I would, therefore, allow this appeal. The effect of that is, I think, that the judgment must be against the first third party, the insurance company, and the judgment against the second third party, the brokers, must be discharged.’

[307] Murfitt v The Royal Insurance Company Ltd (1922) 10 Ll L Rep 191 [The facts appear from the judgment]. McCardie J: ‘This is an unusual case in the facts which give rise to this litigation, and the hypothesis on which I am invited to give

my judgment. The action is brought by Mr Murfitt against the Royal Insurance Company, a well-known company, and the plaintiff claims upon a verbal contract of insurance… The matter arises thus. The plaintiff is a nurseryman and fruit grower; and his holding is at March, Cambridgeshire, quite close to the line of the Great Eastern Railway. He has upon his land a quantity of valuable fruit trees and other fruit crops. Last year was exceptionally dry. Fires broke out even on fruit farms; and the plaintiff desired to insure his fruit farm against fire risks. In these circumstances he went on 16 July to see Mr Allwood, who was an agent of the defendant company, and the matter was discussed. Plaintiff said: “I want an insurance for £3,000 on my holding” (giving him details). “Will you do it at once or I must go elsewhere?” Allwood said: “We will do it for you and we will hold you covered until the office either accepts your proposal or turns it down.” Allwood added: “This cover I give you is on condition you promise not to approach any other office.” Plaintiff gave his promise, and then Allwood finally agreed to cover him. A discussion arose and Allwood said: “I do not know the premium: I will let you know later on.” It is upon that verbal bargain that the plaintiff founds his action. Allwood then went back to the office at Peterborough. It was Saturday afternoon. He did not then send on the proposal for the signature of the plaintiff: but the next day he did forward it. This was filled up with the necessary details and answers to the appropriate questions. The plaintiff signed this proposal and sent it back. The office at Peterborough got it on the Monday duly signed by the plaintiff. The manager of the Peterborough branch wrote on it the terms “18 July until March, 1922,” and sent it on to the Lincoln head office for consideration; and on 22 July a fire broke out in the plaintiff’s orchard and serious damage occurred. About 23 July, the defendant company refused to accept the proposal.

I make it clear at once that this was a well-known and important company; and at that time they were unaware that the fire had taken place. They refused it because it was not the class of insurance they desired to undertake. Plaintiff himself, at the time of the fire, was away. A few days later Mr Allwood, having heard of the refusal by the defendant company, saw the plaintiff and told him that the company had declined. Much correspondence took place; and ultimately the insurance company wrote the plaintiff and said they disputed the authority of Mr Allwood to give verbal cover. Now these are the broad facts… The first question I have to deal with is: Had Mr Allwood actual authority conferred upon him by express writing or express statement by word of mouth? I think the answer to that question is plainly No. The broad features of the defendants’ organisation are these. They have their chief head office in Liverpool. They have another head office in Lincoln; and they have what they call a branch office at Peterborough. The Peterborough manager is Mr Carter and the assistant manager is Mr Hammond. Mr Allwood is not one of the salaried officials of the company: he is what has been called a full agent. He was so appointed at the end of 1919; and the documents connected with his appointment state that every class of business is transacted by the Royal Insurance Co. Now what does a full agent mean? It has, in my view, a particular meaning in the insurance world. It does not mean that he is a salaried official: but it distinguishes between the full agent and the casual or intermittent agent. The casual agent pays over any premiums he may receive and at once gets his commission; while the full agent runs an account with the company, delivers his cash account quarterly for his premiums, and then gets his commission. That was the position of this agent, Mr Allwood. I am satisfied that there is no writing which gives him any authority to make an insurance; and I am satisfied there was

no verbal statement which gave him authority to make an insurance. Upon this point I have no doubt. The next question is this: Was there a holding out by the company of Mr Allwood as an agent with this authority to make this bargain. In my opinion there was no holding out at all. There had been previous transactions by the plaintiff with Mr Allwood as an agent of the defendants; and both these transactions related to motor-cycles. In each case a parallel arrangement to cover was made: but in each case a document was expressly given by the company in order to indicate that cover was given. One was a cover note and the other was a cover letter. With regard to motor-cycles, a book of forms was kept; and apparently there is no difficulty in getting the form of cover: but this was a wholly separate form of assurance, and it is a striking fact that throughout the whole of the books of the Royal Insurance Co. there is no trace of any prior insurance by them on fruit crops or the like. In my opinion there was no holding out at all by the insurance company upon which the plaintiff could rely as an estoppel against them. That leads me to the third point, which is one to which I have given particular attention. Has Mr Allwood implied authority to give a verbal cover? Let me be quite plain on the ground on which I am going to decide this point: there must be no misunderstanding about it. I hold, in the first place, that the decision in Linford v Provincial Co (34 Beav. 291) is a sound decision, and one fully applicable to the present case. I think that decides that an ordinary local agent of an insurance company is not — without special authority — authorised by the company to make a contract. I accept that decision fully. On the other hand, I have no doubt of the authority in the case of Mackie v European Assurance Society (21 LT 102). The effect of that decision is that if an insurance company gives to its agents a book of forms for making insurances, the agent will then have power to make a bargain upon the terms contained in the form.

That is the effect of the Mackie case. It turns on giving an agent a book of forms. Now, these two authorities I accept: but the present case is one in which the question arises as to whether or not Mr Allwood had, by the consent of the officials at Peterborough, implied authority. One fact is plain and undisputed; and that is that Mr Carter, the Peterborough manager, could give authority to Mr Allwood to give verbal cover. I have hesitated much on this branch of the case: but, on the whole, I come to the conclusion that the contention of Mr Bevan for the plaintiff is right. It is, as he has pointed out, a striking feature in this case that there is a substantial body of correspondence between the various officials of the company inter se; and I have read these letters carefully. They contain various questions and comments: but in not one of them is there a suggestion that Mr Allwood acted without authority. That is a most striking circumstance; and I am not sure Mr Bevan is not right in saying it is almost conclusive. But there are other features in this case that lead me to the conclusion that the plaintiff is right. It seems plain from all the witnesses that you cannot carry on a fire insurance business unless you give verbal cover. If this company would not give verbal cover their business would be impossible. They know it and I know it. The broad principle is that an agent cannot work as an agent unless he has authority to give verbal cover. In the present instance Mr Allwood is a most respectable man. He occupies a high position in another company. He is a gentleman of respectability and weight; and there is no reason whatever why he should not be authorised with such power. For two years before this it is plain he had frequently given verbal cover, although it is true cover notes followed: but, as Mr Bevan pointed out, so with regard to Mr Carter and Mr Hammand cover notes followed. I remember the evidence of the various witnesses; and I come to the conclusion, after hearing the arguments, that

Mr Allwood habitually granted verbal cover, and that that practically was and must have been perfectly well known both to Mr Carter and Mr Hammond; and that Mr Allwood was acting with their assent and knowledge. I do not blame them: on the contrary, if they had not given Mr Allwood the right to make verbal cover he could not have got business for the company. The thing that made them give cover was the necessity of the situation. Without doubting the good faith of the witnesses in this case, on the whole, and from the correspondence, I think the recollection of Mr Allwood is more accurate on various points than that of Mr Carter or Mr Hammond. Although, therefore, Mr Allwood was not supplied with a particular book of forms, I am satisfied he was a man to have such verbal authority, and that with the consent of Mr Carter he had it. The result, therefore, is that this transaction on July 16 was within the authority of the agent, and the company would be bound by it.’

(See also, Zurich General Accident Liability Insurance Co Ltd v Rowberry [1954] 2 Lloyd’s Rep 55 (CA)).

3.2.2 Apparent or Ostensible Authority The third party is generally ignorant of the agent’s actual and implied authority and relies on what is termed the agent’s apparent or ostensible authority ie. the agent’s authority as it appears to the world at large. Apparent authority arises where the principal, either by words or, as is more common, by conduct, represents to the third party that the agent has authority to perform a particular act. Where the third party acts on such a representation the principal is

estopped from claiming that the agent acted in excess of his or her actual authority (see the judgment of Diplock LJ in Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 at 504). An agent’s apparent authority will often coincide with his or her actual authority. ‘But sometimes [apparent] authority exceeds actual authority. For instance, when the board appoint the managing director, they may expressly limit his authority by saying he is not to order goods worth more than £500 without the sanction of the board. In that case his actual authority is subject to the £500 limitation, but his [apparent] authority includes all the usual authority of a managing director…’ Lord Denning MR in Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549. In Eagle Star Insurance Co Ltd v Spratt [1971] 2 Lloyd’s Rep 116, Lord Denning MR summarised the position regarding the principal’s representation: ‘A principal may hold out an agent as having authority, not only by a representation, but also by his conduct, or even by his silence and acquiescence. Take the owner of a business who puts a manager in charge of the shop or in charge of a farm. He holds out the manager as having authority to make contracts. He may put a private limitation on his authority. He may say he is not to incur liabilities for more than £20. But he cannot rely on that limitation as against the customers. The reason is because he had put the manager in a position to make contracts and is bound by what he does. We had a case a little time ago where a company allowed a “company secretary” to be in the office. Whilst the managing director was away, the company’s secretary

ordered cars on hire in the name of the company without any authority to do so. He ordered them for his own benefit. But the company were held liable. If you find conduct — standing by — of the principal, even though it is not communicated to the other party — and this conduct leads the other party to believe that the agent has authority, that is enough to bind the principal.’

Note: The determination of apparent authority is a fact intensive exercise. For example, in British Bank of the Middle East v Sun Life Assurance Co of Canada (UK) Ltd [1983] 2 Lloyd’s Rep 9, the House of Lords, having scrutinised the particular decision-making structure and processes within Sun Life’s organisation, held that a branch manager of a multinational insurance company lacked apparent authority to represent to the claimant bank that a junior employee had actual authority to execute undertakings on behalf of the company to pay mortgage money to the bank. The weight of evidence pointed to the fact that such undertakings were executed by insurance companies at head office level. [308] Brook v Trafalgar Insurance Co (1946) 79 Ll L Rep 365 (CA) [The issue for the Court of Appeal was whether an agent, Nelson, possessed the requisite authority from the insurers to waive a condition of the policy dealing

with notification of claims. The particular term stated that: ‘Notice of any accident or loss must be given in writing to the company at its head office immediately upon the occurrence of such accident or loss…In the event of failure to comply with the terms of this condition and in particular, if within seven days after such accident or loss has occurred, the company had not been notified as above set forth, then all benefit under this policy shall be forfeited.’ Notwithstanding that waiver had not been expressly pleaded, the trial judge held that the insurers, through their agent, had waived the policy conditions as to notice of loss and that therefore the insured was entitled to recover]. Scott LJ: ‘To put forward a plea of waiver, whether before breach or after breach, of a condition precedent to the right of action contained in a policy is a very serious step. It is quite obvious that it is essential in the interests of justice that the insurance company in such circumstances should have their attention called beforehand to the fact that it is intended to rely on an issue of the kind upon which evidence can be called, and in the absence of an application for leave at the trial to introduce a new issue in that way, I respectfully think that the learned Judge was wrong in considering the issue at all. It would be enough for the purpose of allowing this appeal to say that and nothing more; but I prefer also to deal with the matter as if some form of waiver replication had been before the Court. The learned Judge relied upon the fact that Nelson’s name is mentioned against the printed word “Agent” in the schedule to the policy. He treats that as amounting to conclusive evidence that Nelson had authority on behalf of the company to waive the express condition of written

notice having to be sent to the company’s head office. In my view, even if waiver had been pleaded, that would have been an erroneous inference. It is common knowledge to everybody that policies are issued at the instance of agents who procure the business and who get a small commission on the premium for doing so. That is the sense which prima facie the printed word “Agent” at the bottom of a policy bears; it appears there for the simple reason that it so serves as a record for the office files of the company as to who was the person entitled to commission. To suggest that the word “Agent” in front of the name there gives the commission agent authority to take the place of the company and waive an express condition requiring that written notice should be sent to the head office of the company, when they have dozens of agents all over the country of that type, is, I venture to think, ridiculous…’

Tucker LJ: ‘The first thing that would have had to be alleged was that Nelson was the agent of the insurance company, and it would have been necessary to show whether he was an agent with authority to waive the conditions of the policy pursuant to some express authority derived from the company, or whether he was an ostensible agent held out with such authority, and in the latter event it would have been necessary to give particulars showing the facts and matters relied upon in support of the allegation that he had been held out as having such authority. That was not done. If it had been done, no doubt there would have been discovery showing the position and relationship of Mr Nelson to the insurance company, and all relevant documents of that kind would have been disclosed. All those matters are matters which it is very necessary when a plea of this kind is raised should be carefully considered in the light of all the available evidence.

In this case there was no such plea and, therefore, it is not surprising that the evidence with regard to these matters was of a very scanty and sketchy nature. First of all, in my view, there was no evidence at all that Mr Nelson was an agent having authority to waive the written conditions of the policy. The only evidence that he was an agent at all was contained in the schedule to the policy where he is put in as “Agent: J Nelson.” That clearly indicates he was an agent of some kind, but, especially in connection with insurance matters, there are all kinds and various degrees of agency. The mere fact that a man is described in a policy as an agent is not in itself sufficient to show that he has authority conferred upon him to waive the express conditions of the policy, one of which incidentally it is to be observed, viz, No 9, provides that “Any alteration in the terms of this policy is only binding upon the company when made at the head office under the hand of a managing director or secretary.” The only other matter which is relevant to the question of Mr Nelson’s agency is the answer given by the plaintiff himself, where he was asked the very leading question: “Is he an agent of this company?” — that is referring to Mr Nelson — to which he gave the answer: “Yes.” With regard to that it was not only a leading question, but it was a question with regard to which Mr Brook clearly was not in a position to give any answer of any value at all. So much for Mr Nelson’s agency. The matter does not stop there, because, assuming that he was an agent with this authority, I am quite unable to find from the evidence that was given, any evidence of conduct on his part which would have amounted to waiver had he had that requisite authority…’

(See also, Berryere v Fireman’s Fund Insurance Co (1965) 51 DLR (2d) 603; and Stone v Reliance Mutual

Insurance Society Ltd (below, [314])).

3.2.3 Ratification Notwithstanding that an act of an agent is in excess of his or her actual or apparent authority, the principal will be bound where it has ratified the agent’s conduct. For ratification to be effective the agent must have purported to act on behalf of the principal; and the principal must be capable of being ascertained: Eastern Construction Co Ltd v National Trust Co Ltd and Schmidt [1914] AC 197 at 213. Ratification operates retroactively to the time when the unauthorised act took place. In marine insurance ratification after the occurrence of a loss is possible and in National Oil Well v Davy Offshore Ltd [1993] 2 Lloyd’s Rep 582, Colman J expressed the view that this should also be the position in non-marine insurance.

3.3 Identifying an Intermediary’s Principal Identifying an agent’s principal assumes particular importance in relation to two critical issues: (i) the imputation of knowledge possessed by an agent (for example, if a material fact is disclosed by an insured to the agent, and the agent does not pass this information to the insurer, the insurer will not be able to avoid the policy for non-disclosure if it is found to

be the agent’s principal); and (ii) determining to whom the agent’s duties are owed. Broadly speaking it can be said that insurance agents and Lloyd’s brokers are presumed to be the agents of the insured (on the position of Lloyd’s brokers see Lord Diplock’s speech delivered in American Airlines Inc v Hope [1974] 2 Lloyd’s Rep 301). That this may run contrary to the perception of the typical applicant for insurance was recognised by both the trial judge and Purchas LJ in Roberts v Plaisted [1989] 2 Lloyd’s Rep 341: ‘Under the present state of insurance law [the broker] acted for the assured as his agent and even if the latter disclosed to the former all material facts, if the broker then omitted to include these upon the form there is no protection afforded to the assured in his claim against insurers. On this aspect of the cases Hodgson J commented: “Before I come to examine this contract it is clear that, if the insurers’ contention is correct, this Plaintiff is yet another victim of the insurance industry. He made the fullest disclosure to the broker; like the majority of laymen he probably thought that that was enough and that the broker was the agent of the insurers by whom he was remunerated by way of commission; that mistake was one which, unhappily, is all too common, and all too often used by insurers to escape liability.” Full and frank disclosure to the Lloyd’s broker concerned in presenting on behalf of the proposed assured the proposal to the insurers as against an insurer who complains of nondisclosure and repudiates on that ground avails the proposed insured in no sense at all. To the person unacquainted with the insurance industry it may seem a

remarkable state of the law that someone who describes himself as a Lloyd’s broker who is remunerated by the insurance industry and who presents proposals forms and suggested policies on their behalf should not be the safe recipient of full disclosure; but that is undoubtedly the position in law as it stands at the moment. If I may say so, Mr Justice Hodgson’s strictures on this matter are more than justified. Perhaps it is a matter which might attract the attention at an appropriate moment of the Law Commission.’

Salaried representatives of insurance companies, on the other hand, are deemed to be the agents of the insurer even where part of their remuneration is made up of commission. That said, and as the cases reveal, there are exceptions to these broad propositions. As seen in Stockton v Mason and the Vehicle and General Insurance Co Ltd (above, [306]), the implied authority of the broker to issue cover notes was clearly material to the court’s finding that he was the insurer’s agent in this regard.

3.3.1 Imputing an Agent’s Knowledge to the Insurer As indicated above, typically an insured will seek to show that the insurer has constructive knowledge of a non-disclosed fact by virtue of the broker in question being in possession of the information in question. Whether or not such knowledge will be imputed to the principal will depend upon the agent’s actual or apparent authority.

[309] Wing v Harvey (1854) 5 De GM & G 265 [A life policy contained a condition which provided that if the insured ‘shall go beyond the limits of Europe without the licence of the directors, [the] policy shall become void.’ An assignee of the policy, upon paying the premium to a local agent of the insurers at the branch office where the insurance had first been effected, informed him that the insured was living in Canada. The agent, Mr Lockwood, advised the assignee that the policy would be valid provided the premiums were regularly paid. When the insured, Mr Bennett, died the insurers declined payment on the basis of breach of condition]. Turner LJ: ‘In this case Mr Lockwood, and afterwards his successor Mr Thompson, were beyond all doubt the agents of the insurance office to receive the premiums payable upon the policies, and they successively did receive those premiums upon the policies during the whole period from 1835, when Mr Bennett went to Canada, to 1849, when he died. The premiums were received with a knowledge, on the part of Mr Lockwood and Mr Thompson, that the payments were made by Mr Wing upon the faith of the policies being subsisting policies and valid, notwithstanding the absence of Mr Bennett beyond the limits of Europe, and the society or their officers received those premiums without objection. It has been said, however, that the office so received them without having notice of Mr Bennett’s residence beyond the prescribed limits. Now if it was material to decide that question of fact, I should hold, upon the affidavits before us, that the office was affected with notice of the absence of Mr Bennett beyond the boundaries limited by he policies. I

think it, however, immaterial to determine that question. The office undoubtedly received the money from their agents to whom it had been paid upon express terms and conditions, and the office, having held out Mr Lockwood and Mr Thompson to the world as their agents for the purpose of receiving the premiums, I think it became the duty of of Mr Lockwood and Mr Thompson, and not that of the Plaintiff, to communicate to the head office at Norwich the circumstances under which those premiums had been paid to and received by them, and the representations which were made on the occasions of such payments and receipts. Upon these grounds my opinion is, that these policies must be considered to have been continuing policies, and that this claim must therefore be allowed.’

[310] Blackley v National Mutual Life Association of Australia [1972] NZLR 1038 (CA) [The insured, who had a history of treatment for various cancers, applied for a life policy through K, the respondent company’s agent. Prior to the policy being issued, the insured underwent an operation to have a malignant brain tumour removed. K was aware of this having been told when he called on the insured’s wife to collect the first premium which she paid by cheque. The insured was too ill to sign a banker’s order left by K in respect of future premiums and so his wife duly executed it and mailed it back to the insurers. When the insurer’s medical examiner learned of the operation he notified the branch manager and the insurers repudiated liability on the basis of non-disclosure. The company returned the

first premium together with the banker’s order. No policy was issued. Shortly after, the insured died. His widow argued that a contract had been concluded when she had returned the banker’s order. The insurers contended that K lacked authority to receive disclosures on their behalf and so they were not fixed with knowledge of the insured’s operation. It was held by the New Zealand Court of Appeal that K had ostensible authority to receive such information and therefore the insurers had constructive knowledge of the non-disclosed facts]. Turner P: ‘[I]t is interesting to recall the following cross-examination of Mr Law on the question of Mr Kitt’s ostensible authority to receive disclosures: “It is part of Mr Kitt’s ostensible authority to receive the first premium on behalf of the Association? Yes Is it part of his duty to tell the Association of any knowledge he may receive about the nature of the risk? Yes So was it part of his duty to inform the Association or see that it knew if he heard Dr Blackley had been taken ill? Yes. And lie would be the person you would expect to be told by a proponent if there was some alteration? Normally the agent would be told. And it would then be up to the agent to pass it on? Yes.” I have no doubt that Mr Kitt was held out to the Blackleys as an agent to whom disclosures might properly be made. What was urged upon Richmond J, and upon us, for the defence, and what Richmond J held, was not that he was not so held out, but that even though he was so held out, the disclosure to him by Mrs Blackley should in the

circumstances of the particular case not be regarded as disclosure to the Association. The imputation to a principal of the knowledge of an agent when that agent knowledge has been disclosed to him in reliance upon his ostensible authority to receive it is an application of the principles of estoppel. Though the agent may not in fact have the principal’s authority to receive the disclosure so as to bind the principal as if the latter had knowledge of it, yet the principal may not aver that he was not notified of the facts disclosed, for by holding out the agent he must be deemed, as against the third party, to have given the authority which in fact the contract of agency may not have conferred. But it is always an answer to a plea of estoppel that the representee in fact knew the true position, or did not believe the representation, and that therefore he did not do what he did in reliance upon the representations of the party sought to be estopped. So in the law of agency when it is pleaded that a principal has held out an agent as one clothed with authority to receive disclosures, as if made to the principal, it will be an answer that the third party knew or believed that the disclosures had not in fact been or would not in fact be passed on to the principal. This is the basis of the “exception” of which Bowstead speaks in the passage which I have already cited. But Richmond J applied this to the case in which the third party, not well knowing that the information would not be passed on, merely thought this a likely possibility or, more accurately, should be assumed so to have thought; and he held that the Doctor and Mrs Blackley, if they had thought about the matter, would have realised that it was likely that Mr Kitt had not passed on and would not pass on the information which he had gained to the Association. I think that he was wrong in two respects. First. it was not enough that Mrs Blackley, if she had thought about the matter, would as a reasonable person have thought it likely that Mr Kitt had not passed on, and would not pass on, the

information. Secondly, I do not think that the evidence could warrant even the conclusion that she should have thought that this was likely. I will deal with these two points in order. First, I think that to answer the contention that the disclosure here was sufficient, since it was made to an agent clothed with ostensible authority to receive it, it would be necessary not only to show that the Blackleys suspected, or should have suspected, that the disclosure would not be passed on by Mr Kitt to those superior to him; it must be necessary in my opinion to show that the Blackleys actually knew or believed that the information had not been, and, or would not as the case may be relayed. This is the way in which the rule is stated in Bowstead; and the cases cited in that work appear to me to support, this view… I am of the opinion…that once it is held, as I am prepared to hold, that in this case Mr Kitt was the agent of’ the Association clothed with ostensible authority to receive any disclosures which Dr Blackley offered to make in discharge of his obligation under the condition in the proposal, due disclosure to him was disclosure to the Association, and that this result is not affected, either by the fact that in the event he did not pass the information on, or by any suspicion or possibility, short of actual knowledge or positive belief, by Mrs Blackley, that he had not and would not pass the information on to the Association… In the case before us there is no suggestion that the proposal was inaccurately or inadequately filled in. What is said is simply that after the proposal had been correctly filled in as the parties then understood the facts, supervening events occurred of which it was the duty of the proponent to make disclosure to the Association. The only question is, whether by communicating information of these events, when they became known, to the Association’s agent, the proponent and his wife made due disclosure. I find many of the cases cited of little help on this. In Ayrey v British Legal Assurance Co [1918] 1 KB 136, however, one of

the cases cited on both sides, there is a passage which has seemed to me of assistance. That was a case admittedly stronger for the plaintiff than the one before us, since the person to whom notice was given was the district manager of the company, and not a mere agent. But Atkin J said at p 142: “I have great difficulty in seeing how an assured who desired to impart information to the company could reasonably be supposed to do so otherwise than by giving the information to the district manager. He is the person who is named on the premium card as the district manager of the company, and in my opinion it must be implied that the person holding that position is the person who has authority to receive on behalf of the company information as to all matters affecting a policy issued by the company, and that it was his duty to pass on to the company such information as lie might receive. I think, therefore, that the knowledge of the district manager that there had been a breach of a condition by reason of the concealment of a material fact was the knowledge of the company.” Of course, there it was the district manager of whom Atkin J was speaking. That, was a stronger case. But here, once it has been held that Mr Kitt was held out by the company as its agent to whom disclosures might properly be made, the difference becomes one of degree only. The fact of such an ostensible agency concludes the matter as governed by the same principle as Atkin J adopted. For the reasons which I have already given I have found it proved that the ostensible authority of Mr Kitt included authority to receive oral disclosures. Once that is proved, in my opinion the case for the defence fails.’

(See also, Woolcott v Excess Insurance Co Ltd [1979] 1 Lloyd’s Rep 231).

Notes: 1. The issue of imputation of knowledge commonly arises in the situation where the agent completes the proposal form for the prospective insured. If in answer to a question contained in the form the insured tells the truth but the agent falsify’s the answer, the question arises whether the proposer is bound by the agent’s conduct. The solution will depend upon who is the principal. If it is the proposer, then he or she is bound and the insurers will not be deemed to have constructive knowledge of the truth. If, however, the agent is a full-time employee of the insurer it might be tenable to argue on the basis of Wing v Harvey (above, [309]) and Blackley (above, [310]), that knowledge of the truth should be imputed to it as principal. 2. The knowledge of an agent who is acting to defraud his or her principal cannot be imputed: Group Josi Re v Walbrook Insurance Co Ltd [1996] 1 Lloyd’s Rep 345. [311] Bawden v London, Edinburgh & Glasgow Assurance Co [1892] 2 QB 534 (CA) [The insurer’s agent completed a proposal form for accidental injury insurance on behalf of a proposer who was illiterate and had lost an eye. The agent was

aware of the proposer’s condition but did not communicate this to the insurers. The form contained a term warranting that the insured was free from physical infirmity. The insured was involved in an accident and lost his good eye. The insurers repudiated liability]. Lord Esher MR: ‘We have to apply the general law of principal and agent to the particular facts of this case. The question is, what was the authority of such an agent as Quin? His authority is to be gathered from what he did. He was an agent of the company. He was not like a man who goes to a company and says, I have obtained a proposal for an insurance; will you pay me commission for it? He was the agent of the company before he addressed Bawden. For what purpose was he agent? To negotiate the terms of a proposal for an insurance, and to induce the person who wished to insure to make the proposal. The agent could not make a contract of insurance. He was the agent of the company to obtain a proposal which the company would accept. He was not merely their agent to take the piece of paper containing the proposal to the company. The company could not alter the proposal; they must accept it or decline it. Quin, then, having authority to negotiate and settle the terms of a proposal, what happened? He went to a man who had only one eye, and persuaded him to make a proposal to the company, which the company might then either accept or reject. He negotiated and settled the terms of the proposal. He saw that the man had only one eye. The proposal must be construed as having been negotiated and settled by the agent with a one-eyed man. In that sense the knowledge of the agent was the knowledge of the company. The policy was upon a printed form which contained general words applicable to more than one state of circumstances, and we

have to apply those words to the particular circumstances of this case. When the policy says that permanent total disablement means “the complete and irrecoverable loss of sight in both eyes,” it must mean that the assured is to lose the sight of both eyes by an accident after the policy has been granted. The contract was entered into with a oneeyed man, and in such a case the words must mean that he is to be rendered totally blind by the accident. That, indeed, would be the meaning in the case of a man who had two eyes. If the accident renders the man totally blind, he is to be paid £500 for permanent total disablement. Quin, being the agent of the company to negotiate and settle the terms of the proposal, did so with a one-eyed man. The company accepted the proposal, knowing through their agent that it was made by a one-eyed man, and they issued to him a policy which is binding upon them, as made with a one-eyed man, that they would pay him £500 if he by accident totally lost his sight, ie, the sight of the only eye he had. In my opinion, the plaintiff is entitled to recover £500 for the total loss of sight by the assured as the direct effect of the accident.’

Lindley LJ: ‘I am of the same opinion. The case turns mainly upon the position of Quin. What do we know about him? The company have given us no information about the terms of his agency. In the printed form of proposal he is described as the agent of the company for Whitehaven, and it is admitted that he was their agent for the purpose of obtaining proposals. What does that mean? It implies that he sees the person who makes the proposal. He was the person deputed by the company to receive the proposal, and to put it into shape. He obtains a proposal from a man who is obviously blind in one eye, and Quin sees this. This man cannot read or write, except that he can sign his name, and Quin knows this. Are we to be told that Quin’s knowledge is not the knowledge of

the company? Are they to be allowed to throw over Quin? In my opinion, the company are bound by Quin’s knowledge, and they are really attempting to throw upon the assured the consequences of Quin’s breach of duty to them in not telling them that the assured had only one eye. The policy must, in my opinion, be treated as if it contained a recital that the assured was a one-eyed man. The £500 is to be payable in case of the “complete and irrecoverable loss of sight in both eyes” by the assured. If the assured has only one eye to be injured, this must mean the total loss of sight. Within the true meaning of the policy, as applicable to a one-eyed man, I think the plaintiff is entitled to recover £500.’

Notes: The decision in Bawden cannot be taken to represent the general rule and has been distinguished in a number of cases. On its particular facts, the decision might be explained by reference to the plea of non est factum (see further, J. Beatson, Anson’s Law of Contract (Oxford, OUP, 2002) at 332 et seq). [312] Biggar v Rock Life Assurance Co [1902] 1 KB 516 [The facts appear from the judgment]. Wright J: ‘In this case Biggar, who was a publican, seems to have been canvassed by the insurance company’s agents, who in February induced him to send in a proposal for insurance against accidents. The ordinary course would have been for the applicant to fill in the answers to the questions in the proposal form; but in the present case Cooper, the

company’s agent, filled up the proposal form without consulting Biggar as to the answers to be given, and then invited Biggar to sign the form so filled up, which Biggar did without reading it. The proposal form so signed contained not only the questions, with the answers inserted by the agent, but also a declaration at the foot to which Biggar himself signed his name, and which stated (inter alia) that “no company has ever declined to assure me nor to renew my policy,” and also that he requested the company to grant “a policy in accordance with the above particulars”; by the declaration Biggar further agreed that “the above statements shall form the basis of the contract.” The answers inserted by Cooper, the agent, were false in many material particulars; but Biggar was not aware of their falsity, and apparently was not aware of what the answers were in fact or of what were the questions to which they were the answers. This false proposal form was afterwards transmitted to the company by Cooper and the proposal was accepted; the premium was then paid by Biggar through Cooper and the policy was issued. Some little time afterwards Biggar met with an accident, and the question now is whether he is entitled to recover on the policy. It is plain that the policy is prima facie avoided, for some of the particulars and statements in the answers, the correctness of which was a condition precedent to the validity of the policy, were false; Biggar, therefore, cannot recover unless he is able to shew that the insurance company is prevented from setting up that ground of avoidance by reason of its agent, Cooper, having acted in fraud of his principals. I will deal with a minor point first. It is said that in any case (whatever may be the proper decision as to the main question here) the claimant is disentitled to recover, because he signed a paper containing certain other particulars, and especially the statement that no company had ever declined to assure him or to renew his policy. I am inclined to think that that is of itself sufficient to prevent him

from having any claim against the company; but I do not wish to rest my decision upon that, because I do not think the case was stated with reference to that particular contention, and I do not think it is so explicit with regard to it as I could have wished. I do not feel quite clear that this representation which he signed is sufficiently untrue, and I prefer to deal with the case upon the main point. As to that, I agree with the principles which were laid down by the Supreme Court of the United States in New York Life Insurance Co v Fletcher 117 U S 519, decided in 1885, in which the judgment of the whole Court was delivered by Field J. It seems to me that that case is very much in point, although in some respects it is different from the present case: in some respects it is weaker, and in some respects stronger. I agree with the view taken by the Supreme Court in that case, and apparently in other cases there cited, that if a person in the position of the claimant chooses to sign without reading it a proposal form which somebody else filled in, and if he acquiesces in that being sent in as signed by him without taking the trouble to read it, he must be treated as having adopted it. Business could not be carried on if that were not the law. On that ground I think the claimant is in a great difficulty. But, further, it seems to me that here, as in the case of New York Life Insurance Co v Fletcher, it would be wrong to treat Cooper, the company’s agent, as their agent to suggest the answers which Biggar was to give to the questions in the proposal. Cooper was an agent to receive proposals for the company. He may have been an agent, as Lindley and Kay LJJ put it in Bawden v London, Edinburgh and Glasgow Assurance Co [above, [311]] to put the answers in form; but I cannot imagine that the agent of the insurance company can be treated as their agent to invent the answers to the questions in the proposal form. For that purpose, it seems to me, if he is allowed by the proposer to invent the answers and to send them in as the answers of the proposer, that

the agent is the agent, not of the insurance company, but of the proposer. I cannot put the doctrine better than in the language of the Supreme Court in New York Life Insurance Co v Fletcher, at pp 532–33 of the case referred to, where they are citing from and adopting previous decisions of the Supreme Court. They say (speaking of another case): “The application was signed without being read. It was held that the company was not bound by the policy; that the power of the agent would not be extended to an act done by him in fraud of the company and for the benefit of the insured, especially where it was in the power of the assured by reasonable diligence to defeat the fraudulent intent; that the signing of the application without reading it or hearing it read was inexcusable negligence; and that a party is bound to know what he signs.” Then, speaking of the agent’s conduct, they say: “His conduct in this case was a gross violation of duty, in fraud of his principal, and in the interest of the other party. To hold the principal responsible for his acts, and assist in the consummation of the fraud, would be monstrous injustice. When an agent is apparently acting for his principal, but is really acting for himself or third persons and against his principal, there is no agency in respect to that transaction, at least as between the agent himself, or the person for whom he is really acting, and the principal…The fraud could not be perpetrated by the agent alone. The aid of the plaintiff or the insured, either as an accomplice or as an instrument, was essential.” Then they go on:

“She says that she and her husband signed the application without reading it and without its being read to them. That of itself was inexcusable negligence. The application contained her agreements and representations in an important contract. When she signed it she was bound to know what she signed. The law requires that the insured shall not only in good faith answer all the interrogatories correctly, but shall use reasonable diligence to see that the answers are correctly written. It is for his interest to do so, and the insurer has a right to presume that he will do it. He has it in his power to prevent this species of fraud, and the insurer has not.” That doctrine of the Supreme Court of the United States seems to me to be good sense and good law. Even if those doctrines are not to be applied to their full extent, still I cannot conceive how this policy can be held to be binding on the company. The very basis of the policy is the statements in the proposal. These statements are false in several material respects. How, then, can the policy be binding on the company? If the plaintiff is entitled to anything, I think that the most he could ask for would be that the Court should say that the contract is void on the ground of either fraud or mistake, with the consequence, perhaps, that he may be entitled to recover back the premium that he paid; but I cannot see how it can be held under these circumstances that the company is bound by the policy. I see no equity against the company in this case — no equity, for instance, such as might exist on the ground of receipt of premium with knowledge of the falsity of the statements. They never knew of the falsity of the statements, and they never knew that the proposal form had been filled in with answers invented by the person purporting to act as their agent. I think the answer to the

question asked by the learned arbitrator must be that the facts stated shew a defence in law.’

[313] Newsholme Bros v Road Transport and General Insurance Co Ltd [1929] 2 KB 356 (CA) [The insurers agent who, although told the true facts, inserted false answers when completing a proposal form for the insurance of a bus. The form, which was signed by the insured, contained a basis of the contract clause. The agent was not authorised by the insurance company to complete proposal forms. His duties were to sell insurances and to check that proposal forms were duly completed. He was not authorised to give a cover note or to conclude contracts of insurance. A policy was issued. When the insured made a claim under it, the insurers repudiated liability on the ground of the untrue statements in the proposal form]. Scrutton LJ: ‘In my view, the important question for the decision of this case is whether the knowledge of the agent, acquired in filling up the proposal for the assured, is to be taken as the knowledge of the company. If the person having authority to bind the company by making a contract in fact knows of the untruth of the statements and yet takes the premium, the question may be different. Even then I see great difficulty in avoiding the effect of the writing signed by the proposer that the truth of the statements is the basis of the contract. But where the person contracting for the company has no actual knowledge, but only constructive notice, the

difficulties of the proposer are greater. In commercial matters, the doctrine of constructive notice is not favoured…In Blackburn, Low & Co v Vigors (1887) 12 App Cas 531 a broker employed to effect an insurance, heard of a fact affecting the risk, and did not tell his principal. That broker did not effect that insurance, but, later, the principal did effect an insurance on that risk. On a loss occurring, the underwriters alleged that the knowledge of the first broker was the knowledge of the principal, and as the principal had not disclosed a fact he must be taken to have known, the insurance was void. The House of Lords held that this contention was erroneous; that while it was true that if the first broker had effected a policy, he would have been bound to disclose his actual knowledge to the underwriters, he was not so bound to disclose his knowledge to his principal that his principal, though it was not disclosed, must be taken to know it. Another objection to this imputation of constructive knowledge may be found in the recent decision of the House of Lords, in Houghton’s case [Houghton v Northard, Lowe [1928] AC 1, 18, 19], where Lord Sumner points out that where knowledge is to be imputed to an artificial person, in the first place it must be the knowledge of the directors who deal with the company’s rights, and, in the second place, the knowledge of a person who acquires it in a breach of duty, and is guilty of a breach of duty in respect to it, is not to be imputed to a company to whom, from the hypothesis, he would be very unlikely to disclose it in fact. He cites In re Hampshire Land Co. [1896] 2 Ch. 743, 750, where Vaughan Williams LJ declines to hold that the agent’s “knowledge of his own fraud or of his own breach of duty is, under the circumstances, the knowledge of the company.” I find it difficult to reconcile these principles laid down in the highest tribunal with the decision in Bawden’s case [see above, [311]]…It appears to me that the facts in this present case are not substantially similar with those in Bawden’s case so as to make the conclusions of law drawn from them in the

latter case binding on this Court, even if those conclusions are not inconsistent with the two decisions in the House of Lords to which I have referred. In my view the decision in Bawden’s case is not applicable to a case where the agent himself, at the request of the proposer, fills up the answers in purported conformity with information supplied by the proposer. If the answers are untrue and he knows it, he is committing a fraud which prevents his knowledge being the knowledge of the insurance company. If the answers are untrue, but he does not know it, I do not understand how he has any knowledge which can be imputed to the insurance company. In any case, I have great difficulty in understanding how a man who has signed, without reading it, a document which he knows to be a proposal for insurance, and which contains statements in fact untrue, and a promise that they are true, and the basis of the contract, can escape from the consequences of his negligence by saying that the person he asked to fill it up for him is the agent of the person to whom the proposal is addressed.’

Notes: While the decision in Newsholme continues to represent the orthodoxy in English insurance law, it was distinguished by the Court of Appeal in Stone (below, [314]) and has not been followed in other common law jurisdictions (see the decision of the Supreme Court of Canada in Blanchette (below, [315]) and the statutory reforms in Australia and New Zealand (see below, ‘Reform’ and [324]). In distinguishing Newsholme, Lord Denning MR placed considerable emphasis upon the authority of the particular agent in Stone and the fact that the

insurers had in their possession the means to ascertain the truth with respect to the earlier lapsed policy (see also, Ayrey v British Legal and United Provident Assurance Co Ltd [1918] 1 KB 136 — information given to a district manager was imputed to head office). [314] Stone v Reliance Mutual Insurance Society Ltd [1972] 1 Lloyd’s Rep 469 (CA) [The facts appear from the judgment]. Lord Denning MR: ‘Mr. Leonard Stone lives with his wife in a flat at 86 Hebden Court, Laburnum Street, [E.2] He took out policies of assurance in respect of fire, theft and endowments with the Reliance Mutual Insurance Society Ltd. The premiums were payable weekly. They were collected by collectors who called at the door and entered the amount in a premium receipt book for each policy. One of these policies covered the risk of fire. This was issued as a result of a call by a canvasser, Mr Brooks, on 26 April, 1966. He saw the wife, Mrs. Stone. He filled in the proposal form and she signed it. In February, 1967, there was a fire at the premises. The branch manager went to see the damage. The society paid Mr Stone £280 3s. 6d. for the damage done. In August 1967, the policies lapsed because the premiums had not been paid. It is not suggested that this was the fault of Mr or Mrs Stone. She said that the collector had not been to collect the money. In January 1968, Mr O’Shea, an inspector, called from the insurance society. He had with him a new agent to show him the area. He was calling on people who were existing

policyholders or whose policies had lapsed and to seek their revival. He was not canvassing for new business. Mr Stone was not in. So Mrs Stone saw Mr O’Shea. He asked her if she would like to take out a new policy, and suggested it should be for a higher amount, £1,100, instead of £500. She said in evidence: “I agreed, and he got out some forms and started filling them in. He didn’t ask me any questions. When he’d filled them in (2 forms) he gave them to me to sign. He showed me where to sign. I didn’t read them.” Mr O’Shea agreed that he filled in the forms. He said in evidence: “It is company policy that I should put the questions, writing down answers.” As much turns on the proposal form, I must read a good deal of it. It was a printed form…. “5. State Policy Numbers of insurance held by you with the Society and whether lapsed or in force. None … 7. Give particulars and dates of any claims you have made in respect of any risks hereby proposed to be insured None …………………………………………………………… 1. State sum proposed to be insured: [for fire or burglary] £1100 I HEREBY DECLARE that the answers given in the above proposal are in every respect true and correct…and that I have not concealed any important circumstances that ought to be communicated to the Society. I further declare in so far as any part of this proposal is not written by me the person who has written same has done so by my instructions and as my agent for that purpose. I

agree that the above proposal and this declaration shall be the basis of the Contract of Insurance between the Society and myself, and I am willing to accept a policy subject to the provisions and conditions contained therein, and I agree that the liability of the Society does not commence until this proposal has been accepted by the Directors and the premium paid. Proposer’s Signature X Theresa Stone Witness S.O’Shea Date 29/1/68.” There is a mark near Mrs Stone’s signature as if she was told where to sign. It is apparent that the answers to questions 5 and 7 were wrong. Mr O’Shea must have made a mistake in filling them in. The society had information, no doubt in their own records about the lapsed policies and about the fire claim. Mr O’Shea cannot have known about them or remembered them - else he could not have inserted “None” as the answers. The proposal form went up to the head office of the society. They do not seem to have checked their records either. At any rate they issued a policy against burglary and housebreaking and it was delivered to 86 Hebden Court, E.2. It gave the insured as Leonard Stone. The commencement date was 29 January 1968. The sum insured was £1,100. The premium was 10d. a week. Thereafter the premiums were duly paid. On 16 October 1969, thieves broke into Mr Stone’s flat at 86 Hebden Court. He at once called the police. He obtained a claim form from the local office. Within two days, on 18 October 1969, he put in his claim to the Reliance Insurance Society. On the form was a question to which he gave answers disclosing fully the previous fire claim; thus showing good faith.

“11. Have you ever before sustained loss by fire, burglary, YES housebreaking or larceny?……………FIRE DAMAGE FEB-1966 Was a claim made upon any Company or underwriters? If PAID £280 so, give name, date, nature of loss and amount paid…” That answer was quite correct except that “1966” was a mistake for “1967”. He added a list of the items stolen amounting to £211. Mr Stone sent that form in to the local office of the Reliance Insurance Society in Leyton. They received it on 23 October, 1969. An assessor went to the flat and agreed the amount at £211. The collectors went on collecting the premiums which were duly paid. On 9 January 1970, he signed another claim form containing the same particulars, and sent it to the local office at Leyton. They sent it on to the head office at Tunbridge Wells. Head office received it on 19 January 1970, and rejected the claim. They alleged that he had not disclosed the previous fire claim… The case was tried in the Mayor’s and City of London Court. The Judge reserved his judgment and, with some regret, dismissed the claim. He thought that the case could not be excepted from the established principle as set out in Newsholme Bros v Road Transport and General Insurance Co Ltd [above, [313]]. His findings are not quite as full as one could have wished. But, as I read them, this much is quite clear. Neither party was guilty of any fraud. Fraud was not alleged. It was not proved. It was not found. The only inference is that the answers in the proposal form were inserted by mistake. Whose mistake? Clearly Mr O’Shea’s mistake: because he did not ask Mrs Stone the questions; and he inserted the answers out of his own head, without checking up from her — or from the Society’s records — whether they were true or not. No doubt it was Mrs Stone’s

mistake too. She ought to have read through the questions and answers before she signed the form: but she did not do so. Her mistake was, however, excusable, because she was of little education, and assumed that the agent would know all about the previous policies and that there had been claims made under them. She said: “He didn’t ask about any previous claims. He already knew about it.” On those facts, it seems to me that the agent by his conduct impliedly represented that he had filled in the form correctly and that he needed no further information from her. Relying on this implied representation, she signed the form which he put before her. Later the policy was sent and she paid the premiums. What then is the legal position? It is quite clear that, in filling in the form, the agent here was acting within the scope of his authority. He said: “It is company policy that I should put the questions, writing down answers.” This distinguishes the present case from Newsholme’s case, where the agent had no authority to fill in the proposal forms: and it was held that he was merely the amanuensis of the proposer. The present case is more like Bawden v London, Edinburgh and Glasgow Assurance Co [above, [311]]…That case was adversely commented on in Newsholme’s case, but I think it was correctly decided. It would have been most unjust if the company had been allowed to repudiate liability. The case presents itself to my mind like this: The society seek to repudiate liability by reason of the untruth of two answers in the proposal form. They seek to fasten those untruths onto the insured. They do so by virtue of a printed clause in the proposal form. They make out that it was the insured who misled them. Whereas the boot is on the other leg. The untrue answers were written down by their own agent. It was their own agent who made the mistake. It was he who ought to have known better. It was he who put the printed form before the wife for signature. It was he who

thereby represented to her that the form was correctly filled in and that she could safely sign it. She signed it trusting to him. This means that she, too, was under a mistake, because she thought it was correctly filled in. But it was a mistake induced by the misrepresentation of the agent, and not by any fault of hers. Neither she nor her husband should suffer for it. No doubt it was an innocent misrepresentation for which in former times the only remedy would be to cancel the contract and get back the premiums. But nowadays an innocent misrepresentation may give rise to further or other relief. It may debar a person from relying on an exception. Likewise in this case it disentitles the insurance company from relying on the printed clause to exclude their liability. Their agent represented that he had filled in the form correctly: and having done so, they cannot rely on the printed clause to say that it was not correctly filled in. So they are liable on the policy.’

[315] Blanchette v CIS Ltd (1973) 36 DLR (3d) 561 (Supreme Court of Canada) [The insured had signed a composite proposal form for insurance covering his granary and public liability. He subsequently telephoned the insurers representative, Raiche, to obtain cover on his tractor. Raiche, who completed the relevant part of the previously signed proposal form, entered incorrect answers to the questions contained therein. The proposal form contained a basis of the contract clause. The issue for the Court was whether the insured was Raiche’s principal and therefore bound by his misrepresentations thus entitling the insurers to repudiate liability].

Pigeon J: ‘Raiche was not a mere soliciting agent, that is a man having no authority to make a contract binding the company. In order to hold that no contract results from the receipt of the premium with an application under such circumstances, one would have to say that this is an offer open to acceptance for an indefinite length of time that is, as long as the company does not decide whether to accept or to refuse the offer. This would mean that if a loss occurs in the meantime, which may be a matter of weeks if not months, it could simply refuse the offer, but otherwise it could issue a policy dated from the day specified in the application, thus taking the benefit of the premium for the elapsed time without having been at risk. This cannot be so. If the company is to earn the premium from the date of the application by issuing a policy bearing that date, this means that a contract has been made when the premium was received by the agent. On the basis that initially the application covered only the granary and the liability, appellant testified that there had been. no questions put with respect to the Farm Equipment Floater and no answers given or written. He asked the agent to come back in order to cover the tractors but Raiche said this was unnecessary and it could be done by telephone conversation. Appellant admits that Raiche did not at that time repeat the statement that he would be covered immediately. In my view, this makes, no difference. The previous statement was clearly the enunciation of an established policy, as a matter of fact, the agent’s interpretation of the company’s established policy. It should therefore be understood to apply to the tractors as well as to the other risks. This is borne out by the letter written by the company to appellant’s solicitors in which there is this statement:

“Your letter deals with Mr Blanchette’s application for insurance through Mr Raiche and the fact that Mr Raiche advised Mr Blanchette that his equipment was covered by fire insurance, until our Company rejected the. application. While this commitment on the part of our Agent may be correct, we have refused to accept the application, on the basis of misrepresentation and non-disclosure on the part of Mr Blanchette.” In view of the evidence as to Raiche’s duties, I fail to see how it can be said that he did not have at least apparent authority to make this commitment. He was not a mere soliciting agent, he had some authority to bind the company and the latter should be held to whatever authority he professed to exercise and was reasonably believed to have… Under these circumstances, can the company rely on the inaccurate answer written by the agent? We are not here dealing with an application signed in blank which the insured has authorised the agent to fill subsequently. We are faced with what is really a second contract made by telephone between the agent and the insured. I cannot agree that an applicant for insurance who signs an application form leaving a part concerning “farm equipment” completely blank and who later applies for this type of coverage and authorizes by ‘telephone the company’s agent to complete the form for that coverage, must be in the same position at law as if he had signed the form without reading answers previously entered by the agent. I can see no authority for that proposition and there is undoubtedly an important difference between the two situations. When the insured signs after the answers have been entered by the agent, he has the opportunity of reading them. On the assumption that he is under a duty to verify before signing that the agent has properly filled in the

form, I can understand how he can be said to be negligent if he does not do so. However, in the present case, the signed form was already in the hands of the agent when he told the appellant that the additional coverage could be obtained by his making the necessary additions on the basis of the information given him by telephone. When Blanchette agreed not to insist on Raiche returning to his home for the purpose of adding the tractor coverage on the insurance application, he had no means of verifying the correctness of the form as completed. In my view, it is unfair to hold that he should suffer the consequences of Raiche’s failure to complete the form properly.’

Notes: 1. The courts in most USA jurisdictions have also taken the view that an agent who procures insurance and completes the proposal form does so as the agent of the insurer: ‘the insurer cannot rely on incorrectly recorded answers known to the insured where the incorrect answers are entered pursuant to the agents advice, suggestion or interpretation’, Stewart v Mutual of Omaha Insurance Co 817 P2d 44, 53 (Ariz Ct App 1991). 2. Adams has argued that notwithstanding the lack of direct legislative intervention the Newsholme principle might nevertheless be circumvented by a future court. [316] JE Adams, “More Nails in the Coffin of ‘Transferred Agency’” [1999] JBL 215

‘The problems of “the transferred agency”, whereby the insured agent becomes, or is treated as becoming, the proposer’s agent in relation to the completion of the proposal are well known and well documented. The criticisms have not prompted legislative intervention, the ABI Statements of Practice do not address the issue directly [see now the GISC Codes, above, [303] and [304]] and, to date at least, the Insurance Ombudsman accepts the conventional view. The absence of recent litigation is equivocal; the point may be treated as so firmly settled as not to justify proceedings or insurers, as a body, choose not to take the point. The purpose of this article is to suggest that, were it now to be litigated, a combination of legislation, delegated legislation and “quasi-litigation” might help to produce an answer different from that traditionally given’. Brokers Apart from the possible impact of the Financial Services Act 1986 (discussed below), brokers are largely untouched by the new developments. Given their position as agents of the proposer, that is not a surprise (at least not to a lawyer) and indeed almost none of the authorities affected brokers strictly defined. The major problem has been the identification of the status, the foremost example of which is Woolcott v Excess Insurance Co [1979] 1 Lloyds Rep 231 where, although the intermediary was described as a broker, it was seemingly assumed that the knowledge he was found to have should have been communicated to the insurer. The Financial Services Act The 1986 Act, and the concomitant delegated legislation and rules, introduced the concepts of “authorised persons” (ie those allowed to offer financial services) and “appointed representatives”. The latter is “employed” by the former

under a contract of services requiring or permitting him to carry on investment business in the form of procuring contracts with third parties and giving advice to third parties and for whose conduct the authorised person had accepted responsibility in writing. The statute renders the principal responsible for “anything said, done or omitted by the representative as if there had been express authorization” [see section 44]. It imposes vicarious liability on the principal for the representative’s action in breach of the rules in, or made under, the Act. The existence of this imposed responsibility significantly strengthens the arguments against transferred agency for, under the statute, the intermediary is plainly the agent of the insurer, as regards the whole of the conduct. The categorisation of implied authority varies between authors — implied actual authority, apparent authority, ostensible authority, usual authority and customary authority — but for present purposes it is not necessary to pursue the full debate. If the authorised person is obliged to answer for the (mis-)deeds of the appointed representative, it should not be difficult for the proposer’s advisors to fit the circumstances into one or other category of implied authority. What could be wider than the formula for responsibility on the insurer of “anything said, done or omitted”? If the proposer vouchsafes material information to the intermediary, which is either not transmitted on the form to the insurer, or partially, misleadingly, wrongly or ambiguously transmitted, there is surely an act or omission. The first limb of the Newsholme [above, [313]] decision is thus effectively overcome. What, then of the second test, the negligence of the proposer approach? Stone v Reliance Mutual Insurance Society [above, [314]] departed from the 1929 case on this score, because of a finding, on the facts, that the status of the intermediary and the relative unsophistication of the plaintiff’s wife (with whom the inspector dealt) permitted a finding that he had authority to

represent to her that the form had been correctly completed. The structure of section 44, and its generality, gives any appointed representative a wide authority so that nice questions of his, or her, hierarchical ranking can be avoided and reliance on his, or her, standing established so enhancing the prospects of following Stone. The LAUTRO rules forbade the representative to complete the proposal form on behalf of the proposer unless the proposer agrees he should do so. The rules have been adopted by the Personal Investment Authority, doubtless on a temporary basis. The prohibition thus continues into the new scheme. One’s main worry lies in the ease with which, in practice, the agreement of the investor (proposer) “that he may do so” could be procured. Furthermore, if the intermediary does complete the form, how effective in practice is the consequential obligation to ask [sic not “ensure”] the investor “to check that what he has written is correct” and then “to ensure [sic] that the investor reads the form through before signing it”? If the rule is breached, that is an act for which the insurer must answer under section 44 of the 1986 Act. If the rule is observed, that still does not destroy the possibility that the mandatory statutory structure overcomes both limbs of the Newsholme principle. Of course, all these provisions affect only those insurances when negotiated by a broker which constitute investments within the scope of the 1986 Act. There is no reason to suppose that the Financial Services Authority will want to vary these rules, when it takes over in due course. Non-broker Intermediaries The ABI promulgated its Code of Practice for All Intermediaries (Including All Employees of Insurance Companies) Other than Registered Brokers in November 1988, it took effect in January 1989 and was re-issued (with minor amendments) in August 1994. It relates to general

business as defined in the Insurance Companies Act 1982. The general sales principles include the following: “A (ii) [The intermediary] shall make it known that (s)he is — (a) An employee of an insurance company, for whose conduct the company accepts responsibility; or (b) An agent of one company, for whose conduct the company accepts responsibility; or (c) An agent of two or up to six companies, for whose conduct the companies accept responsibility; or (d) An independent intermediary seeking to act on behalf of the prospective policy-holder, for whose conduct the company/companies do not accept responsibility.” Thus, for categories (a) to (c), the holding out goes well beyond section 44 of the Financial Services Act, in that the intermediary is obliged to tell the potential proposer that the insurer stands behind him or her. As the preamble to the Code states “As a condition of membership of the ABI, members undertake to enforce this Code and to use their best endeavors to ensure that all those involved in selling their policies observe its provisions.” Thus ABI insurers should make their non-broker intermediaries, of whatever status, hold out, ie expressly state, that the relevant insurer accepts responsibility for their conduct. Thus, it is urged, neither intermediary nor insurer can exclude their conduct in misdealing with information supplied by a proposer. Under principle C (ii) the intermediary must “”ensure that the consequences of non-disclosure and inaccuracies [in completion of the proposal form] are pointed out to the prospective policy-holder by drawing attention to the relevant statements in the proposal form and by explaining them himself to the prospective policyholder”. Note A (ii) also appears in the Code of Practice for Life Insurance (Non Investment) Business also issued in November 1988.

Here, in the consumer cases, the over-ruling of “transferred agency” is the more readily found. Scrutton LJ’s scepticism “I have great difficulty in understanding how a man who has signed without reading it, a document which he knows to be a proposal for insurance and which contains statements in fact untrue, and a promise that the are true”, [Newsholme, at 382] can be rejected. All intermediaries, save registered brokers, are to have the backing of the member insurer in relation to their conduct in no way restricted to any particular elements of that conduct. The cases already hold that attempts to make the insurer’s representative the agent of the proposer by wording in the proposal fail. So far as consumers are concerned, the Unfair Terms in Consumer Contracts Regulation may also assist. The “Indicative and Illustrative List of Terms Which May Be Regarded as Unfair” in Schedule 3 includes: “(n) limiting the seller’s…obligations to respect commitments undertaken by his agents…”. If that is not sufficient, the general wording of Regulation 4(1), defining as unfair a term “which contrary to the requirement of good faith causes a significant imbalance in the parties rights and obligation under the contract to the detriment of the consumer” also assists the present agreement. The saving for core terms (if clearly expressed) seems not to apply. If unfair, it does not bind the consumer. At the very least, the Regulations should outlaw the wording frequently found in proposals expressly making the insurer’s representative who completes the proposal the agent of the proposer. One can thus conclude that there are further weapons that can be put to good use in the assault on the citadel of “transferred agency”. Even if the role of the ABI in policing its own pronouncements is somewhat pusillanimous, perhaps the Ombudsman may be firmer. One day, of course, a government may belatedly take a part in ending it.’

Notes: 1. It is lamentable that the GISC Codes do not address the harshness of Newsholme and align the law with the expectations of insureds (neither para 19 of the GISC’s Commercial Code nor, more importantly, the General Insurance Code for Private Customers (above, [303]) pick up on the calls for reform made by both Hodgson J and Purchas LJ in Roberts v Plaisted (above, 3.3). Until legislation changes the law, it falls to the Ombudsman to champion the consumer in this regard. 2. As Adams points out (above, [316]), the LAUTRO rules made under the 1986 Act prohibited an agent from completing the proposal form on behalf of the proposer unless the proposer agreed that he should do so. If there was such an agreement the agent was under a duty to ask the proposer to check the form and ensure that he or she read it before signing it. Notwithstanding the FSMA 2000 it seems likely that insureds will remain responsible for any inaccuracies unless non est factum can be pleaded.

3.4 The Duties of an Intermediary In addition to the duties imposed by the FSMA 2000 and the GISC an insurance intermediary is also subject to the duties imposed by the general law:

principally deriving from tort and contract (although it should be noted that agents, as fiduciaries, are also subject to fiduciary duties (see J Lowry and P Rawlings Insurance Law: Doctrines and Principles (Oxford, Hart Publishing, 1999) pp 334–35).

3.4.1 The Agent’s Duty of Care An agent owes a duty of care to the principal and will be liable for any reasonably foreseeable losses consequent upon a breach. Such liability runs concurrently in tort and contract and so the agent may be sued in either: Henderson v Merrett Syndicates Ltd (below, [318]). The relevant limitation period will need to be taken into account when determining which cause of action should be pursued (see J Lowry and P Rawlings, Insurance Law: Doctrines and Principles (Oxford, Hart Publishing, 1999) pp 326–27). As explained by Cantley J in Cherry Ltd v Allied Insurance Brokers Ltd (below, [317]) and by Lord Goff in Henderson v Merrett (below, [318]) the basis of an agent’s liability for breach of the duty of care is the decision of the House of Lords in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 464. The court’s determination of the scope of the duty of care will, in turn, determine the measure of damages for its breach (see Aneco Reinsurance Underwriting Ltd v Johnson and Higgins Ltd (below, [319]) where, on the particular facts, the defendants were held liable for the full losses suffered by their clients).

[317] Cherry Ltd v Allied Insurance Brokers Ltd [1978] 1 Lloyd’s Rep 274 [The defendant brokers had acted for the claimants for over 50 years. Dissatisfied with the size of the premiums they were charged given their low claims record, the claimants decided to place their business elsewhere and they instructed the defendants to terminate their policies. At a meeting with the defendants on 13 August 1974 they learnt that the existing insurers refused to cancel cover mid-term. In order to avoid double insurance the claimants cancelled the new policies but failed to inform the defendants. Subsequently, the original insurers agreed to cancel, but the defendants did not pass this information on to the claimants. The claimants suffered a loss and discovered that they were uninsured. They therefore sued the defendants in negligence.] Cantley J: ‘It is contended that they had no duty to be careful. I think in the circumstances of this case they had. The meeting of 13 August was a mutual business meeting from the point of view of both parties; there was nothing casual about it. They were giving information within their specialised knowledge and they knew or ought to have known that it would be taken seriously and acted upon in a transaction of importance. Whatever may have been the position in contract, the situation seems to me to have been covered by the principles as stated by Lord Morris of Borth-y-Gest in the well-known case of Hedley Byrne & Co Ltd v Heller &

Partners Ltd [1964] AC 464 at pp 501 and 502, where he said “I consider that it follows and that it should now be regarded as settled that if someone possessed of a special skill undertakes, quite irrespective of contract, to apply that skill for the assistance of another person who relies upon such skill, a duty of care will arise. The fact that the service is to be given by means of or by the instrumentality of words can make no difference. Furthermore, if in a sphere in which a person is so placed that others could reasonably rely upon his judgment or his skill or upon his ability to make careful inquiry, a person takes it upon himself to give information or advice to, or allows his information or advice to be passed on to, another person who, as he knows or should know, will place reliance upon it, then a duty of care will arise.” Accordingly I hold that the plaintiffs are entitled to succeed in this action. I am not asked to make an award of damages, because the calculation of the appropriate damages is a matter of some intricacy and substance. I am asked to make a declaration, and I do make a declaration, that the plaintiffs are entitled to recover from the defendants as damages such sum as they would have recovered under policy 02CL1532/12 of the General Accident Fire & Life Assurance Corporation Ltd. if that policy had been in force on 29 August, 1974.’

[318] Henderson v Merrett [1995] 2 AC 145 (HL) [The facts are immaterial]. Lord Goff:

Syndicates Ltd

‘The governing principle…I turn immediately to the decision of this House in Hedley Byrne & Co Ltd v Heller & Partners Ltd [above]. There, as is of course well known, the question arose whether bankers could be held liable in tort in respect of the gratuitous provision of a negligently favourable reference for one of their customers, when they knew or ought to have known that the plaintiff would rely on their skill and judgment in furnishing the reference, and the plaintiff in fact relied upon it and in consequence suffered financial loss. Your Lordships’ House held that, in principle, an action would lie in such circumstances in tort; but that, in the particular case, a duty of care was negatived by a disclaimer of responsibility under cover of which the reference was supplied. The case has always been regarded as important in that it established that, in certain circumstances, a duty of care may exist in respect of words as well as deeds, and further that liability may arise in negligence in respect of pure economic loss which is not parasitic upon physical damage. But, perhaps more important for the future development of the law, and certainly more relevant for the purposes of the present case, is the principle upon which the decision was founded. The governing principles are perhaps now perceived to be most clearly stated in the speeches of Lord Morris of Borth-y-Gest (with whom Lord Hodson agreed) and of Lord Devlin. Lord Morris said, at pp 502–03: [His Lordship quoted passages from the speeches of Lords Morris [see above] and Devlin, and continued] From these statements, and from their application in Hedley Byrne, we can derive some understanding of the breadth of the principle underlying the case. We can see that it rests upon a relationship between the parties, which may be general or specific to the particular transaction, and which may or may not be contractual in nature. All of their Lordships spoke in terms of one party having assumed or undertaken a responsibility towards the other…Further, Lord Morris spoke

of that party being possessed of a “special skill” which he undertakes to “apply for the assistance of another who relies upon such skill.” But the facts of Hedley Byrne itself, which was concerned with the liability of a banker to the recipient for negligence in the provision of a reference gratuitously supplied, show that the concept of a “special skill” must be understood broadly, certainly broadly enough to include special knowledge. Again, though Hedley Byrne was concerned with the provision of information and advice, the example given by Lord Devlin of the relationship between solicitor and client, and his and Lord Morris’s statements of principle, show that the principle extends beyond the provision of information and advice to include the performance of other services. It follows, of course, that although, in the case of the provision of information and advice, reliance upon it by the other party will be necessary to establish a cause of action (because otherwise the negligence will have no causative effect), nevertheless there may be other circumstances in which there will be the necessary reliance to give rise to the application of the principle. In particular, as cases concerned with solicitor and client demonstrate, where the plaintiff entrusts the defendant with the conduct of his affairs, in general or in particular, he may be held to have relied on the defendant to exercise due skill and care in such conduct. In subsequent cases concerned with liability under the Hedley Byrne principle in respect of negligent misstatements, the question has frequently arisen whether the plaintiff falls within the category of persons to whom the maker of the statement owes a duty of care. In seeking to contain that category of persons within reasonable bounds, there has been some tendency on the part of the courts to criticise the concept of “assumption of responsibility” as being “unlikely to be a helpful or realistic test in most cases” (see Smith v Eric S Bush [1990] 1 AC 831, 864–65, per Lord Griffiths; and see also Caparo Industries plc v

Dickman [1990] 2 AC 605, 628, per Lord Roskill). However, at least in cases such as the present, in which the same problem does not arise, there seems to be no reason why recourse should not be had to the concept, which appears after all to have been adopted, in one form or another, by all of their Lordships in Hedley Byrne (see, eg, Lord Reid, at pp 483, 486 and 487; Lord Morris (with whom Lord Hodson agreed), at p 494; Lord Devlin, at pp 529 and 531; and Lord Pearce at p 538). Furthermore, especially in a context concerned with a liability which may arise under a contract or in a situation “equivalent to contract,” it must be expected that an objective test will be applied when asking the question whether, in a particular case, responsibility should be held to have been assumed by the defendant to the plaintiff: see Caparo Industries plc v Dickman [1990] 2 AC 605, 637, per Lord Oliver of Aylmerton. In addition, the concept provides its own explanation why there is no problem in cases of this kind about liability for pure economic loss; for if a person assumes responsibility to another in respect of certain services, there is no reason why he should not be liable in damages for that other in respect of economic loss which flows from the negligent performance of those services. It follows that, once the case is identified as falling within the Hedley Byrne principle, there should be no need to embark upon any further enquiry whether it is “fair, just and reasonable” to impose liability for economic loss — a point which is, I consider, of some importance in the present case. The concept indicates too that in some circumstances, for example where the undertaking to furnish the relevant service is given on an informal occasion, there may be no assumption of responsibility; and likewise that an assumption of responsibility may be negatived by an appropriate disclaimer. I wish to add in parenthesis that, as Oliver J recognised in Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp [1979] Ch 384, 416F–G (a case concerned with

concurrent liability of solicitors in tort and contract, to which I will have to refer in a moment), an assumption of responsibility by, for example, a professional man may give rise to liability in respect of negligent omissions as much as negligent acts of commission, as for example when a solicitor assumes responsibility for business on behalf of his client and omits to take a certain step, such as the service of a document, which falls within the responsibility so assumed by him.’

[319] Aneco Reinsurance Underwriting Ltd v Johnson and Higgins Ltd [2002] 1 Lloyd’s Rep 157 (HL) [The facts appear from the speech of Lord Steyn]. Lord Steyn: ‘1. The shape of the appeal The central issue in this case is not one of high legal principle but an evaluative one involving matters of fact and degree. This would not have been fully apparent when the Appeal Committee granted leave to appeal. The broad question is whether London reinsurance brokers, who were in breach of duty to a Bermudian reinsurance company, are liable only for the reinsurance cover which the company lost (US$11 m.), or for the total losses which the company suffered on the transaction (US$35 m.). This in turn depends on an assessment whether on the facts of the case it is governed by the “scope of the duty” principle applied by the House in Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191, known as South Australia Asset Management Corporation v York Montague Ltd (“SAAMCO”) or whether the brokers had undertaken or assumed a duty to advise the company as to what course of action they should take.

II. The Bullen treaty and the reinsurance contracts Mr Bullen was the underwriter of four syndicates at Lloyd’s which wrote marine excess of loss business, ie they reinsured losses of other marine insurers so far as those losses exceeded a particular level. In the autumn of 1998 Mr Bullen discussed with Mr Forster, an experienced broker with Johnson and Higgins Ltd, the idea of a proportional reinsurance of his excess of loss account. Mr Forster drafted a treaty (“the Bullen treaty”) on a basis which he believed would be attractive to the Bullen syndicates. He had identified Aneco Reinsurance Underwriting Ltd. (now in liquidation) as potential reinsurers of the Bullen treaty. In truth what was contemplated was a retrocession of this treaty but I will adopt the description of it as reinsurance used during the proceedings. … Johnson and Higgins were acting as Mr Bullen’s brokers in the first or (from Aneco’s point of view) inwards transaction and as Aneco’s brokers in the second or outwards transaction. Mr Forster knew from the start that if satisfactory outwards reinsurance was not available in the market Aneco would not have proceeded. Mr Forster said in due course at the trial that “the whole thing would have collapsed”… Unfortunately Mr Forster negligently failed properly to present the risk to Aneco’s reinsurers, some of whom subsequently avoided the policies as they were entitled to do. Euphemistically Mr Forster represented to Aneco’s reinsurers that the Bullen treaty was a quota share treaty when it was in fact a fac/oblig treaty. The difference is that a quota share treaty is not facultative as far as the reassured (a person in the position of Bullen) is concerned: he must cede a set proportion of every risk which falls within the limits of the contract, so that everything which meets those

criteria is automatically ceded. By contrast fac/oblig treaties are plainly open to abuse. The reassured is able to put onto his reinsurer the least attractive pieces of qualifying business in his book, while keeping what he considers to be the best business for himself. A reinsurer will tend only to reinsure another underwriter on fac/oblig terms if he has considerable trust in the way that his reassured will use it. It is common ground, now, that Mr King would not have agreed to lead the reinsurance of a fac/oblig treaty, and that on a proper presentation of the risk, it would have been impossible to get enough underwriters to subscribe the reinsurance slip, so that the reinsurance that Mr Crawley desired was never available in the market. If Mr Forster had made the enquiries, presentation and disclosure that he should have made, he would have discovered that the outwards reinsurance cover on which Mr Crawley to his knowledge relied from the start was never available. In the event, Aneco suffered a loss on the Bullen treaty of more than US$35 m., of which they would have recovered US$11 m. from their reinsurers if the reinsurance which Aneco had asked for and which Johnson and Higgins claimed to have obtained had been effective. The brokers received the usual 3 per cent brokerage under the Bullen treaty and 10 per cent. in respect of the six excess of loss contracts.

III. The High Court proceedings Aneco sued the brokers in negligence. Aneco formulated its claim for damages on two alternative bases. Its primary case was a claim for all losses which it had in fact suffered by entering into the reinsurance of the Bullen treaty. Aneco put forward this claim on the basis that the brokers had wrongly advised them that the reinsurance was available in the market, and that this advice led them to enter into the Bullen treaty. An indispensable part of this way of putting

the claim was that in truth alternative security was never available. The secondary case of Aneco was a claim for all the sums which would have been payable under the outwards reinsurance if it had been in place. …

V. The issues before the House Before the House the Court of Appeal’s conclusions on the non- availability of alternative reinsurance cover was accepted. It follows that Mr Forster’s advice to Aneco that reinsurance cover was available in the market was wrong and was negligently given. In these circumstances the principal question is: Is the correct measure of damages all of Aneco’s losses under the Bullen treaty or is the correct measure equal to the recovery which Aneco would have made under the reinsurance contracts but was unable to make to the extent that those have been avoided? …

VII. The law Given that this case can be decided by applying settled principles, I do not propose to examine any problems which do not arise. Nevertheless, I must set out, without examination, the contours of established doctrine. In the leading judgment in SAAMCO [1997] AC 191 Lord Hoffmann illustrated “the scope of duty” concept with an example. He said, at p 213D: “A mountaineer about to undertake a difficult climb is concerned about the fitness of his knee. He goes to a doctor who negligently makes a superficial examination and pronounces the knee fit. The climber goes on the expedition, which he would not have undertaken if the

doctor had told him the true state of his knee. He suffers an injury which is an entirely foreseeable consequence of mountaineering but has nothing to do with his knee.” Lord Hoffmann said that on the usual principle the doctor is not liable. Lord Hoffmann supported his reasoning saying that, if the contrary were the case, the paradoxical situation would arise that the liability of a person who warranted the accuracy of the information would be less than that of the person who gave no such warranty but failed to take reasonable care: at pp 213H–214A. Lord Hoffmann generalised the principle as follows, at p 213C–F: “It is that a person under a duty to take reasonable care to provide information on which someone else will decide upon a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong. A duty of care which imposes upon the informant responsibility for losses which would have occurred even if the information which he gave had been correct is not in my view fair and reasonable as between the parties. It is therefore inappropriate either as an implied term of a contract or as a tortious duty arising from the relationship between them. The principle thus stated distinguishes between a duty to provide information for the purpose of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action he should take. If the duty is to advise whether or not a course of action should be taken, the adviser must take reasonable care to consider all the potential consequences of that course of action. If he is negligent, he will therefore be responsible for all the foreseeable loss which is a consequence of that course of action having been taken. If his duty is only to supply information, he must take reasonable care to ensure that

the information is correct and, if he is negligent, will be responsible for all the foreseeable consequences of the information being wrong.” The House has twice followed and applied the law as stated in SAAMCO: see Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) [1997] 1 WLR 1627 and Platform Home Loans Ltd v Oyston Shipways Ltd [2000] 2 AC 190. In the latter case Lord Hobhouse of Woodborough summarised the SAAMCO principle by saying “it is the scope of the tort which determines the extent of the remedy to which the injured party is entitled” at p 209B. There was an interesting debate during the hearing of the appeal on the validity or otherwise of Lord Hoffmann’s paradox. In a closely reasoned case note Professor Jane Stapleton has argued that conceptually there is no paradox: “Negligent Valuers and Falls in the Property Market” (1997) 113 LQR 1. In the interests of brevity, and doing less than justice to the full rigour of the argument (at pp 3–5), I cite only one passage, at p 5: “Buying a warranty from one’s contracting party is a completely different deal than obtaining an obligation of care. If one accepts that the law of contract damages should not allow the plaintiff to shift the bad bargain on to the defendant, it is not paradoxical that the fate into which the former deal locks its buyer might be worse than that of the person protected by the latter. In terms of the protection of the law of contract damages, a contractual warranty can leave you worse off than an entitlement to due care.” …

VIII. The correct characterisation of the case …

The starting point of the enquiry is not in doubt. If the brokers had carefully performed their duty to report on the availability of reinsurance they would inevitably have reported to Aneco that reinsurance cover was not available in the market. In that event, Aneco would not have entered into the Bullen treaty. The issue is simply: Did the brokers undertake a duty to advise Aneco as to what course of action they should undertake? The argument on behalf of the brokers was that they only undertook a duty to exercise reasonable care to obtain the reinsurance ordered and to report the result of their endeavours. Evans LJ, who has vast experience of the way in which reinsurance business is transacted, gave the answer to this argument. He observed that it would be “highly artificial to derive from the evidence any suggestion that Mr Forster was not advising Mr Crawley what course to take”: at para 78. There was ample material to support this conclusion. Only one item of evidence need be cited. In his evidence Mr Forster accepted that the brokers were advising Mr Crawley as to what reinsurance was available and as to the state of the market. He said: “[A.] Yes, I think we were advising him of what was available then, and we were advising him about the state of the market at that time, as well. [Q.] Yes, quite, you were advising him as to the state of the market? [A.] Yes.” The core of the reasoning of Evans LJ was at paras 82–84: “…the fact that no reinsurance cover was available in the market is important, because it introduces an additional head of breach of duty by Johnson and Higgins. They are liable not merely for failing to obtain effective cover on the terms which they reported to Aneco, but also for failing to report that no cover could be obtained.

The last factor in particular means in my judgment that the Banque Bruxelles principle — compensating the claimant only for the consequences of the advice or information being wrong — fails to provide proper compensation in the present case. Aneco is also reasonably entitled to compensation for Johnson and Higgins’ failure to report correctly the current market assessment of the reinsurance risks which Aneco was proposing to undertake. Those risks were central to Aneco’s decision and Mr Forster took it upon himself to advise Mr Crawley with regard to them. This is far removed from the lender/valuer relationship and even from the client/professional adviser relationship to which the Banque Bruxelles case applies, and even more so from the doctor and mountaineer. I therefore would hold that Aneco is entitled to recover damages for the whole of the losses which it suffered in consequence of entering into the Bullen treaty, acting on Johnson and Higgins’ advice with regard to the availability of reinsurance (retrocession) and therefore on the current market assessment of the risk.” For my part this reasoning is convincing… The contrary reasoning of Aldous LJ, and the arguments of Counsel for the brokers, are in my view based on an artificial and unrealistic distinction between reporting on the availability of reinsurance in the market and reporting on the assessment of the market on the risks inherent in the Bullen treaty. These are two sides of the same thing: they are inextricably intertwined. If the brokers had advised Aneco of the non availability of reinsurance cover in the market, that would inevitably have revealed to Aneco the current market assessment of the risk. There was no other credible reason for reinsurance being unavailable. On the evidence Evans LJ was correct to conclude that the brokers’ breach of duty was their negligent advice “with regard to the availability of reinsurance (retrocession) and therefore

on the current market assessment of the risk”. In my view the conclusion of Evans LJ is supported by the commercial realities and inherent probabilities in the relationship between broker and reinsured revealed by the documentary and oral evidence. Counsel for the brokers placed great weight on the argument that the conclusion of the majority places a broker, circumstanced in a dual capacity as Mr Forster was, in an invidious position. He argued that the difficulty lies in holding that the broker, who owes a duty to the insured to place the insurance, is simultaneously under a duty of care to the insurer to provide advice to him on whether or not to write the insurance at all. The answer is clear. Any problem of the brokers arising from the performance of their dual functions in this case was entirely of their own making. It cannot divert the House from arriving at the inescapable conclusion on the facts that the brokers assumed a duty to advise Aneco as to what course to take. In the result the brokers’ failure to advise that reinsurance was unavailable in the market resulted in a recoverable loss of US$35 m. The width of the duty assumed by the brokers is determinative of this being the correct measure of damages. Ultimately, on matters of fact the question is on which side of the line drawn in SAAMCO the present case falls. In my view the majority of the Court of Appeal came to the correct conclusion. The brokers were fortunate in obtaining leave to appeal to the House on what turned out to be issues of fact. Nevertheless, it was necessary to give the closest attention to all the arguments deployed during a three day hearing. Having done so my view is that the arguments of the brokers must be rejected.

IX. Disposal I would dismiss the appeal with costs.’

3.4.2 Agents Completing Proposal Forms We saw above that it is common for agents or brokers to complete proposal forms on behalf of applicants and that the Newsholme principle holds that an agent’s knowledge about the insured risk will not necessarily be imputed to the insurers. The question that arises is what liability, if any, does an agent have to the insured where the agent fails to pass on material information to the insurers that was disclosed by the insured at the proposal stage? [320] O’Connor v BDB Kirby & Co [1972] 1 QB 90 (CA) [The claimant instructed the defendant broker to arrange vehicle insurance for his new car. The broker completed the proposal form on the basis of information supplied by the claimant but inadvertently stated that the car was garaged whereas, in fact, it was parked on the street. The insurers repudiated liability and the insured sued the broker]. Davies LJ: ‘The fact that the assured read that form and failed or omitted to read it properly, and did not notice, as he said he did not notice, that the form was wrongly filled in with regard to the garage, was the ground upon which the judge found the assured one-third to blame for his loss. A division of liability on those lines in a case of this kind is a somewhat novel thing, and I do not think that it ought to have been a

ground for a division of liability…But, in my view…it was the duty of the assured to have read that form: it was his application, he signed it and, if he was so careless as not to have read it properly, then in my opinion he has only himself to blame for his loss. On those two grounds, and particularly the latter, I would allow this appeal and enter judgment for the broker and the firm.’

Karminski LJ: ‘I agree. When the matter was before the judge, although the assured was represented by counsel, the broker was in person representing also the firm. In the result, therefore, the judge had not the advantage we have had here of a full and careful argument on behalf of the broker and the firm. The proposal form is what I imagine would be the usual form, and amongst other questions is one directed as to the place or places where the car is garaged, whether normally garaged in a private garage, a public garage or in the open. The premium, we understand, varies accordingly — not surprisingly. The broker put in “yes” against the words “private garage,” and the premium was adjusted accordingly. I am not at all persuaded that that was done deliberately in order to attract a lower premium. I am much more inclined to think that it was a pure mistake; if a word of censure is applicable, it was a piece of carelessness on the broker’s part… What follows seems to be the vital matter here. The broker told the assured to read through the proposal form and to check that everything was accurate. The proposal form contained a large number of answers dealing with other questions. The assured apparently read it through and signed it. The form itself stressed the importance of correct answers to the questions asked in relation to the policy of insurance.

I have come to the conclusion…that the sole, effective cause of the loss here was the assured’s failure to check the entire contents of the proposal form, failing in consequence to notice the error with regard to the garage facilities. For those reasons, I have no doubt at all that the decision of the judge was wrong, and I agree that this appeal succeeds and the judgment below must be set aside.’

Note: 1. In reaching its decision in O’Connor v Kirby the Court of Appeal applied Biggar v Rock Life Assurance Co (above, [312]) together with Newsholme (above, [313]). The effective cause of the insured’s loss was his own failure to correct the mistake. However, following the enlargement of the scope of the Hedley Byrne principle by the House of Lords in Henderson v Merrett (above, [318]), the decision in O’Connor might well be restrictively viewed by a future court. 2. Indeed, the modern approach towards an agent’s or broker’s liability in negligence is illustrated by the decision in McNealy in which the scope of a broker’s duty of care was considered by the Court of Appeal. [321] McNealy v The Pennine Insurance Co Ltd West Lanc Insurance Brokers Ltd and Carnell [1978] 2 Lloyd’s Rep 18 (CA) [The facts appear from the judgment].

Denning LJ: ‘This is an interesting point which may often occur. Mr McNealy had served in the Navy and become expert on the guitar. After leaving the Navy he had many jobs. He eventually became a repairer of property. But he had a sideline as a player on the guitar. He went on cruise ships as a member of the band. In 1971 he bought a Triumph motor car. He wanted to insure it. He did not want immediate insurance because he was going to Italy to play the guitar. It was a six-week tour. He had a singer with him, Miss Whittaker. They were both to join a band in Italy. He was not taking his car but he wanted it insured so that he could pick it up at Bristol on the way back and then take Miss Whittaker to her home. So he arranged the insurance through brokers ready for his return to England. They got back to Bristol on 4 November 1971. While taking Miss Whittaker home in the car, he ran into a wall and damaged the car. Miss Whittaker was also injured. Police came up. They wondered what he was doing with a guitar in the back of his car. They thought that he might have stolen it; but he satisfied them that he was a musician. So all was well on that score. But he wanted to claim on his insurance cover, both for the damage to the car and also to meet a claim by Miss Whittaker for her injuries. He claimed against The Pennine Insurance Co Ltd, but they said that they were not liable. So he turned round and went against his brokers, a company called West Lancs Insurance Brokers Ltd. The man in charge there was a Mr Carnell. Mr McNealy said: “If the insurance company are not liable to me on my insurance, I want to sue the brokers”. That is the point in the case. Are the brokers liable? The facts are these: In June 1971, before leaving for Italy, Mr McNealy went to the office of the brokers. He told them that he wanted to effect an insurance ready on his return to England. The broker, Mr Carnell, and his company were in

touch with several insurance companies. He suggested to Mr McNealy that he should insure with the Pennine Insurance Co. Now the Pennine Insurance Co offered very low rates to a limited class of motorists, but they excluded many others. The broker had in his office a leaflet headed “Underwriting instructions” issued by the Pennine Insurance Co. It set out a list of “Risks not acceptable”. I will not go through them all, but a good many ordinary people were excluded from this low-cost insurance. Among those excluded there were “bookmakers, jockeys and others connected with racing”, “whole or part-time musicians”, “journalists and press photographers”, “students” and “service personnel”. Any person who had not been resident in England for 10 years was not acceptable. All those people were not acceptable to the Pennine Insurance Co for this low-cost premium. The broker knew all about those exclusions. He knew perfectly well that part-time musicians were not acceptable risks. Nevertheless when Mr McNealy went to see him, he simply asked him “What is your occupation?” Mr McNealy said “Property repairer”. The proposal form asked for “Full details of occupation”. The answer was simply “Property repairer”. At the trial a question arose as to how and when the proposal form was filled in, but we need not go into it. The form produced to the Court was filled in by the broker himself: but it was signed by Mr McNealy or on his behalf. The important thing is that Mr McNealy was simply asked “What is your occupation?”, and he said “Property Repairer”. On that answer, the risk was acceptable at low rates. The insurance company accepted it. Mr McNealy believed himself to be covered by a comprehensive insurance which also covered passengers. At the trial of the case, it was accepted by both sides that the insurance company were not liable. The reason for their non-liability was because the broker was the agent of the assured. It is well-settled that in all matters relating to the

placing of insurance the insurance broker is the agent of the assured, and of the assured only…In the present case the broker knew perfectly well that a part-time musician was excluded from this risk. Then I go on to ask: Ought that to have been disclosed to the insurance company? Clearly it should have been. It was a most material fact. All facts are material which are, to the knowledge of the proposed assured, regarded by the insurers as material: and that extends to the knowledge of his broker also. Mr Carnell, the broker, knew that it was very material for the insurance company to know that Mr McNealy was a part-time musician. If the insurance company had known that he was a part-time musician, they would not have given him cover at this low premium. They would not have given him any cover at all. Not having a remedy against the insurance company, Mr McNealy said, “If that is so, surely the broker, my agent, is liable”. Certainly he is liable. It was clearly the duty of the broker to use all reasonable care to see that the assured, Mr McNealy was properly covered. An obvious step in the course of doing his duty would have been to say to Mr McNealy: The Pennine will not cover you if you are a full or part-time musician, a bookmaker, a jockey, or anything to do with racing. He ought to have gone through the whole list with Mr McNealy and said: You are not going to be accepted if you are one of these categories because, if you are, the insurance company can get out of it. I am afraid the broker did not do his duty. He did not go through that list with Mr McNealy at all. He simply asked him what was his occupation, and Mr McNealy said “property repairer”. The broker ought to have gone on and asked: “Have you ever been or are you a full or part-time musician?”, and the answer would certainly have been “Yes”. On the answer being “Yes”, the broker should have said: It is no good trying to insure with the Pennine. You had better go to one of the companies who are ready to insure full or part-time

musicians, but that will no doubt be at a higher premium. The broker did not do that at all. In other words, he did not do all that was reasonable to see that Mr McNealy was properly covered. It seems to me that that quite clearly was a breach of duty, and that breach of duty was the cause of all the trouble that Mr McNealy found himself in. I think the Judge was quite right. The broker was liable for not taking proper care to effect the insurance, and he is therefore liable for the full amount of the claim.’

[322] Warren v Henry Sutton & Co [1976] 2 Lloyd’s Rep 276 [The claimant, Warren, instructed his brokers to add a friend, Wright, to his policy as an additional driver. The brokers told the insurers that Wright had ‘no accidents, convictions, or disabilities’ without first checking this with the claimant. In fact Wright did have previous convictions. They were involved in an accident and the insurers repudiated liability on the ground of misrepresentation. The claimant sued the brokers on the basis that they were responsible for the misrepresentation in that they failed to ask the relevant questions about Wright’s record.] Sir John Pennycuick: ‘Assuming then that there was no positive statement by Mr Warren to Mr Sutton, can one say the mere omission by Mr Warren to communicate Mr Wright’s record to him occasioned Mr Sutton’s misrepresentation? It seems to me that the answer to that is in the negative. Mr Sutton was under a duty to obtain cover for Mr Wright, if possible, to make such inquiries as were necessary to that end and to

make a suitable statement to the Legal and General. His misrepresentation was due to his omission to make any inquiries and not to the omission of Mr Warren to communicate to him what he knew about Mr Wright’s record. The most that can be said on behalf of Mr Sutton in this respect is that Mr Warren might have put him on his guard. But that I think is insufficient to absolve Mr Sutton from making inquiries and giving a truthful statement to the Legal and General. In truth, Mr Sutton’s reason for not making inquiries was apparently the principal Mr Warren not giving his account promptly.’

3.4.3 Contractual Liability The liability of a broker or agent in contract depends upon the express or implied terms of the agreement entered into with the principal. As indicated above, the intermediary is also under a duty to discharge contractual obligations with reasonable care and skill. 323 London Borough of Bromley v Ellis [1971] 1 Lloyd’s Rep 97 (CA) [Ellis purchased a car from D who agreed to transfer the car’s insurance to him. Ellis instructed the brokers through whom the insurance had been arranged to effect the transfer. The brokers obtained a proposal form and issued a cover note. Some four months later the brokers submitted the proposal form to the insurers who then queried an answer in the proposal concerning Ellis’s claims record. The brokers did not contact Ellis about the query and subsequently the

insurers informed them that cover would be cancelled and that further cover notes should not be issued. The brokers failed to relay this information to Ellis. Subsequently, he was involved in an accident and learnt that he was uninsured]. Lord Denning MR: ‘The brokers were, I think, under a duty of care to look after Mr Ellis’s interests. I know that the brokers were not his agents. They were agents for the insurance company; but, nevertheless, they were also under a duty to use reasonable care to Mr Ellis. He had asked them to arrange the transfer of the insurance. They had undertaken the duty of arranging the transfer. They had taken the proposal form from him and got it filled in. They were clearly under a duty to arrange the transfer with reasonable care so as to see that he was protected. They failed in many respects, one after the other. They ought to have sent off the proposal form straightaway to the insurance company — or, at all events, sent it within the first 30 days of the cover note. They did not do so. They did not do it until 11 November. That was far too late. Then, when the query was raised, they did not do anything about it. It is clear to me that this want of due care was the reason why he was not insured on 26 February 1967. I think that Mr Ellis was entitled to indemnity from the brokers for their failure to use reasonable care. I would dismiss the appeal, accordingly.’

Note: In Youell v Bland Welch & Co Ltd, The Superhulls Cover Case (No 2) [1990] 2 Lloyd’s Rep 431 at 445, Phillips J accepted counsel’s submission that a broker’s duties could be reduced to three propositions:

‘Mr. Sumption referred me to authorities that establish that an insurance broker’s duties include the following: (i) He must ascertain his client’s needs by instruction or otherwise. (ii) He must use reasonable skill and care to procure the cover which his client has asked for, either expressly or by necessary implication. (iii) If he cannot obtain what is required, he must report in what respects he has failed and seek his client’s alternative instructions. McGillivray & Parkington, Insurance Law, 8th edn. (1988), para 385; Callendar v Oelreichs (1838) 5 Bing NC 58 [132 ER 1026]; Hood v West End Motor Car Packing Co [1917] 2 KB 38 at p 47 per Lord Justice Scrutton; Mitor Investment (Pty) Ltd. v General Accident Fire & Life Assurance Corporation (1984) WAR 365 at pp 37 (Supreme Court of Western Australia); Eagle Star Insurance Co Ltd v National Westminister Finance Australia Ltd (1985) 58 ALR 165 at p 173 (PC)’

3.5 Reform Calls for reform have also long been made in relation to the duties and status of insurance intermediaries. For example, although the courts have accepted the Newsholme principle as a correct statement of the law it has nevertheless attracted significant criticism as running counter to the reasonable expectations of insureds and should therefore be reversed. The Law Reform Committee Fifth Report Cmnd 62 (1957) recommended that: ‘any person who solicits or negotiates a contract of insurance shall be deemed…to be the agent of the insurers, and that the knowledge of such person shall be deemed to be the knowledge of the insurers.’

This is now the position in Australia. The Insurance (Agents and Brokers) Act 1984 (Cth) implemented the recommendations of the Australian Law Reform Commission (ALRC 16). It provides that all insurance intermediaries apart from brokers should operate under written authorisation from insurers and that insurers are responsible for the conduct of their agents. [324] (Australian) Insurance (Agents and Brokers) Act 1984 (Cth) (as amended) ‘Part II — General 10 Insurance intermediaries other than brokers to operate under written agreements (1) An insurance intermediary (other than an insurance broker) shall not arrange, or hold the intermediary out as entitled to arrange, a contract of insurance as agent for an insurer unless an agreement in writing between the intermediary and the insurer authorizes the intermediary to arrange: (a) that contract; (b) any contracts of insurance; or (c) a class of contracts of insurance in which that contract is included; as agent for that insurer. (2) An insurer shall not cause or permit an insurance intermediary (other than an insurance broker) to arrange, or hold the intermediary out as entitled to arrange, a contract of insurance as agent for that insurer unless an agreement in writing between the insurer and the intermediary authorizes the intermediary to arrange: (a) that contract;

(b) any contracts of insurance; or (c) a class of contracts of insurance in which that contract is included; as agent for that insurer. (2A) An agreement referred to in this section must specify whether an insurance intermediary can appoint a person as the intermediary’s agent for the purposes of the agreement. (3) Subsections (1) and (2) do not apply in relation to any act or thing done by an employee of an insurer in the course of performing his or her duties as such an employee. (4) Where an insurance intermediary to whom subsection (1) applies proposes, or holds the intermediary out as entitled, to arrange, or has arranged, a contract of insurance as agent of an insurer, ASIC, or the intending insured or the insured, may request the intermediary to give ASIC, the proposed insured or the insured a copy of the agreement authorising the intermediary to arrange that contract, and, if such a request is made, the intermediary shall comply with the request within 7 days after the day on which the request is received by the intermediary. (5) ASIC may request an insurer to give ASIC a copy of the agreement referred to in subsection (2) that is in force between the insurer and an insurance intermediary referred to in the request, and, if such a request is made, the insurer shall comply with the request within 7 days after the day on which the request is received by the insurer. (6) The validity of a contract of insurance is not affected by a contravention of this section. 11 Liability for conduct of agents and employees (1) This section applies to any conduct of an employee or agent of an insurer:

(a) on which a person in the circumstances of the insured or intending insured could reasonably be expected to rely; and (b) on which the insured or intending insured in fact relied in good faith. (1A) An insurer is responsible, as between the insurer and the insured or intending insured, for the conduct of an employee of the insurer in relation to any matter relating to insurance, whether or not the employee acted within the scope of his or her employment. (1B) If a person is the agent of one insurer only, the insurer is responsible, as between the insurer and the insured or intending insured, for the conduct of the agent in relation to any matter relating to insurance, whether or not the agent acted within the scope of the authority granted by the insurer. (1C) If: (a) a person who is the agent of more than one insurer is the agent of one insurer only in respect of a particular class of insurance business; and (b) the person engages in the conduct in relation to any matter relating to that class of insurance business; the insurer who granted the agency agreement in respect of that class of insurance business is responsible for the conduct, as between the insurer and the insured or intending insured, whether or not the agent has acted within the scope of the authority granted by the insurer. (1D) If: (a) a person is the agent of more than one insurer in respect of a particular class of insurance business; and (b) the person engages in the conduct in relation to any matter relating to that class of insurance; the insurers are jointly and severally responsible for the conduct, as between themselves and the insured or

intending insured, if the agent has acted beyond the scope of the authority granted by any of the insurers. (1E) If: (a) a person is the agent of more than one insurer in respect of a particular class of insurance business; and (b) the person engages in the conduct in relation to a matter relating to that class; and (c) the person, in so engaging, has acted within the scope of the authority granted by one only of those insurers; that insurer is responsible for the conduct, as between the insurer referred to in paragraph (c) and the insured or intending insured. (1F) If: (a) a person is the agent of more than one insurer in respect of a particular class of insurance business; and (b) the person engages in the conduct in relation to a matter relating to that class; and (c) the person, in so engaging, has acted within the scope of the authority granted by some only of those insurers; the insurers referred to in paragraph (c) are jointly and severally responsible for the conduct, as between themselves and the insured or intending insured. (1G) If: (a) a person is the agent of more than one insurer; and (b) the person engages in the conduct in relation to any matter relating to a class of insurance business in which the person is not the agent of any of those insurers; the insurers are jointly and severally liable for the conduct, as between themselves and the insured or intending insured, despite the fact that the agent acted

outside the scope of the authority granted by any of the insurers. (1H) If: (a) a person (the principal agent) is the agent of an insurer; and (b) the principal agent appoints a second person (the sub-agent) to act as agent of the principal agent; then, for the purpose of determining the ultimate responsibility of the insurer under this section, the actions of the sub-agent are to be taken to be the actions of the principal agent: (c) whether the agency agreement entered into between the principal agent and the insurer permitted or forbade the principal agent to appoint the sub-agent; and (d) whether or not the sub-agent acted within the scope of his or her authority. (1J) If: (a) a person is the agent of at least one insurer in respect of life insurance business; and (b) the person is the agent of at least one other insurer in respect of another class of insurance business (general insurance business); the provisions of this section do not operate: (c) if the person engages in the conduct in relation to life insurance business — so as to make any insurer referred to in paragraph (b) responsible for the conduct; and (d) if the person engages in conduct in relation to general insurance business — so as to make any insurer referred to in paragraph (a) responsible for the conduct. (1K) If: (a) a person is the agent of more than one insurer in respect of a particular class of insurance business; and

(2)

(3)

(4) (5)

(b) the person engages in the conduct in relation to a matter relating to that class; and (c) any one or more of the insurers enters or enter into a contract of insurance as a result of the conduct; then, for the purposes of this section, the agent is taken, in respect of the conduct, to have acted within the scope of the authority granted by the insurer or each insurer who so entered into a contract of insurance. The responsibility of an insurer under subsection (1A), (1B), (1C), (1D), (1E), (1F), (1G) or (1H) extends so as to make the insurer liable to an insured or intending insured in respect of any loss or damage suffered by the insured or intending insured as a result of the conduct of the agent or employee. Subsections (1A), (1B), (1C), (1D), (1E), (1F), (1G), (1H) and (1J) and (2) do not affect any liability of an agent or employee of an insurer to an insured or intending insured. An agreement, in so far as it purports to alter or restrict the operation of subsection (1A), (1B), (1C), (1D), (1E), (1F), (1G), (1H), (1J) or (2), is void. An insurer shall not make, or offer to make, an agreement that is, or would be, void by reason of the operation of subsection (4).

12 Certain insurance intermediaries to be agents of insurers (1) Subject to this section, an insurance intermediary shall be deemed, in relation to any matter relating to insurance and as between an insured or intending insured and an insurer, to be the agent of the insurer and not of the insured or intending insured. (2) Subsection (1) does not apply to a general insurance broker in relation to any matter relating to general insurance business.

(3) Subsection (1) does not apply to a life insurance broker in relation to any matter relating to life insurance business. (4) Subsection (1) does not affect any liability to which, if that subsection had not been enacted, an insurer would have been subject in respect of the conduct of an insurance intermediary. 13 Representations etc. by intermediaries (1) A person to whom this section applies shall not with intent to deceive make a false or misleading statement: (a) as to any amount that would be payable in respect of a proposed contract of insurance; or (b) as to the effect of any of the provisions of a contract of insurance or of a proposed contract of insurance. (1A) A reference in subsection (1) to making a misleading statement includes a reference to omitting to disclose matter that is material to a statement. (2) A person to whom this section applies shall not with intent to deceive, in relation to a proposed contract of insurance: (a) write on a form, being a form that is given or sent to the insurer, matter that is material to the contract and is false or misleading in a material particular; (b) omit to disclose to the insurer matter that is material to the proposed contract; (c) advise or induce the intending insured to write on a form, being a form that is given or sent to the insurer, matter that is false or misleading in a material particular; or (d) advise or induce the intending insured to omit to disclose to the insurer matter that is material to the proposed contract. (3) A person to whom this section applies shall not with intent to deceive, in relation to a claim under a contract of insurance:

(a) fill up, in whole or in part, a form, being a form that is given or sent to the insurer, in such a way that the form is false or misleading in a material particular; (b) omit to disclose to the insurer matter that is material to the claim; (c) induce the insured to fill up, in whole or in part, a form, being a form that is given or sent to the insurer, in such a way that the form is false or misleading in a material particular; or (d) advise or induce the insured to omit to disclose to the insurer matter that is material to the claim. (4) An act done in contravention of subsection (1) or (2) constitutes an offence against the subsection concerned notwithstanding that a contract of insurance does not come into being. (5) The persons to whom this section applies are: (a) insurance intermediaries; and (b) agents and employees of insurance intermediaries and of insurers. Penalty:Imprisonment for 2 years…’

Notes: 1. New Zealand has also reformed its law governing insurance intermediaries. The New Zealand Insurance Law Reform Act 1977, section 10(1) provides that ‘a representative of an insurer who acts for the insurer during the negotiation of any contract of insurance, and so acts within the scope of his actual or apparent authority, shall be deemed, as between the insured and the insurer and at all times during the negotiations…to be the agent of the insurer.’

Section 10(2) adds that ‘an insurer shall be deemed to have notice of all matters material to a contract of insurance known to [its] representative…concerned in the negotiation of the contract before the proposal of the insured is accepted by the insurer.’ 2. For the UK, the National Consumer Council Report Insurance Law Reform 1997 took the view that regulation along the lines of the Australian model is long overdue. Recommendation 2 of the Report states: ‘We recommend reform of the law on insurance to provide that: (a) intermediaries who are not registered brokers are deemed to be the agent of the insurer in any matter relating to insurance between an insured (or intending insured) consumer and the insurer; and (b) the insurer is responsible, and liable for damages, for the conduct of its agents in connection with any matter relating to insurance where — a person in the circumstances of the insured (or intending insured) could reasonably be expected to rely on the agent, and — where the insured (or intending insured) did in fact and in good faith rely on that agent.’

Legislative intervention is awaited. In the meantime it has been left to the Insurance Ombudsman to mitigate the harshness of the law. In his 1989 Report he noted that: ‘I am now prepared, in appropriate cases, to hold insurers responsible for the defaults of

intermediaries. Speculation as to exactly what will prove an appropriate case appears fruitless.’

4 The Duty of Disclosure and Misrepresentation 4.1 Utmost Good Faith Insurance is a rare species of contract where both parties, the proposer and the insurer, are under a mutual duty of utmost good faith. The insurance contract is therefore exceptional in being founded upon the doctrine of uberrimae fidei. This should be contrasted with the general common law rule that a party entering into a contract is under no duty to disclose material information: [401] Bell v Lever Bros Ltd [1932] AC 161 (HL) Lord Atkin: ‘Ordinarily the failure to disclose a material fact which might influence the mind of a prudent contractor does not give the right to avoid the contract. The principle of caveat emptor applies outside contracts of sale. There are certain contracts expressed by the law to be contracts of the utmost good faith, where material facts must be disclosed; if not, the contract is voidable. Apart from special fiduciary relationships, contracts for partnership and contracts of

insurance are the leading instances. In such cases the duty does not arise out of contract; the duty of a person proposing an insurance arises before a contract is made, so of an intending partner.’

As commented by Lord Atkin, in insurance contracts the parties are under a positive duty to disclose all material facts and breach of this duty renders the contract voidable. Thus, non-disclosure on the part of the insured entitles the insurer to avoid the contract ab initio notwithstanding the absence of any fraudulent intent. The duty therefore places a heavy burden on insureds. As such, it has proved controversial and, as we shall see, there have long been calls for reform (see, for example, the Law Commission’s Report No 104 (below, [430]) and the Report of the Sub-Committee of the British Insurance Law Association, Insurance Contract Law Reform (below, [438]). It should be borne in mind, however, that in practice the duty does not operate as harshly as might appear from its face. The Insurance Ombudsman (see the Digest, below, [423]) has done much to mitigate its force by adopting the principle of proportionality. Further, the Association of British Insurers, in return for the exemption of insurance contracts from the ambit of the Unfair Contract Terms Act 1977, issued the Statement of General Insurance Practice (1986, replacing 1977) and the Statement of Long Term Insurance Practice (1986) (below, [433] and [434]), whereby most insurers undertake to waive their strict legal rights where the policyholder

is a non-business (ie. consumer) insured (see J Birds [1970] MLR 677). We begin by looking at the early origins of the duty of utmost good faith before going on to examine its content, scope and duration (the issue of whether the duty triggers during the claims process is considered in chapter 11). Misrepresentation is considered in the second part of this chapter. Finally, we review the vexed question of reform.

4.1.1 (i) Origins of the Duty [402] Carter v Boehm (1766) 3 Burr 1905 [The insured, George Carter who was the Governor of Sumatra, effected a policy in 1759 against the risk of a French attack on Fort Marlborough. When, in fact, the fort was attacked and taken by the French the insurers rejected the insured’s claim arguing that he had failed to disclose the vulnerability of the fort and the likelihood of enemy attack. A special jury found in favour of the insured.] Lord Mansfield CJ: ‘First. Insurance is a contract upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only: the underwriter trusts to his representation, and proceeds upon confidence that he does not keep back any circumstance in his knowledge, to mislead the underwriter into a belief that the circumstance does not exist, and to induce him to estimate the risqué, as if it did not exist. The keeping back

such circumstance is a fraud, and therefore the policy is void. Although the suppression should happen through mistake, without any fraudulent intention; yet still the underwriter is deceived, and the policy is void; because the risqué run is really different from the risqué understood and intended to be run, at the time of the agreement. The policy would equally be void, against the underwriter, if he concealed; as, if he insured a ship on her voyage, which he privately knew to be arrived: and an action would lie to recover the premium…Good faith forbids either party, by concealing what he privately knows, to draw the other into a bargain, from his ignorance of that fact, and his believing the contrary. But either party may be innocently silent, as to grounds open to both, to exercise their judgment upon…This definition of concealment, restrained to the efficient motives and precise subject of any contract, will generally hold to make it void, in favour of the party misled by his ignorance of the thing concealed. There are many matters, as to which the insured may be innocently silent — he need not mention what the underwriter knows…what way soever he came to the knowledge. The insured need not mention what the underwriter ought to know; what he takes upon himself the knowledge of; or what he waves being informed of. The underwriter needs not be told what lessens the risque agreed and understood to be run by the express terms of the policy. He needs not to be told general topics of speculation: as for instance — the underwriter is bound to know every cause which may occasion natural perils…The reason of the rule which obliges parties to disclose, is to prevent fraud, and to encourage good faith. It is adapted to such facts as vary the nature of the contract; which one privately knows, and the other is ignorant of, and has no reason to suspect. The question therefore must always be “whether there was, under all the circumstances at the time the policy was underwritten, a fair representation; or a concealment; fraudulent, if designed; or, though not

designed, varying materially the object of the policy, and changing the risqué understood to be run.” The underwriter at London, in May 1760, could judge much better at the probability of the contingency, than Governor Carter could at Fort Marlborough, in September 1759. He knew the success of the operations of the war in Europe. He knew what naval force the English and French had sent to the East Indies. He knew, from a comparison of that force, whether the sea was open to any such attempt by the French. He knew, or might know everything which was known at Fort Marlborough in September 1769, of the general state of affairs in the East Indies, or the particular conditions of Fort Marlborough, by the ship which brought the orders for the insurance. He knew that ship must have brought many letters to the East India Company; and, particularly, from the governor. He knew what probability there was of the Dutch committing or having committed hostilities…’

Notes: 1. It is noteworthy that Lord Mansfield’s antecedents were Scottish, and Scottish contract law, in line with the Civilian tradition, requires good faith on the part of contracting parties. As pointed out by Lord Mustill in Pan Atlantic Insurance Co v Pine Top Insurance Co (below, [405]), Lord Mansfield was at the time attempting to introduce into English commercial law a general principle of good faith. This attempt was ultimately unsuccessful and only survived for limited classes of transactions, one of which was insurance (see also, Lord Hobhouse in The Star Sea (below, [425])). For a stimulating debate on the concept of good faith, see ADM. Forte (ed)

Good Faith in Contract and Property Law (Oxford, Hart Publishing, 1999). 2. The reason for such a wide ranging duty of disclosure was explained by Channell J in Re Yager (1912) 108 LT 28 who said that insurers are entirely dependent upon the proposer providing full disclosure of all circumstances relevant to the calculation of the risk to be underwritten and the appropriate premium to be charged. But note, Professor Hasson, in a closely reasoned essay, has argued that Lord Mansfield’s speech in Carter v Boehm has been misconstrued in subsequent cases with the result that a far stricter duty of disclosure than that originally envisaged by the Chief Justice has been erroneously fashioned by successive English judges: see R Hasson, “The Doctrine of Uberrimae Fides in Insurance Law — A Critical Evaluation” [1969] MLR 615 (below, [429]). 3. The Marine Insurance Act 1906, codifying the common law, has given statutory effect to the concept of uberrimare fides: Section 17 Insurance is uberrimae fidei A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party.’

The duty has long been strictly applied to all types of insurance contracts: ‘in all cases of insurance, whether on ships, houses, or lives, the underwriter

should be informed of every material circumstance within the knowledge of the assured’: Lindenau v Desborough (1828) 8 Barn & C 586; and, more recently, it has been described as ‘an incident of the contract of insurance’ The Good Luck [1988] 1 Lloyd’s Rep 514 at 546, Hobhouse J.

4.1.2 (ii) The Content of the Duty: The Test of Materiality and the Requirement of Inducement Lord Mansfield’s formulation of the disclosure duty has been codified by section 18 of the Marine Insurance Act 1906. The law governing misrepresentation is contained in section 20 of the Act. Notwithstanding the title of the statute these provisions are of general application in insurance law. ‘Section 18 Disclosure by assured (1) Subject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract. (2) Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk [emphasis added; the “prudent insurer” test was first formulated by Blackburn J in Ionides v Pender (1874) LR 9 QB 531].

(3) In the absence of inquiry the following circumstances need not be disclosed, namely: (a) Any circumstance which diminishes the risk; (b) Any circumstance which is known or presumed to be known to the insurer. The insurer is presumed to know matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his business, as such, ought to know; (c) Any circumstance as to which information is waived by the insurer; (d) Any circumstance which it is superfluous to disclose by reason of any express or implied warranty. (4) Whether any particular circumstance, which is not disclosed, be material or not is, in each case, a question of fact.’ ‘Section 20 Representations pending negotiation of contract (1) Every material representation made by the assured or his agent to the insurer during the negotiations for the contract, and before the contract is concluded, must be true. If it be untrue the insurer may avoid the contract. (2) A representation is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk…’

Notes: 1. As commented above, sections 17–20 of the 1906 Act codified the common law and they are of general application — there being no difference between marine and non-marine insurance in this respect: PCW Syndicates v PCW Reinsurers [1996] 1 WLR 1136, 1140. 2. To determine whether or not a non-disclosed fact is material, section 18(2) of the 1906 Act states

that it must be such as would ‘influence’ the ‘judgment’ of the prudent insurer. Although the Act does not go on to define these requirements the courts have laid down the requisite tests for determining whether they are satisfied. [403] Container Transport International Inc v Oceanus Mutual Underwriting Association (Bermuda) Ltd [1984] 1 Lloyd’s Rep 476 (CA) [The facts are immaterial]. Kerr LJ: ‘I have so far referred to non-disclosure and misrepresentation in general terms, without reference to the crucial qualification that the right to avoid a contract of insurance on these grounds arises only if the undisclosed or misrepresented circumstances are “material to the risk”, to use a common paraphrase… I…turn to what the learned Judge called the “theoretical difficulty “concerning the interpretation of section 18 (2)… The point at issue turns mainly on the meaning of “judgment” in the phrase “would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk”. The Judge in effect equates “judgment” with “final decision”, as though the wording of these provisions had been “would induce a prudent underwriter to fix a different premium or to decline the risk”… This interpretation differs crucially from what I have always understood to be the law and from the interpretation which Mr Evenett [an underwriter and expert witness for

Oceanus] adopted in much of his evidence. Mr Evenett interpreted section 18 (2) in the sense that “judgment” referred to the assessment or evaluation of the risk…In my view this is the correct approach, and I would expect everyone experienced in the market to reply in this sense, whether underwriter or broker… The duty of disclosure, as defined or circumscribed by [by the 1906 Act], is one aspect of the overriding duty of the utmost good faith mentioned in section 17. The actual insurer is thereby entitled to the disclosure to him of every fact which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk. The latter words, as Mr Evans rightly said, must comprise any terms, and not only the level of premium, which an insurer might require in the wording of the cover, eg warranties, franchises, deductibles, exceptions, etc. The word “judgment” — to quote the Oxford English Dictionary to which we were referred — is used in the sense of “the formation of an opinion”. To prove the materiality of an undisclosed circumstance, the insurer must satisfy the Court on a balance of probability — by evidence or from the nature of the undisclosed circumstance itself — that the judgment, in this sense, of a prudent insurer would have been influenced if the circumstance in question had been disclosed. The word “influenced” means that the disclosure is one which would have had an impact on the formation of his opinion and on his decision-making process in relation to the matters covered by section 18 (2). One must bear in mind that the issue is as to the relevance, and not as to the weight, of any evidence which may be adduced in order to show that an undisclosed circumstance was material. Such evidence may be given by the actual insurer who — ex hypothesi — has accepted the risk in ignorance of the undisclosed fact. For him, it may be relatively easy to say simply: “Had I known this, I would have declined the risk, or imposed such-and-such a term, or

charged such-and-such a premium”. But this is not the nature of the evidence to which section 18 (2) is directed; nor is such evidence required from any witness who may be called on the question of materiality. The section is directed to what would have been the impact of the disclosure on the judgment of the risk formed by a hypothetical prudent insurer in the ordinary course of business…He is in a hypothetical position, and evidence to support the materiality of the undisclosed circumstance, from this point of view, is therefore often given by an independent expert witness whose evidence has to be assessed by the Court long after the event… The weight which the Court would give to such evidence is then a matter for the Court… …It follows that when [the relevant provisions of the 1906 Act] are read together, one way of formulating the test as to the duty of disclosure and representation to cases such as the present…is simply to ask oneself: “Having regard to all the circumstances known or deemed to be known to the insured and to his broker, and ignoring those which are expressly excepted from the duty of disclosure, was the presentation in summary form to the underwriter a fair and substantially accurate presentation of the risk proposed for insurance, so that a prudent insurer could form a proper judgment — either on the presentation alone or by asking questions if he was sufficiently put on enquiry and wanted to know further details — whether or not to accept the proposal, and, if so, on what terms?” This is not an onerous duty for brokers to discharge in practice. Nor was it at all difficult in the present case.’

Note: The decision in CTI generated considerable criticism particularly against the burden it places on the insured: see Henry Brooke QC, “Materiality in

insurance contracts” [1985] LMCLQ 437; Adrian Hamilton QC, “Avoidance of liability on the grounds of misrepresentation and non-disclosure, or, the rise and rise of avoidable reinsurance,” Insurance and Reinsurance Law, September 1985, p 131; Anthony Diamond QC, “The law of marine insurance — has it a future?” [1986] LMCLQ 25; Steyn J, “The Role of Good Faith and Fair Dealing in Contract Law: A Hairshirt Philosophy?” [1991] Denning LJ 131, 138–140; and Howard .N Bennett, “The Duty to Disclose in Insurance Law” [1993] LQR 513. [404] Malcolm Clarke, “Failure to Disclose and Failure to Legislate: Is it Material? — II” [1988] JBL 298 ‘Materiality; the degree of influence The proposer must disclose what he knows or can be assumed to know…which is material to the risk. What is material is decided by reference to the judgment of the prudent underwriter. Some facts are more important than others and there remains this question: how great must be the potential influence on the assessment of risk of the undisclosed fact, if the insurer is to be allowed to avoid the contract?

The three degrees of influence Section 18(2) of the Marine Insurance Act 1906 provides that a fact is material if it “would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.” This rule. applies also to nonmarine insurance and although the proposals of the Law Commission were not addressed to marine insurance, there is little doubt that when the courts pronounce on disclosure

of hull risks, there are repercussions for householders. The reference in section 18(1) to influence does not tell us the degree of influence that is required. There are broadly speaking three possibilities: (A) Information type A is so material that, if the insurer had known it, he would have refused to make the contract at all, or he would have responded by further investigation leading to refusal. This is the degree of influence required in certain jurisdictions’ of the United States, if the insurer is to rescind. In a recent decision [Knight v US Fire Insurance Co 651 F Supp 471 (SD NY 1986)] the Federal District Court of New York said that materiality in this context depends on whether the information is “something which would have controlled the underwriters’ decision to take on the risk”… (B) Information type B is such that, if the insurer had known of it, he would still have made the contract of insurance but only on terms, especially as to premium, different from those he did make, or he would have responded with further investigation leading to insurance on different terms. Some support for this view can be found in England in early cases. More recent support is found in [Berger Ltd v Pollock [1973] 2 Lloyd’s Rep 442, 463] where the nondisclosure of certain information, was held immaterial because the judge was “far from satisfied that, if the undisclosed matters had been fully reported and explained to these underwriters, they would in fact have declined to accept this declaration under open cover or have sought to vary its terms or to require an increased rate of premium.” The judge, however, was Kerr J (as he then was), who later took a different view in CTI v Oceanus [above, 4.3]… (C) Information type C is such that, if the insurer had known of it, he would have considered it relevant but

not so material that he would have refused the contract or insisted on different terms. It would have “affected” his judgment perhaps by reinforcing it — it was information which, together with other facts, had they been present, would have produced a different contract, but, considered alone, made no difference to the particular contract or its terms. As a result of the judgments of the Court of Appeal in CTI v Oceanus, this is the current rule in England. It has been suggested that this case moves English law in the direction proposed by the Law Commission. It is very doubtful that the Court of Appeal thought it was moving the law at all; on tire contrary, one of the bases of the decision was a desire to respect the Court’s view of precedent. In reality it will be contended that the Court has moved the law away from precedent, away from principle and, if the Law Commission was indeed concerned, as it appears, to protect the assured, away from the interests of the assured… There are a number of reasons for thinking that [CTI]… moves in the wrong direction. Precedent. In CTI v Oceanus the Court of Appeal considered its opinion to be in accord with precedent. About this there must be doubt. In the beginning there was Lord Mansfield who would not lightly set a contract aside for nondisclosure: “Although the suppression should happen through mistake, without any fraudulent intention; yet still the underwriter is deceived, and the policy is void; because the risk run is really different from the risk understood, and intended to be run, at the time of the agreement.”

It is submitted that most of the early cases, some of which seemed to influence the Court of Appeal, can be distinguished on one or more of the following grounds: (a) The cases did not concern information type C, and therefore the decision in those cases did not concern the materiality of such information. (b) The materiality of the information was admitted and thus not the subject of searching debate by the court. (c) The cases concerned fraud, to which courts have usually responded with a rule more favourable to the insurer. Other cases, previously considered leading cases on materiality, were distinguished by the Court of Appeal… [In]…Zurich General Accident & Liability Insurance Co. Ltd. v Morrison [1942] 2 KB 53…the issue was whether a judgment obtained against the assured by the victim of a motor accident could be enforced against the insurer under the Road Traffic Act 1934, section10. The insurer pleaded non-disclosure that the assured had failed the driving test. The Court of Appeal rejected this defence. Lord Greene MR, said: “The evidence entirely fails to convince me insurers, had they known of the failure to pass would have declined to issue a policy on precisely terms as those on which they did issue the question.”

that the the test, the same policy in

In CTI v Oceanus Kerr LJ distinguished the Morrison case as turning on the particular statute; in a sense this is right, but in a sense it is not. For a plea of non-disclosure the statute required not one thing but two: not only objective materiality (potential influence), but also subjective materiality (actual influence). In Oceanus there was one hurdle and in Morrison there were two; but the first hurdle in each case, that of objective materiality, was the same. On

that question Morrison was and is good precedent in England. Practicality. “It is possible to say that prudent underwriters in general would consider a particular circumstance as bearing on the risk and exercising an influence on their judgment towards declining the risk or loading the premium. It is not possible to say, save in extreme cases, that prudent underwriters in general would have acted differently, because there is no absolute standard by which they would have acted in the first place or as to, the precise weight they would give to the undisclosed circumstance.” This opinion from Parker LJ in CTI v Oceanus is open to a number of objections. First, although there is no “absolute standard”, (a loaded phrase), the test of materiality is that of the prudent insurer, an objective test controlled and applied by the court in the light of expert evidence, like that of the reasonable man in tort. To broke a risk it may be necessary in practice to broke the personality, that is, to take account of the views of the particular underwriter; but it is another matter to accommodate marginal views of possibly nervous underwriters by having a rule of law which allows such people to upset important contracts. In the context of insurance practice the test of the prudent insurer is no more a genuine inquiry into the mind of a particular person than it is in relation to the other reasonable or prudent persons who populate the rules of law to legitimise the dominant role of the judge. Secondly, given the objective nature of the materiality test, it is not obvious why it is easier (and thus more practical and more certain) to say that a fact has some influence

(type C) than to say that it has a decisive influence (type A or type B). Thirdly, if the proposer must disclose information type C, there is the further objection that potential assureds wilI be advised to play safe by total disclosure. Over 100 years ago Blackburn J said’s that “it would be too much to put on the assured the duty of disclosing everything which might influence the mind of an underwriter. Business could hardly be carried on if this was required”[Ionides v Pender [(1874) LR 9 QB 531]. The traditional London practice of rapid placement of risks would be blocked by an avalanche of information. The placing file in CTI v Oceanus itself was over 100 pages in length; yet the Court of Appeal held that the insurer had not been told enough! The relentless march of the megabyte, of the machine that copies, stores and faxes to foreign parts, may be such that it is now too late. Principle. In the general law contracts can be ended or avoided, but only if something goes seriously wrong. In recent years the trend of the law has been to make it not easier but harder to end contracts. A contract can be terminated for breach of contract only if the breach is serious or if the contract itself provides for termination in very clear terms.” Since 1967 the right to rescind a contract for misrepresentation is only absolute, ie free of court discretion to refuse rescission, in cases of fraud [the Misrepresentation Act 1967, section 2(2)]. In tort no action for damages will lie in respect of negligent mis-statement, unless that statement contained material information of type A or B. In Jeb Fasteners Ltd. v Marks Bloom & Co. Donaldson LJ thought immaterial all information which “will not affect the essential validity of [the] decision in the sense that if the truth had been known or suspected before the decision was taken, the same decision would still have been made.” In other words the act

impugned must be in some sense a cause of the loss or damage. Last but not least the decision in CTI v Oceanus ignores the basic nature of misrepresentation and non-disclosure as something that vitiates consent, here the consent of the insurer. How can it be said that the consent of the insurer is vitiated, and that the contract should therefore be avoided, if he would have made the same contract on the same terms, even if there had been no misrepresentation or no non-disclosure?…’

Notes: 1. The rejection of the “decisive influence test” by the Court of Appeal in CTI was followed by the House of Lords in Pan Atlantic (below, [405]). However, the majority of their Lordships thought that the harshness of the duty of disclosure, together with the criticisms launched against the CTI decision, could be addressed by assimilating non-disclosure with misrepresentation. It was therefore held that the non-disclosure of a material fact must induce the underwriter to enter into the insurance contract and that inducement was to be presumed. The question of how ignorance of a material fact could operate as an inducement to contract was not addressed. 2. In a powerful dissent, Lord Lloyd reasoned that for the purposes of section 18 of the 1906 Act, “influence” on the prudent insurer’s judgement should be determined by reference to whether or not such influence had a decisive effect in moving the underwriter to accept the risk.

[405] Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co [1995] 1 AC 501 (HL) [The facts are immaterial]. Lord Goff: ‘Underlying the appeal before your Lordships’ House have been two questions of principle, of great importance to the law of insurance. The first relates to the test of materiality in cases of non-disclosure, which in the law of marine insurance is to be found in section 18(2) of the Marine Insurance Act 1906… Here the question for your Lordships is whether, as the appellant plaintiffs (“Pan Atlantic”) have contended, it must be shown that full and accurate disclosure would have led the prudent insurer either to reject the risk or at least to have accepted it on more onerous terms. This has been called the “decisive influence test.” The second question is whether, for an insurer to be entitled to avoid a policy for misrepresentation or non-disclosure, it is enough that the misrepresentation or non-disclosure was material, or whether in addition it must, as Pan Atlantic have contended, have induced the making of the policy on the relevant terms. This has been called the “actual inducement test.” I turn first to the second of these questions. Like both of my noble and learned friends [Lord Mustill and Lord Lloyd], I have come to the conclusion that, on this question, Mr Beloff’s submission on behalf of Pan Atlantic should be accepted; in other words, I accept that the actual inducement test accurately represents the law. I do so for the reasons given by my noble and learned friend, Lord Mustill. Like him, and for the reasons he gives, I conclude that there is to be implied in the Act of 1906 a requirement that a material misrepresentation will only entitle the insurer to avoid the policy if it induced the making of the contract; and that a similar conclusion must be reached in

the case of a material non-disclosure. This conclusion is, as I understand it, consistent with the opinion expressed by my noble and learned friend, Lord Lloyd, that Parliament, by enacting the law as it did in…1906, must have intended to codify the common law on materiality without touching the common law on inducement. I turn next to the first question, which is whether the decisive influence test is the appropriate test for deciding whether a fact which has not been disclosed is a material fact. Here there is a difference of opinion between my two noble and learned friends, Lord Lloyd accepting the decisive influence test and Lord Mustill rejecting it. On this point, I respectfully prefer the reasoning of Lord Mustill…’

Lord Mustill: ‘MATERIALITY This part of the case depends on the words “which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.” The main thrust of the argument for Pan Atlantic is that this expression calls for the disclosure only of such circumstances as would, if disclosed to the hypothetical prudent underwriter, have caused him to decline the risk or charge an increased premium. I am unable to accept this argument. In the first place I cannot find the suggested meaning in the words of the Act. This is a short point of interpretation, and does not yield to long discussion. For my part I entirely accept that part of the argument for Pan Atlantic which fastens on the word “would” and contrasts it with words such as “might.” I agree that this word looks to a consequence which, within the area of uncertainty created by the civil standard of proof, is definite rather than speculative. But this is only part of the inquiry. The next step is to decide what kind of effect the disclosure would have.

This is defined by the expression “influence the judgment of a prudent insurer.” The legislature might here have said “decisively influence,” or “conclusively influence,” or “determine the decision,” or all sorts of similar expressions, in which case Pan Atlantic’s argument would be right. But the legislature has not done this, and has instead left the word “influence” unadorned. It therefore bears its ordinary meaning, which is not, as it seems to me, the one for which Pan Atlantic contends. “Influence the judgment” is not the same as “change the mind.” Furthermore, if the argument is pursued via a purely verbal analysis, it should be observed that the expression used is “influence the judgment of a prudent insurer in determining whether he will take the risk.” To my mind, this expression clearly denotes an effect on the thought processes of the insurer in weighing up the risk, quite different from words which might have been used but were not, such as “influencing the insurer to take the risk.”… [T]he point is that it is not the court after the event, but the prospective assured and his broker before the event, at whom the test is aimed; it is they who have to decide, before the underwriter has agreed to write the risk, what material they must disclose. I am bound to say that in all but the most obvious cases the “decisive influence” test faces them with an almost impossible task. How can they tell whether the proper disclosure would turn the scale? By contrast, if all that they have to consider is whether the materials are such that a prudent underwriter would take them into account, the test is perfectly workable. Furthermore, the argument for Pan Atlantic demands an assumption that the prudent underwriter would have written the risk at the premium actually agreed on the basis of the disclosure which was actually made. Yet this assumption is impossible if the actual underwriter, through laziness, incompetence or a simple error of judgment, has made a bargain which no prudent underwriter would have made, full

disclosure or no full disclosure. This absurdity does not arise if the duty of disclosure embraces all materials which would enter into the making of the hypothetical decision, since this does not require the bargain actually made to be taken as the starting point…Accordingly, treating the matter simply as one of statutory interpretation I would feel little hesitation in rejecting the test of decisive influence… INDUCEMENT I turn to the second question which concerns the need, or otherwise, for a causal connection between the misrepresentation or non-disclosure and the making of the contract of insurance. According to sections 17, 18(1) and 20(1) if good faith is not observed, proper disclosure is not made or material facts are misrepresented, the other party, or in the case of sections 18 and 20 the insurer, “may avoid the contract.” There is no mention of a connection between the wrongful dealing and the writing of the risk. But for this feature I doubt whether it would nowadays occur to anyone that it would be possible for the underwriter to escape liability even if the matter complained of had no effect on his processes of thought. Take the case of misrepresentation. In the general law it is beyond doubt that even a fraudulent misrepresentation must be shown to have induced the contract before the promisor has a right to avoid, although the task of proof may be made more easy by a presumption of inducement. The case of innocent misrepresentation should surely be a fortiori, and yet it is urged that so long as the representation is material no inducement need be shown. True, the inequalities of knowledge between assured and underwriter have led to the creation of a special duty to make accurate disclosure of sufficient facts to restore the balance and remedy the injustice of holding the underwriter to a speculation which he had been unable fairly to assess; but this consideration cannot in logic or justice require courts to go further and

declare the contract to be vitiated when the underwriter, having paid no attention to the matters not properly stated and disclosed, has suffered no injustice thereby… My Lords, in my judgment little or nothing can be gleaned from the twentieth century cases to indicate a solution to the problem of causation. Before stating my own opinion on this problem there are two more points to be made. First, one suggested explanation for the absence from section 20 of any requirement that the misrepresentation shall have induced the contract is that any such requirement had been swept away 30 years before in Ionides v Pender…However, as I have said, although Ionides v Pender was an important case it did not in my opinion have the effect contended for. Secondly, it has been suggested that the absence from the Act of any reference to causation stems from a disciplinary element in the law of marine insurance. The concept is that persons seeking insurance and their brokers cannot be relied upon to perform their duties spontaneously; that the criterion of whether or not the misrepresentation or non-disclosure induced the contract would make it too easy for the assured to say that the breach of duty made no difference; and that accordingly the law prescribes voidability as an automatic consequence of a breach by way of sanction for the enforcement of full and accurate disclosure. For my part, although I think it possible to detect traces of this doctrine in the earlier writings I can see nothing to support it in later sources; and I would unhesitatingly reject any suggestion that it should now be made part of the law. The existing rules, coupled with a presumption of inducement, are already stern enough, and to enable an underwriter to escape liability when he has suffered no harm would be positively unjust, and contrary to the spirit of mutual good faith recognised by section 17, the more so since non-disclosure will in a substantial proportion of cases be the result of an innocent mistake.

For these reasons I conclude that there is to be implied in the Act of 1906 a qualification that a material misrepresentation will not entitle the underwriter to avoid the policy unless the misrepresentation induced the making of the contract, using “induced” in the sense in which it is used in the general law of contract. This proposition is concerned only with material misrepresentations. On the view which I have formed of the present facts the effect of an immaterial misrepresentation does not arise and I say nothing about it. There remain two problems of real substance. The first is whether the conclusion just expressed can be transferred to the case of wrongful non-disclosure. It must be accepted at once that the route via…the general common law which leads to a solution for misrepresentation is not available here, since there was and is no general common law of nondisclosure. Nor does the complex interaction between fraud and materiality, which makes the old insurance law on misrepresentation so hard to decipher, exist in respect of non-disclosure. Nevertheless if one looks at the problem in the round, and asks whether it is a tolerable result that the Act accommodates in section 20(1) a requirement that the misrepresentation shall have induced the contract, and yet no such requirement can be accommodated in section 18(1), the answer must surely be that it is not — the more so since in practice the line between misrepresentation and non-disclosure is often imperceptible. If the Act, which did not set out to be a complete codification of existing law, will yield to qualification in one case surely it must in common sense do so in the other. If this requires the making of new law, so be it. There is no subversion here of established precedent. It is only in recent years that the problem has been squarely faced. Facing it now, I believe that to do justice a need for inducement can and should be implied into the Act…I believe that both principle and justice require the conclusion which I have expressed…

Finally, there is the question whether this conclusion holds good for non-marine insurance. The problems raised by the wording of sections 18(1) and 20(1) do not here arise. The general considerations are however the same, and I feel no doubt that they should lead to the same conclusion. Before embarking on this long analysis I suggested that the questions in issue were short. I propose the following short answers. (1) A circumstance may be material even though a full and accurate disclosure of it would not in itself have had a decisive effect on the prudent underwriter’s decision whether to accept the risk and if so at what premium. But, (2) if the misrepresentation or non-disclosure of a material fact did not in fact induce the making of the contract (in the sense in which that expression is used in the general law of misrepresentation) the underwriter is not entitled to rely on it as a ground for avoiding the contract. These propositions do not go as far as several critics of the CTI case would wish, but they maintain the integrity of the principle that insurance requires the utmost good faith, whilst avoiding the consequences, to my mind unacceptable, of upholding Pine Top’s arguments in full.’

Lord Lloyd (dissenting): ‘[T]he duty to disclose every material circumstance known to the assured before a contract of insurance is concluded… is closely linked with the duty to ensure that every material representation is true…Both are illustrations or consequences of the rule, set out in section 17, that a contract of insurance is a contract of utmost good faith. In practice, non-disclosure and misrepresentation are often joined as defences in the same pleading. They were joined in the CTI case and so they are here. Often, as here, the alleged misrepresentation adds nothing. It is but the converse of the non-disclosure (“impliedly represented that [the proffered] information…gave a true and fair picture”)…

[W]hereas the right to avoid for non-disclosure is peculiar to contracts of utmost good faith, the right to avoid for misrepresentation is part of the general law of contract. The reason for the special rule relating to non-disclosure in insurance contracts is that in the usual case it is the assured alone who knows “the special facts, upon which the contingent chance is to be computed:” see Carter v Boehm, per Lord Mansfield…The purpose of the rule is to rectify that imbalance. But in the case of misrepresentation there is no need to differentiate between a contract of insurance and any other contract. There is no reason to put the insurer in a more favourable position than other contracting parties, and no justification for doing so. The ordinary law suffices. Lastly, the duty of disclosure operates both ways. Although, in the usual case, it is the assured who knows everything, and the insurer who knows nothing, there may be special facts within the knowledge of the insurer which it is his duty to disclose, as where (to take the example given by Lord Mansfield in Carter v Boehm) the insurer knows at the time of entering into the contract that the vessel has already arrived. Thus the obligation of utmost good faith is reciprocal…Nor is the obligation of good faith limited to one of disclosure. As Lord Mansfield warned in Carter v Boehm, there may be circumstances in which an insurer, by asserting a right to avoid for non-disclosure, would himself be guilty of want of utmost good faith. THE PRUDENT INSURER …Mr Beloff’s criticism of the CTI test can be encapsulated in a series of rhetorical questions. If the prudent insurer, knowing of the undisclosed fact, would have accepted the risk at the same premium and on the same terms, what right has the actual insurer to complain? What injustice has he suffered? If the risk run is different from the risk understood or intended to be run, then, as Lord Mansfield made plain in Carter v Boehm, the insurer can avoid; and

rightly so. But if the prudent insurer would have accepted the risk at the same premium and on the same terms, it must be because, so far as he is concerned, the risk is the same risk. How, as a matter of ordinary language, can a circumstance be described as material when it would not have mattered to the prudent insurer whether the circumstance was disclosed or not? It is obvious that the insurer cannot be required to disclose every circumstance, however remotely related to the assessment of the risk. Why then should he be required to disclose a circumstance which would not in fact have made any difference? How in those circumstances could it be said that the actual insurer’s consent had been vitiated? and if not, on what other juristic basis could he claim the right to avoid the contract? Mr Hamilton’s answer to this line of criticism was that it is the insurer who is entitled to decide whether to accept the risk or not, and if so at what premium. So it is for the assured to disclose everything which the insurer would want to know, or would take into account, in reaching that decision. I do not find this answer satisfactory, not because, as is sometimes said, it makes the insurer judge in his own cause, but rather because it blurs the edges of the prudent insurer test. The purpose of the test…was to establish an objective test of materiality, not dependent on the actual insurer’s own subjective views. The test should therefore be clear and simple. A test which depends on what a prudent insurer would have done satisfies this requirement. But a test which depends, not on what a prudent insurer would have done, but on what he would have wanted to know, or taken into account, in deciding what to do, involves an unnecessary step. It introduces a complication which is not only undesirable in itself but is also, in the case of inadvertent non-disclosure, capable of producing great injustice…

That brings me to the central question. What does section 18(2) of the Act of 1906 mean? In particular, what is meant by the words “would influence the judgment of a prudent insurer?” If I ask myself what the phrase as a whole means, I would answer that it points to something more than what the prudent insurer would want to know, or take into account. At the very least it points to what the prudent insurer would perceive as increasing, or tending to increase, the risk… The ordinary meaning of “influence” is to affect or alter. “Judgment” is a word with a number of different meanings, so it is not possible to identify the ordinary meaning in the abstract. In a legal or quasi- legal context it is often used in the sense of a decision or determination, as in “the judgment of Solomon” or “the judgment of Paris,” or the formal judgment of a court of law. Kerr LJ in the CTI case considered that it meant not the decision itself, but what he called the decision-making process. I accept that the word may bear that meaning. But it is not the primary meaning given in the Oxford English Dictionary, as Kerr LJ’s judgment may suggest, and I see no reason to give it that meaning in the present context. In a commercial context “judgment” is often used in the sense of “assessment.” A market assessment means a judgment as to what the market is going to do, not the process by which a stockbroker arrives at that judgment. That is, in my opinion, the sense in which the word is used in section 18(2) of the Act of 1906… Finally, there is the word “would.” Kerr LJ in the CTI case, at p 492…refers to things which the insurer might have done if he had been told of the undisclosed fact. In my judgment it is never enough to show that a prudent insurer might have declined the risk or charged an increased premium. It is necessary to show that he would have done. My provisional conclusion…is that Mr Beloff succeeds on the first half of his argument, and that in order to avoid a

contract for non-disclosure it must be shown that a prudent insurer, if he had known of the undisclosed fact, would either have declined the risk altogether, or charged an increased premium…My reasons for preferring Mr Beloff’s test are that it does full justice to the language of section 18 of the Act of 1906. It is well-defined, and easily applied. It does something to mitigate the harshness of the all-ornothing approach which disfigures this branch of the law, and it is consistent with the reasons given by the Court of Appeal for rejecting the test proposed by Mr Hamilton…’

Notes: 1. See J Birds and N Hird, “Misrepresentation and non-disclosure in insurance law — identical twins or separate issues” [1996] MLR 285. 2. The Court of Appeal in the St Paul’s Fire and Marine Insurance Co v McConnell Dowell Constructors Ltd [1995] 2 Lloyd’s Rep 116 held that the test for materiality had been settled by the House of Lords in Pan Atlantic — the insured was under a duty to disclose what the insurer would have wished to know. As regards the question of inducement, it was held that the non-disclosed fact need not be the sole inducement, it need only be demonstrated that it was an inducement. This accords with the position in the general law of contract: Edgington v Fitzmaurice (1885) 19 Ch D 459, Bowen LJ). [406] Norma J Hird, “Pan Atlantic — Yet More to Disclose” [1995] JBL 608

‘…We have recently had the first appellate court decision since Pan Atlantic: in St Paul Fire and Marine Co (UK) Ltd v McConnell Dowell Constructors Ltd, the Court of Appeal was asked to clarify certain issues arising out of the Pan Atlantic judgment. The facts of St Paul McConnell Dowell were the contractors for the construction of certain buildings in the Marshall Islands. Their client was the government of that territory and the project comprised the Parliament building and an administration block on Majuro Atoll. In 1982, the government commissioned a report from Geo-Engineering and Testing Inc, (GET), which recommended that piled, rather than shallow spread, foundations should be used in the construction project. MD were instructed to proceed with phase 1 of the project in 1989, and therefore instructed a New Zealand based broker to obtain quotations for Contractors’ All Risks insurance. An architect’s report at this time, however, (unknown to the brokers), concluded that the GET report had underestimated the stability of shallow spread foundations, and that it was unnecessary to incur the extra expense of piled foundations. The brokers obtained quotations based on the use of piled foundations, and eventually, in early 1990, placed the cover with St Paul, and three other insurers. Construction commenced, using shallow spread foundations, and, by the end of 1990, the Parliament building was discovered to be suffering serious subsidence problems. St Paul sought to avoid the contract of insurance on the grounds of misrepresentation — the policy made no actual reference to the foundations which were to be used, and it was accepted that the misrepresentation was entirely inadvertent… The decision a) Materiality

…In the course of his judgment, Evans LJ discussed, at some length, the reasoning of the majority of the House of Lords in Pan Atlantic, particularly the leading speech by Lord Mustill, which was endorsed by Lord Goff. He considers that Lord Mustill was quite definite in his determination of the test for materiality, quoting particularly: “I can see nothing in them [authorities and textbooks] to suggest that before 1906 materiality was understood as extending only to such circumstances as would definitely have changed the underwriter’s mind; and they furnish substantial support for the view that the duty of disclosure extended to all matters which would have been taken into account by the underwriter when assessing the risk (ie the “speculation”) which he was consenting to assume. This is, in my opinion, what the Act was intending to convey, and what it actually says.” This does appear to be quite definite, and an appeal by McConnell Dowell on this point, at least to this writer, always appeared futile. Evans LJ goes on to say however, “This concept, in my judgment, is no different from the formulation in Steyn LJ’s judgment (“would have appreciated that it was a different risk”). To this extent, Lord Mustill expressly approved the Court of Appeal’s definition…” This statement, is, I think, worthy of some consideration. It surely must be argued that Lord Mustill neither intended, nor did, in fact, approve the CA’s definition of materiality. If materiality is determined only by a reference to something which might be of interest to a prudent insurer, this does not come close to a test which defines materiality in terms of an appreciated “increased risk”. The fact may be of interest to a prudent insurer, and it may, indeed, increase the risk, but, according to the House of Lords, only the first

of these need be shown — no reason as to why it is of interest need be given and, therefore, the second must be regarded as being irrelevant. That Lord Mustill did not support the CA’s test is further borne out by remarks which he made on its judgment earlier in his own: “In the Court of Appeal, we find the court striving, through the medium of the principal judgment delivered by Steyn LJ, to find a workable understanding of the ratio of the CTI case which was consistent not only with the rejection of decisive influence as the test for materiality but also with the rejection of any requirement of influence on the actions of the individual underwriter. It may well be that but for this second constraint the court might have felt more free in its ruling on materiality.” Lord Mustill is undoubtedly correct in his conclusion on that judgment. All three members of the Court of Appeal were unhappy with the result in Pan Atlantic, and clearly felt the need to establish a narrow test for materiality, in the interests of fairness and justice. It has already been argued elsewhere [1995 JBL 194] that had the court not rejected the decisive influence test, then there would have been no need for such artificial “striving”. Lord Mustill, on behalf of the majority of the House, also went on to reject it; therefore he, in the interests of fairness and justice, was forced to introduce a completely novel concept of inducement into the law of utmost good faith. He then, of course, was not constrained when ruling on materiality, and it appears quite clear from his judgment that he was in no doubt that the proper test for materiality should be the much broader based test of “interest”, rather than “increased risk”. This left Evans LJ, in St Paul with something of a dilemma, and we see signs of that same artificial striving, referred to above, as he struggles to reconcile the various pronouncements in various courts on this issue. His final

conclusion is yet more interesting. He says, “once the question of inducement is removed from the definition of materiality, therefore, it may be that in practical terms there is little difference between the decisive influence test and the correct test, expressed in terms of the prudent underwriter’s estimate of the risk.” This is undoubtedly correct, if he means inducement in the strict sense, but surely the whole point here is that the definition of materiality expressed in the MIA impliedly carries within it the essential concept of a causal link between the misrepresented or undisclosed facts, and the insurer’s right to avoid because of loss, but, it is the prudent insurer we are here concerned with, not the actual insurer. The courts’ stubborn refusal to accept the decisive influence test as the correct test for materiality appears therefore to be somewhat mystifying. All previous case law authority points this way; even those insurance law cases where judges speak of materiality and inducement as separate issues, it is plain from their language that they are not referring to inducement in the strict sense that the HL spoke of it in Pan Atlantic, but rather as it being a concept that does not allow an underwriter to avoid the policy if he has suffered no loss. Equally, there is no mention of inducement in the Marine Insurance Act. The current courts’ insistence on separating the prudent insurer from the actual insurer is what is causing the problem, and this insistence is both unnecessary, and unfair…To introduce the actual insurer into the equation simply lays an extra burden onto the insured, because it opens the door to an insurer to state that, regardless of the fact that the undisclosed material may not have induced the prudent insurer into the contract, it nevertheless induced him, the actual insurer, with all of his particular idiosyncrasies. In the light of this, it must be said again that the sensible, fair test for materiality must be considered to be the “decisive influence” test so firmly rejected by almost

everyone, and further, if we accept that the aim of the HL in Pan Atlantic, and the CA in St Paul was to clarify the law on this issue, then we must conclude that, despite a valiant attempt, both have failed to do so. The introduction of an inducement requirement of the actual insurer has served only to muddy further far from clear waters.

b) Inducement In St Paul, it was common ground between the parties that, following Pan Atlantic, inducement on the part of the actual underwriter must now be proved, but, again, there were unresolved issues. These were (i) did the underwriter benefit from a presumption of inducement? and (ii) did the misrepresented or undisclosed fact have to be shown to be the inducement, rather than merely an inducement? If the proper test for materiality is the very broad one based on “interest”, then, if inducement is to aid the insured in any meaningful way, the first of these must be discounted, and the second vigorously supported. Alas, exactly the opposite was decided by the CA in St Paul. A presumption of inducement was supported by Lord Mustill in Pan Atlantic, but denied by Lord Lloyd. In St Paul, three of the underwriters produced evidence of inducement, but one failed to do so; the resolution of this issue therefore became crucial. The CA held that a presumption of inducement in favour of the insurer did, indeed, exist; we must therefore assume that it is so strong that an insurer can rely upon it without adducing evidence. This is a regrettable state of affairs, and highlights the difficulties discussed above, of introducing the actual insurer into the picture. It is made even worse by further pronouncements which state that it is not necessary for the insurer to show that the undisclosed or misrepresented facts were the only inducement, but only that they were a possible, (not even probable), cause of his acting the way he did. Any

safeguards which the House of Lords intended to introduce for insureds are now, clearly, redundant. It has been stated that following the Court of Appeal’s decision in St Paul, the law on utmost good faith in insurance has not changed in any meaningful way. It is arguable that it has changed, and not for the better. Before Pan Atlantic it was at least still open to the insured to argue that contained within the definition of materiality was the need for a causal link between the misrepresented or undisclosed fact, and the remedy of avoidance for loss — this door has now been closed, and if the recent pronouncements on inducement are considered correct, and are followed, then the law is even more prejudiced in favour of the insurer…’

Note: The extent of the inducement requirement thus continues to be somewhat uncertain. In Marc Rich & Co AG v Portman [1996] 1 Lloyd’s Rep 430 (decided before St Paul Fire), Longmore J narrowed the scope of inducement so that it would only trigger where the insurers were unable, with good reason, to give evidence. He said: ‘Mr Kealey [counsel for the claimants] submitted that Mr Overton had so little understanding of the risk that he was writing that it would have made no difference to him if he had been told, at the time when he initialled the endorsements, about the matters now said not to have been disclosed… Mr Kealey [citing Lord Mustill’s speech in Pan Atlantic] submitted that this presumption is much diminished if it can be shown that the actual underwriter was careless in the writing of the very risk itself…In most cases in which the actual underwriter is called to give evidence and is cross-

examined, the Court will be able to make up its own mind on the question of inducement. The presumption will only come into play in those cases in which the underwriter cannot (for good reason) be called to give evidence and there is no reason to suppose that the actual underwriter acted other than prudently in writing the risk. In cases where he is called and the Court genuinely cannot make up its mind on the question of inducement, the insurer’s defence of nondisclosure should fail because he will not have been able to show that he had been induced by the non-disclosure to enter into the insurance on the relevant terms. At the end of the day it is for the insurer to prove that the non-disclosure did induce the writing of the risk on the terms in which it was written.’

The Court of Appeal (reported at [1997] 1 Lloyd’s Rep 225), affirmed the decision but did not take the opportunity to give a detailed consideration of the point. Leggatt LJ merely observed that he could ‘see no warrant for interfering with [the trial judge’s] conclusion.’ In the ICCI decision (below, [407]) the presumption operated in favour of the insurers notwithstanding that they did not give direct evidence to substantiate inducement. [407] Insurance Corporation of the Channel Islands v Royal Hotel Ltd [1998] Lloyd’s Rep I R 151 [The insured, a hotel owner, falsified the hotel’s occupancy rates in order to inflate the sums that would be payable under the policy’s business

interruption cover. In 1992 the hotel was closed as a result of a series of fires]. Mance J: ‘Looking at all the material before me, I am satisfied that all the underwriting personnel within ICCI and Mr Walpole as its managing director would have taken a serious view of Royal Hotel’s conduct, and that ICCI would have been unlikely to offer renewal if it had known of such conduct before renewal. I accept that the matter would have been likely to reach Mr Walpole’s attention. He was and is clearly the dominant character within ICCI…his primary role over the last 14 years has been in management and administration. In that role he would naturally be concerned about the quality of the ICCI’s portfolio…I consider that Mr Walpole was and is someone who would, if he had known of conduct such as the Royal Hotel’s conduct…have adopted and applied the general attitude…of not knowingly insuring a person whom he believed to be dishonest and of refusing renewal accordingly. I also consider that this is the attitude which any reputable and experienced insurer (like the present insurers) would have been likely to adopt in the face of dishonest conduct such as Royal Hotel’s here. I therefore find that ICCI was induced to underwrite the… policy in October 1991 by non-disclosure of Royal Hotel’s conduct…’

See also, Aneco Reinsurance Underwriting Ltd v Higgins [1998] 1 Lloyd’s Rep 565.

Notes: 1. Longmore J’s approach in Marc Rich is clearly discernible in the recent decision of the Court of Appeal in Assicurazioni (below, [408]) in which Clarke LJ drew a sharp distinction

between materiality on the one hand, and inducement on the other. It was stressed that while the determination of materiality was based on an objective test, the question of inducement was clearly a subjective issue. Further, although the non-disclosed or misrepresented fact need not be the sole inducement (see also the St Paul’s Fire case, above) it must be effective in causing the actual insurer to enter into the contract. 2. Significantly, the majority of the court doubted whether there was a presumption of law that an insurer was induced. This has the unfortunate consequence of leaving Lord Mustill’s presumption of inducement in some doubt — although, of course, it must be borne in mind that Assicurazioni is a decision of the Court of Appeal. [408] Assicurazioni Generali SpA v Arab Insurance Group (BSC) [2003] 1 WLR 577 (CA) [The facts are immaterial]. Clarke LJ: ‘Before considering the issues of fact, it is convenient to discuss briefly the relevant legal principles. Non-disclosure It is common ground that the relevant principles are stated by the House of Lords in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501. In order to be

entitled to avoid a contract of insurance or reinsurance on the ground of non-disclosure the insurer or reinsurer must show that the fact not disclosed was material and that its non-disclosure induced the contract…

Materiality In Pan Atlantic the House of Lords, by a majority, held that to be material a fact did not have to have a decisive influence on the mind of the prudent underwriter. The test is that stated in subsections 18(2) and 20(2) of the Marine Insurance Act 1906, which relate to non-disclosure and misrepresentation respectively and which the House of Lords held set out the common law principles relevant to non-marine (as well as marine) insurance… Inducement In Pan Atlantic the House of Lords held that the material non-disclosure or misrepresentation must induce the contract. It was expressly held that it is not sufficient that the non-disclosure or misrepresentation is material… It was not necessary for Lord Mustill to consider the precise meaning of “induced” in the general law of contract. Lord Mustill did, however, refer to a presumption of inducement which has been given some consideration subsequently: see eg Clarke on The Law of Insurance Contracts, 3rd edition paragraph 22–3C, Arnould on The Law of Marine Insurance, 16th edition, volume 3, paragraph 611, and St Paul Fire & Marine Insurance Co (UK) Ltd v McConnell Dowell Constructors Ltd [1995] 2 Lloyd’s Rep 116. In paragraph 611 of Arnould the editors say: “Under the general law, a misrepresentation need not be the sole inducement, but must have been a real and substantial cause affecting the decision of the representee to enter into the contract, or to do so on the terms agreed.”

They cite as examples JEB Fasteners Ltd v Marks, Bloom & Co [1983] 1 All ER 583 and Edgington v Fitzmaurice (1885) 29 Ch D 459. In paragraph 22–3C of Clarke it is said that what is usually required is what is identified as a type B representation, which is defined as follows: “Type B is a representation such that, if the recipient had known the truth, he would still have been willing to make the contract, but only on different terms, notably, but not only as to premium.” It seems to me that the true position is that the misrepresentation must be an effective cause of the particular insurer or reinsurer entering into the contract but need not of course be the sole cause. If the insurer would have entered into the contract on the same terms in any event, the representation or non-disclosure will not, however material, be an effective cause of the making of the contract and the insurer or reinsurer will not be entitled to avoid the contract… Those principles seem to me to be consistent with the approach of this court in St Paul Fire & Marine v McConnell: see per Evans LJ (with whom Rose and Nourse LJJ agreed) at pages 124–5, where he discussed the general principles, and at page 127, where he held that, if the three underwriters who gave evidence had been told the truth, on no view would they have underwritten the insurance at the same premium on terms which included subsidence risk. Evans LJ also considered the role played by presumption in this class of case. He did so in the context of a fourth underwriter who was not called to give evidence, no doubt because the trial took place before the decision of the House of Lords in Pan Atlantic… Evans LJ put the position thus at page 127:

“The existence of such a presumption is recognised in the authorities; see Halsbury’s Laws vol 31 par 1067 where the law is stated as follows: Inducement cannot be inferred in law from proved materiality, although there may be cases where the materiality is so obvious as to justify an inference of fact that the representee was actually induced, but, even in such exceptional cases, the inference is only a prima facie one and may be rebutted by counter evidence.” The authorities cited include Smith v Chadwick (1884) 9 App Cas 187 and in my judgment they justify the above statement of the law. This provides a reminder of the need to distinguish “materiality” from “inducement”, although inevitably the two overlap. Here, the evidence of the three underwriters who did give evidence and of the expert witnesses was clear. If the underwriters had been told the true state of the ground conditions, as revealed by the 1982 report, and of the conflicting views expressed by the authors of that report…then they would have called for further information and in all probability either refused the risk or accepted it on different terms. In fact, all four underwriters including Mr Earnshaw accepted it without any relevant enquiries. There is no evidence to displace a presumption that Mr Earnshaw like the other three was induced by the non-disclosure or misrepresentation to give cover on the terms on which he did. In my judgment, these insurers also have discharged their burden of proof. It appears to me that a presumption of this kind really amounts to no more than this. It simply operates where the evidence before the court is enough to lead to the inference that the insurer or reinsurer was, as a matter of fact, induced to enter into the contract. In all the circumstances I would summarise the relevant principles of inducement in this context in this way:

1. In order to be entitled to avoid a contract of insurance or reinsurance, an insurer or reinsurer must prove on the balance of probabilities that he was induced to enter into the contract by a material non-disclosure or by a material misrepresentation. 2. There is no presumption of law that an insurer or reinsurer is induced to enter in the contract by a material non-disclosure or misrepresentation. 3. The facts may, however, be such that it is to be inferred that the particular insurer or reinsurer was so induced even in the absence from evidence from him. 4. In order to prove inducement the insurer or reinsurer must show that the non-disclosure or misrepresentation was an effective cause of his entering into the contract on the terms on which he did. He must therefore show at least that, but for the relevant nondisclosure or misrepresentation, he would not have entered into the contract on those terms. On the other hand, he does not have to show that it was the sole effective cause of his doing so. …’

4.1.3 Non-Disclosure in the Proposal Form and the Issue of Waiver Insurance is generally effected by the insured answering questions contained in a proposal form. Where such answers are declared to be ‘the basis of the contract’ that has the effect of preventing any argument as to the materiality of those questions (see further, chapter 8). But the mere fact that the insurer has asked particular questions does not

relieve the insured of his general obligation at common law to disclose any material fact which might affect the risk, or which might affect the mind of the insurer as to whether or not he should issue a policy. An issue that arises in this context is whether an insurer can be taken to have waived (see section 18(3)(c) of the 1906 Act) the right to information by virtue of the way in which questions are framed in the proposal form. A question may stipulate a time period, for example: ‘Have you made an insurance claim during the last five years’. In such a case the insurer would be taken to have waived disclosure of claims outside the specified time notwithstanding that such claims would satisfy the test of materiality. Ultimately, whether or not there is waiver is a question of construction and in cases of ambiguity the particular question asked will be construed contra proferentum. The position was succinctly stated by Woolf J in Hair v Prudential Assurance Co [1983] 2 Lloyd’s Rep 667: ‘It is more likely…that questions asked will limit the duty of disclosure, in that, if questions are asked on particular subjects and the answers to them are warranted, it may be inferred that the insurer has waived his right to information either on the same matters but outside the scope of the questions or on kindred matters to the subject-matter of the question. Thus, if an insurer asks “How many accidents have you had in the last three years?” it may well be implied that he does not want to know of accidents before that time, though these would still be material. If he were to ask whether any of the proposer’s brothers or sisters had died

on consumption or had been inflicted with insanity it might well be inferred that the insurer had waived similar information concerning more remote relatives, so that he could not void the policy for nondisclosure of an aunt’s death of consumption or an uncle’s insanity. Whether or not such waiver is present depends on a true construction of the proposal form, the test being: Would a reasonable man reading a proposal form be justified in thinking that the insurer had restricted his right to receive all material information and consented to the omission of the particular information in issue?’

In Phoenix Life Assurance Co v Raddin 120 US 183 (1886) the US Supreme Court observed that: ‘Where an answer of the applicant to a direct question of the insurer’s purports to be a complete answer to the question, any substantial misstatement or omission in the answer avoids the policy issued on the faith of the application…But where upon the face of the application a question appears to be not answered at all, or to be imperfectly answered and the insurers issue a policy without further inquiry, they waive the want or imperfection in the answer, and render the omission to answer fully immaterial.’

[409] Schoolman v Hall [1951] 1 Lloyd’s Rep 139 (CA) [The facts appear from the judgment of Cohen LJ]. Cohen LJ: ‘The case arises out of a Lloyd’s policy known as a “Jewellers’ Block Policy, “issued on 18 November 1948, by Lloyd’s underwriters to the plaintiff in respect of jewellery owned by him and in connection with a retail jeweller’s

business carried on by him at No 467, Oxford Street, London, W 1. Unfortunately, he suffered a burglary — and it is not now disputed that it was a genuine burglary — on 21 December 1948. The underwriters refused to recognise his claim, and, as a result, proceedings in that connection were commenced on 14 May, 1949. By his defence the defendant set up as the main defence, or, at any rate, the only defence at issue at the trial, this: In order to induce the defendant to make and grant to the plaintiff the policies aforesaid the plaintiff concealed from the defendant a fact then material to be known to him, but of which the defendant was ignorant, that is to say, that the plaintiff had a criminal record. Then follow particulars of the criminal record which, I think, I need not specify in detail; it is sufficient to mention that it covers a period from 1927 to 1934… The question is whether he ought to have disclosed that criminal record up to that date. In his reply the plaintiff, while admitting that he failed to disclose his criminal record, claimed that he was released from his obligation by the defendant…he said that he would rely upon the questions, terms and all the contents of the written proposal which the defendant required the plaintiff to make for the purpose of obtaining insurance, and upon the answers and statements made by the plaintiff in the said written proposal… In order that the point thus raised may be fully appreciated, I must turn now to the form of that questionnaire. That questionnaire is undated, but in fact it was filled in some time in 1948. On it there were no less than 15 questions, all of which I think can clearly be described as being in the nature of trade questions, namely: nature of the business; protection against burglary, safes and the like; window display; stock; travelling in connection with the business; the sending of goods comprised in the business in the United Kingdom and elsewhere; exhibition of stock at any exhibition. All those last seven questions, I

think, are confined to a period of a year before the proposal form is filled in. Then comes: “Losses: Have you ever sustained a loss or losses? If so, give statement covering past five years with particulars, amounts claimed, and whether paid in full or otherwise.” No. 12 is a question about the fire insurance rate. Then follows: “13. For what amount is the policy required? 14. References: Unless proposing for renewal, please give two references from your trade. 15. (a) Have Lloyd’s or any insurer ever cancelled or refused to issue or to continue any insurance for you? (b) Have you been previously insured? If so, state where, risks covered, and for what amount?” Then come these words upon which some reliance is placed: “Signing this form does not bind the proposer to complete the insurance, but it is agreed that this form shall be the basis of the contract should policy be issued.” …[T]wo issues were raised by Mr Marshall, who then appeared for the plaintiff. First, he argued that, having regard to the terms of the proposal form, the defendant must be regarded as having waived any requirements for further information other than that contained in the answers to the questions in the proposal form, that is to say, five years before the form was completed. In the alternative, he alleged that this criminal record, relating, as it did, to matters which had occurred long before — the most recent being 15 years before the trial — was not a material fact. So far as the first issue was concerned, the learned Judge ruled that on the question of waiver there was no evidence

to go to the jury on the point, and he left the other question to the jury — the question of materiality of the nondisclosure of the criminal record. The jury found that that was non-disclosure of a material fact. From that finding, Mr Ashe Lincoln recognises he cannot successfully appeal — there being clear evidence in support of that finding — but, he says, the learned Judge misdirected himself as to the meaning and consequence of the proposal form, and that, even if he had not misdirected himself, there was still an issue which ought to have been left to the jury, namely, whether any reasonable man, looking at that application form and construing it as it ought to be construed, would think he was under an obligation to disclose a criminal record in relation to a period so long before the date of the application form?… In the present case, Mr Ashe Lincoln asks us to draw the inference, from the nature of the questions that are put to the proposer in the proposal form, that the insurer is indifferent to anything but trade matters, and, he would add, to anything which occurred more than five years before. He did feel a little difficulty about the latter submission, because he was bound to admit that, in the only two clauses which could be said in any way to refer to questions of a moral character -that is, “No 14. References,” and No 15 as to refusal or continuance of other insurance policies — there was no time limit whatsoever. But, he said, elsewhere in six questions the time limit was 12 months, and as to “Losses” the time limit was five years, and so, he said, anybody reasonably reading this proposal form would jump to the conclusion, or might jump to the conclusion, that such ancient history as a fifteen-year-old criminal record was not relevant. The difficulty I feel, however, is that the questions in the proposal form are, in substance, confined to trade matters, and, like the learned Judge, I cannot spell out of it any waiver of the ordinary right of the intending insurer to the

disclosure of material facts dealing with other matters which might influence the mind of the insurer in deciding whether or not to issue a policy… So, I think [applying the observations of Lord Dunedin in Glicksman v Lancashire and General Assurance (see below, [419])…while the insurers have stipulated that the answers to the fifteen questions “shall be the basis of the contract,” that only has the effect of preventing any argument as to the materiality of those questions should dispute arise, but it does not relieve the proposer of his general obligation at common law to disclose any material which might affect the risk which was being run, or which might affect the mind of the insurer as to whether or not he should issue a policy… For these reasons, I think that the argument as to waiver cannot be sustained and that the decision of the learned Judge was right. This appeal must therefore be dismissed.’

See also, New Hampshire Insurance Refineries Ltd [2002] Lloyd’s Rep 462.

Co v Oil

Notes: 1. An issue that has arisen recently is whether the failure of an insurer to stop collecting premiums under a direct debit mandate after avoidance is sought for nondisclosure can constitute waiver. In Drake Insurance plc v Provident Insurance plc [2003] All ER (D) 02, the insured had failed to disclose a speeding conviction when renewing his motor policy. Moore-Brick J held that the defendant insurer was induced to renew and was therefore entitled to avoid the policy. On the issue of waiver, the judge considered that the automatic collection of

premiums was insufficient evidence of any intent to waive avoidance. 2. An important matter that has come before the courts is the extent to which the parties can exclude or vary the duty of utmost good faith by a contract term. [410] HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2001] Lloyd’s Rep IR 703 (CA) [The policies in question (time variable cover policies, hereafter TVC) related to high risk film finance insurance. They contained exclusion clauses (termed “truth of statement” clauses) which provided, inter alia, that “[3]…any misstatement…shall not be the responsibility of the insured or constitute a ground for avoidance of the insurers’ obligations under the Policy” and that “[6]…[the insured] will not have any duty or obligation to make any representations, warranty of disclosure of any nature express or implied…” [7]…and shall have no liability of any nature to the insurers for any information provided by any other parties and [8]…any such information provided by or non-disclosure by other parties…shall not be a ground or grounds for avoidance of the insurers’ obligations under the Policy…” The issues for the Court of Appeal were whether (i) given the fraudulent, reckless or negligent nondisclosures by the brokers, Heaths, were the insurers, HIH, entitled to avoid the policies notwithstanding the “truth of statement” clauses; and (ii) were the

insurers entitled to damages from the insured, Chase, or the brokers, or both. It was held that the clauses were wide enough in scope to exclude liability for misrepresentation and non-disclosure by the brokers. However, the wording of the particular clauses was not sufficient to prevent the insurers from avoiding the policies vis-à-vis the insureds. Rix LJ, agreeing with the trial judge, noted that while, as a matter of public policy, no person can exclude liability for his or her own fraudulent conduct, it is possible to exclude liability for the fraudulent misrepresentations of an agent (although ‘it may be different…if the principal is in some way implicated in the agent’s fraud’). However, he thought that in practice it would be rare to find a form of wording for such an exclusion clause that would be acceptable to the other contracting party: ‘To warn a potential contract party of an agent’s possible fraud would be a remarkable clause to find in any agreement’]. Rix LJ: Where non-disclosure is concerned…the law has not distinguished, as far as I am aware, certainly not in the same way [as with misrepresentation], between innocent, negligent and fraudulent non-disclosure…It has not been suggested in this Court…that non-disclosure of itself can give rise to any cause of action, other than to the remedy of avoidance in the context of the duty of good faith, even where the non-disclosure may be described as fraudulent… the [trial] Judge held that there was no remedy in damages for breach of the duty of good faith and said nothing in his judgment or his order to allow for any remedy in damages

for fraudulent non-disclosure. There has been no appeal from that. For the purposes of the current appeal and cross-appeal therefore I approach the matter on the basis that even where the non-disclosure is fraudulent there is no remedy in damages pursuant to the duty of good faith. Moreover, whether there is a remedy in the tort of deceit has simply not been the basis of any consideration, here or below…It follows that for the purposes of the argument in this case no distinction arises in the matter of remedies whether a nondisclosure is innocent, negligent or even fraudulent: whichever it is, the only remedy contemplated is that of avoidance. The only relevant purpose, therefore, for distinguishing between an innocent, negligent or fraudulent non-disclosure is to test whether an exclusion of the right to avoid for non-disclosure operates equally for all three kinds of non-disclosure. In this connection the next matter for consideration is what is meant by a fraudulent non-disclosure. The term has never been defined. Sometimes it is referred to as a deliberate concealment: but I am by no means sure that the two can be equated. A matter may be deliberately concealed in the honest but mistaken belief that it is not relevant or material or that enquiry of it has been waived. There may be nothing dishonest in that, but ex hypothesi the remedy of avoidance remains…No authority has been cited for a definition of fraudulent non-disclosure: and the absence of such authority in my judgment is not a merely collateral matter but intimately connected with the current problem of asking whether it makes sense to distinguish between fraudulent and non-fraudulent non-disclosure. I am doubtful that it is. No case has been cited in which the distinction has been material to any remedy or absence of remedy under an insurance contract. On the other hand a distinction is sometimes drawn by the policy itself. Thus in Arab Bank Plc v Zurich Insurance Co

[1999] 1 Lloyd’s Rep 262 there was an “Innocent Nondisclosure” clause which excluded the insurer’s right to avoid for non-disclosure or misrepresentation where the assured could establish that “such alleged non-disclosure, misrepresentation or untrue statement was innocent and free of any fraudulent conduct or intent to deceive”. So there the clause itself distinguished on the basis of “fraudulent conduct or intent to deceive”. It would seem that dishonesty rather than deliberateness was the test. In the absence of express language, however, I know of no authority which requires a distinction between the possible causes of non-disclosure. In saying that I am conscious that in Carter v Boehm itself Lord Mansfield does seem to have considered that there was a difference between the concealment which the duty of good faith prohibited and mere silence…As a result nondisclosure in the insurance context in the early years was referred to as “concealment”, and the doctrine has sometimes been viewed and explained as constructive fraud. However, Lord Mansfield was seeking to propound a doctrine of good faith which would extend throughout the law of contract, and in that respect his view did not bear fruit. Where, however, in the insurance context it put down firm roots, it came to be seen as a doctrine which went much further than the antithesis of fraud, and, as it has come to be developed, “non-disclosure will in a substantial proportion of cases be the result of an innocent mistake” (Pan Atlantic Insurance Co. Ltd. v Pine Top Insurance Co. Ltd. [above, [405]], per Lord Mustill). In sum, I do not think that, in the absence of express language, any line is to be drawn between the various possible causes of or motives for non-disclosure. It is not in this way that the distinction is to be drawn. The question to my mind is whether a non-disclosure can support a claim in fraud, with its remedies in damages and/or rescission: either because of an analysis it amounts or gives rise to a

fraudulent misrepresentation or perchance for any other reason. Aikens J has held in effect…that only misrepresentation, and not non-disclosure, can give a remedy in damages for fraud, and there has been no appeal from that conclusion…If a distinction is drawn by contract, then effect will have to be given to that distinction according to its terms (cf. Arab Bank v Zurich Insurance). In the absence of such contractual provision, however, I do not think that the law has so far equipped itself to mark out the fine lines which would have to be drawn between the various degrees of culpable non-disclosure.’

Note: The Court in HIH thus confirmed that as far as nondisclosure is concerned the law does not distinguish between innocent, negligent and fraudulent nondisclosure. Further, nondisclosure does not give rise to any corresponding duty of care in tort. However, in the House of the Lords (see below, [411]), Lord Bingham explained that “where the nondisclosure or misrepresentation were other than innocent, the insurer might have rights additional to that of avoidance: the right to damages given by section 2(1) of the Misrepresentation Act 1967 to the victim of the negligent misrepresentation; and the right to recover damages for deceit given by the common law to the victim of a fraudulent misrepresentation.’ (See also the speech of Lord Hobhouse). [411] HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] Lloyd’s Rep 61 (HL)

[The questions for the House of Lords to decide were a series of preliminary issues on the construction of the ‘truth of statement clauses’ (see [410], above)]. Lord Bingham: ‘The issues between the parties concern the correct interpretation of a “Truth of Statement” clause contained in policies of insurance made between Chase (as representative of a syndicate of lending banks) as the insured and HIH which, although now in liquidation and not an appellant, has been treated as the lead company among a group of underwriting companies… Chase was advancing substantial sums to finance the making of future films. If the films, when made, proved successful and generated substantial revenue, Chase would expect or hope to recoup its outlay from the revenue stream assigned to it. But the films might not prove successful and might either produce no revenue stream or a revenue stream insufficient, after deductions, to repay the loan. To the extent that the revenue stream fell short of the sum advanced, Chase would look to the insurance policies. These provided the security without which, it seems safe to infer, Chase would not have lent at all… When the phrases numbered [6], [7] and [8] in the truth of statement clause are read against the backcloth of the general law very briefly summarised in the last paragraph of this opinion [in which his Lordship had recited sections 17– 20 of the 1906 Act], three points are immediately striking. First, Chase as the insured, although expressly relieved of any obligation to make any representation at all (phrase [6]), is not relieved of liability for any misrepresentation which it may voluntarily choose to make. Secondly, Chase is expressly relieved of any duty or obligation to make any disclosure of any nature (phrase [6]). Thirdly, no attempt has been made (whether by joining Heaths as a party to the

contract or in any other way) to relieve Heaths of any liability to which it might be liable as an agent. The parties have left Heaths to look after itself. In the present case, no allegations of misrepresentation or non-disclosure have been made against Chase at all, so the crucial question is: in what circumstances and to what extent, on a proper interpretation of the truth of statement clause, is Chase to be liable for misrepresentation or non-disclosure by Heaths? While the clause must of course be read as a whole, it can only be conveniently analysed by considering in a little detail the three phrases on which the argument turns. Phrase [6] This phrase reflects the obvious intention of the draftsman to distance Chase from the underlying transaction. It need make no representation and no disclosure, such duties being expressly waived. It was argued for Chase that this waiver relieved Heaths also of its disclosure duty, since s. 18(3) of the 1906 Act provides that — “In the absence of inquiry the following circumstances need not be disclosed, namely… (c) Any circumstance as to which information is waived by the insurer…” Since the disclosure obligation of the agent under section 19 is expressly subject to the provisions of section 18 as to circumstances which need not be disclosed, it was argued, the insurers’ waiver of Chase’s duty relieved Heaths also and thus operated to relieve Chase of any liability as principal. This is not in my opinion a tenable argument. For reasons which are readily understandable in the commercial context, the insurers relieved Chase of its usual obligation to disclose. It could not be supposed that the insurers did not require any disclosure of information of material

circumstances, only that they were not looking to Chase to get it. Phrase [6] makes plain that the insurers were not waiving disclosure of information of any material circumstances but were relieving Chase of its disclosure obligation altogether. Chase relied in argument on the rhetorical question posed by Saville LJ in Société Anonyme d’Intermediaries Luxembourgeois v Farex Gie [1995] LRLR 116 at p 157: “Why should it be a breach of good faith sufficient to deprive the assured of his contract if the agent fails to disclose something which, had the assured known of it, would not have had to have been disclosed by the latter?” But on the present assumed facts the answer is clear: it is a breach because the insurers have chosen to rely not on disclosure by Chase, distanced from the detail of the transaction, but on disclosure by the agent, actively involved. Phrase [7] It was common ground, and rightly so, that phrase [7], read with phrase [8], precludes avoidance of the policy by the insurers on the ground of innocent misrepresentation by Heaths: if the phrase does not have that effect, it has no effect at all. But the parties were divided as to how much further protection the phrase gives to Chase and in particular whether its effect is to deny Heaths’ authority to speak for Chase and whether it denies the insurers their usual remedies if Heaths were guilty of negligent or fraudulent misrepresentation. Chase contended that the effect of phrase [7] is to deny the authority of Heaths to speak for Chase. The Judge and the Court of Appeal both rejected this argument: [2001] 1 Lloyd’s Rep 30, paras 47, 70; [2001] 2 Lloyd’s Rep 483, para 144. These decisions were plainly correct. There is nothing

in the clause which could reasonably be understood as denying or restricting the implied and apparent authority of Heaths as Chase’s agent. In submitting that phrase [6] does not deny the insurers their usual legal remedies for negligent misrepresentation by Heaths, the insurers drew sustenance from the wellknown principles propounded by Lord Morton of Henryton giving the judgment of the Board in Canada Steamship Lines Ltd v The King [1952] AC 192 at p 208. There can be no doubting the general authority of these principles, which have been applied in many cases, and the approach indicated is sound. The Courts should not ordinarily infer that a contracting party has given up rights which the law confers upon him to an extent greater than the contract terms indicate he has chosen to do; and if the contract terms can take legal and practical effect without denying him the rights he would ordinarily enjoy if the other party is negligent, they will be read as not denying him those rights unless they are so expressed as to make clear that they do. But, as the insurers in argument fully recognised, Lord Morton was giving helpful guidance on the proper approach to interpretation and not laying down a code. The passage does not provide a litmus test which, applied to the terms of the contract, yields a certain and predictable result. The Courts’ task of ascertaining what the particular parties intended, in their particular commercial context, remains. In relation to negligent misrepresentation, the key to the understanding of phrase [7] in my view lies in the provision that Chase shall have “no liability of any nature…”. This is comprehensive language, clearly chosen to give Chase an extended immunity. It cannot refer simply to the liability of Chase to suffer the avoidance of the contract, since that is the subject of express provision in phrase [8]. So the language must be intended to preclude the liability of Chase for damages under section 2(1) of the 1967 Act for any

negligent misrepresentation by Heaths and also any right of the insurers to avoid the policy on that ground. I find nothing commercially surprising in this interpretation, from the viewpoint of Chase or the insurers. In a complex transaction of this kind, the possibility that Heaths as agent might make and fail to correct a representation which was later held to be both untrue and negligent would be very real. Chase, distanced from the transaction, would have little knowledge of what was represented and little opportunity to correct it. It could reasonably seek protection against loss or diminution of its security on such a ground. The insurers for their part might reasonably accept this chink in their armour, recognising that their rights against Heaths in such an eventuality would remain unimpaired. Does phrase [7] then operate to protect Chase against any liability for damages or any risk of avoidance if the insurers should be induced to enter into the contract by any fraudulent misrepresentation of Heaths acting as the agents of Chase? In submitting that such is the effect of the phrase, Lord Grabiner QC for Chase emphasised the comprehensive language already noted, “no liability of any nature”. Read literally, those words would cover liability for fraudulent misrepresentation, or deceit. If Chase’s security for its loan is to be cast-iron, the policy must stand even if induced by the deceit of Heaths. This is not a negligible argument. But neither the Judge nor the Court of Appeal accepted it and I am satisfied that they were right not to do so. For, as Rix LJ observed more than once in his judgment (paras 160, 169), fraud is a thing apart. This is not a mere slogan. It reflects an old legal rule that fraud unravels all: fraus omnia corrumpit. It also reflects the practical basis of commercial intercourse. Once fraud is proved, “it vitiates judgments, contracts and all transactions whatsoever”: Lazarus Estates Ltd v Beasley [1956] 1 QB 702 at p 712, per Denning LJ. Parties entering

into a commercial contract will no doubt recognise and accept the risk of errors and omissions in the preceding negotiations, even negligent errors and omissions. But each party will assume the honesty and good faith of the other; absent such an assumption they would not deal. What is true of the principal is true of the agent, not least in a situation where, as here, the agent, if not the sire of the transaction, plays the role of a very active midwife… It is clear that the law, on public policy grounds, does not permit a contracting party to exclude liability for his own fraud in inducing the making of the contract. The insurers have throughout contended for a similar rule in relation to the fraud of agents acting as such…I do not however think that the question need be finally resolved in this case. For it is in my opinion plain beyond argument that if a party to a written contract seeks to exclude the ordinary consequences of fraudulent or dishonest misrepresentation or deceit by his agent, acting as such, inducing the making of the contract, such intention must be expressed in clear and unmistakable terms on the face of the contract…I think it clear that…the language of phrase [7] falls well short of what is required to meet Chase’s objective, as both the Judge (para 81(3)) and the Court of Appeal (paras 159, 160) held. Phrase [8] In relation to misrepresentation, phrase [8] adds nothing to phrase [7]: there may be no avoidance for innocent or negligent misrepresentation, but the phrase does not, for reasons already given, apply to fraudulent misrepresentation. In relation to non-disclosure, there was some difference of opinion between the Judge and the Court of Appeal. I think it plain, giving fair effect to the language of this phrase, that innocent or negligent non-disclosure by Heaths is to give the insurers no right to avoid the policy. The

phrase refers to “any…non-disclosure by other parties…”; the English law on non-disclosure is widely recognised to be very strict; and any other reading would weaken Chase’s security to a point which would, it may be inferred, have been unacceptable to it. But fraudulent non-disclosure raises a more difficult problem. The Judge held that phrase [8] did not exclude the insurers’ right to avoid the contract of insurance in circumstances where the breach of the independent duty of disclosure by Heaths was the result of deliberate concealment of material facts: [2001] 1 Lloyd’s Rep 30, paras 76–77. In the Court of Appeal, doubt was cast on the meaning of “fraudulent non-disclosure” ([2001] 2 Lloyd’s Rep 483, para 165) and it was questioned whether the law had distinguished between innocent, negligent and fraudulent non-disclosure (paras 163, 168)… …Rix LJ makes an important but uncontentious point: that silence, where there is a duty to speak, may amount to misrepresentation…Since an agent to insure is subject to an independent duty of disclosure, the deliberate withholding from the insurer of information which the agent knows or believes to be material to the risk, if done dishonestly or recklessly, may well amount to a fraudulent misrepresentation. If, in the present case, the insurers establish nondisclosure by Heaths of this kind, nothing in the truth of statement clause deprives them of their ordinary right to avoid the policy and recover damages against Chase and Heaths. Whether, on the facts of this case, the insurers can establish any deliberate and dishonest or reckless nondisclosure by Heaths which does not amount to a misrepresentation, must be doubtful. In Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501 at p 549, Lord Mustill pointed out that “in practice the line between misrepresentation and nondisclosure is often imperceptible.” But section 84 of the 1906 Act appears to

accept the possibility of fraudulent non-disclosure and I do not think such possibility need be rejected on conceptual grounds. If it were to be established, I would agree with the Judge that phrase [8] does not exclude the insurers’ ordinary right to avoid. I would for my part answer the preliminary issues in this way: On the true construction of the contracts of or for insurance pleaded in the [amended] particulars of claim No 1999 Folio 1413 [the insurers’ action] and on the assumption that the facts and matters pleaded in those particulars of claim are true, the insurers are entitled in law (a) to avoid and/or rescind the contracts of or for insurance against Chase on the grounds, but only on the grounds, of fraudulent misrepresentation or as regards the contracts of insurance fraudulent nondisclosure by Heaths as agent of Chase; (b) to damages from Chase for, but only for, fraudulent misrepresentation by Heaths as agent of Chase and fraudulent non-disclosure by Heaths as agent of Chase if, but only if, such fraudulent non-disclosure by Heaths amounts to fraudulent misrepresentation. On the Court of Appeal’s narrow point relating to fraudulent non-disclosure not amounting to misrepresentation, the insurers’ appeal succeeds, and should be allowed to that extent. The cross-appeal by Chase fails and must be dismissed.’

4.1.3 Proving Non-Disclosure Expert evidence may be adduced by an insurer to assist the court in its determination of whether or not a non-disclosed fact is material (see Yorke v Yorkshire Insurance Co Ltd [1918–19] All ER Rep 877, per

McCardie J; and Roselodge Ltd v Castle (below, [414])). The determination of materiality is necessarily a fact intensive exercise: see, for example, James v CGU Insurance plc [2002] Lloyd’s Rep IR 206. [412] Reynolds v Phoenix Assurance Co [1978] 2 Lloyd’s Rep 440 [The issue of reinstatement that arose in this case is considered in chapter 13, [1304]; the insured’s failure to disclose a criminal conviction is considered below, [418]. Forbes J: ‘Before coming on to the evidence itself I should consider one further preliminary point. In this branch of the law it is permissible for either side to adduce evidence relating to what would be regarded as material. The question at once arises, what is the nature of such evidence and what are the powers and duties of the Court in relation to it? Mr Wilmers maintains that the Court’s only duty is to listen to the evidence, decide whether the witness is telling the truth and, if he is, go on to decide whether he is a reasonable and prudent underwriter. If both decisions are favourable then the Court must act on that evidence. Now I should say at once that I am satisfied that all the insurance witnesses (and such witnesses are called by both sides) were truthful in so far as they dealt with factual questions and also that they all appeared to me to be at any rate prudent underwriters. So far as the word “reasonable” is concerned Mr Wilmers says this merely means “rational” and has none of the connotations of the word as used in the term the

“reasonable man”. Apparently underwriters never ride on the Clapham omnibus. Now I do not accept these arguments. In the first place the evidence of insurers called in this way is expert evidence in the sense that such witnesses are assisting the Court in deciding what a reasonable and prudent underwriter would or would not do. They are not to give evidence of what they themselves would do, because their evidence is expert, that is opinion evidence and not factual. They are to give evidence of what, in their opinion, having regard to the general practice of underwriters, a reasonable underwriter would do. There is a world of difference between saying — “A reasonable underwriter, in my opinion, would do so and so: I would do so myself”; and saying — “I would do so and so, and because I am a reasonable underwriter, it must follow that that is what a reasonable underwriter would do”. The former is unobjectionable expert evidence; the latter is not only logically fallacious but also not really acceptable evidence at all…The test of such a witness is not whether he is telling the truth, but whether he is giving an honest opinion. Further, in giving expert evidence such witnesses are only assisting the Court not deciding the matter. It seems to me therefore that although I may derive assistance from such expert testimony as has been put before me, I am not bound to regard it as conclusive of what a reasonable and prudent underwriter would do.’

4.1.4 (iii) Scope of the Duty It will be recalled that section 18 of the 1906 Act requires disclosure of all facts which are known or presumed to be known by the insured and which are material to the underwriter’s determination of the

risk. Facts known or presumed to be known by the underwriter need not be disclosed. Decisions illustrating the scope of the insured’s duty of disclosure typically relate either to physical or moral hazard. The latter category is generally concerned with the insured’s claims history (including prior refusals to insure) or criminal past.

4.1.5 Physical Hazard Physical hazard can pose problems especially in life or health insurance because an insured may not be aware that a particular condition is symptomatic of a more serious health risk. In Joel v Law Union and Crown Insurance Co (1908) 99 LT 712, FletcherMoulton LJ gave the following example: ‘I will suppose that a man has, as is the case with almost all of us, occasionally had a headache. It may be that a particular one of these headaches would have told a brain specialist of hidden mischief, but to the man it was an ordinary headache indistinguishable from the rest. Now, no reasonable man would deem it material to tell an insurance company of all the casual headaches he had had in his life, and if he knew no more as to this particular headache, there would be no breach of his duty towards the insurance company in not disclosing it.’

[413] Cook v Financial Insurance Co Ltd [1998] 1 WLR 1765 (HL)

[Cook effected disability insurance with FI commencing on 15 October 1992. The policy contained an exclusion clause which provided that: “No benefit will be payable for disability resulting from (a) any sickness, disease, condition or injury for which an insured person received advice, treatment or counselling from any registered medical practitioner during the 12 months preceding the commencement date…” The insured, who regularly went running, collapsed in July 1992 while on a training run. He saw his GP but she could find nothing untoward. On 4 September he again visited her complaining of pain and breathlessness while running. She thought he may be suffering from a viral infection but referred him by letter dated 7 September to a cardiologist to exclude the possibility of angina. On 16 October the insured was examined by the cardiologist who diagnosed angina. In December he was advised to give up work and he claimed under the policy on the ground that he was unable to work due to angina. The insurers refused payment relying on the exclusion clause.] Lord Lloyd: ‘The questions which arise on these facts may be stated as follows. (1) Did the plaintiff receive advice, treatment or counselling for angina prior to 15 October? If not, (2) is it enough to bring the case within the exclusion that he received advice, treatment or counselling for symptoms which later turned out to be those of angina? If, as I think, treatment for a disease requires some knowledge on the part of the doctor of the disease which he is treating, in order to bring the case within the exclusion

clause, so advice for a disease must also require knowledge on the part of the doctor of the disease about which he is giving advice. A doctor does not give advice within the meaning of the clause by saying, “I do not know what is wrong with you; go and see another doctor.” The earliest date on which the plaintiff received advice for angina was therefore 16 October, when he saw Mr Flint. If on 7 September Dr Thorns had suspected angina, it might have been different. But on the facts as found by the judge, that was not the case. Dr Thorns did not suspect angina. She chose to exclude angina by getting a second opinion. But she might just as well have chosen to exclude respiratory disease. I turn to the second question. Is it enough that the plaintiff received advice for symptoms which turned out to be those of angina? In my opinion the answer must also be “No,” unless the insurers can read the word “condition” as including symptoms of a generalised kind which might indicate any number of different diseases, or none… The point is a narrow one, and made to seem all the narrower because the contract of insurance was concluded on the day before the plaintiff saw the consultant. But one can imagine cases where the timescale is much longer. Take a man who complains to his doctor that he is suffering from headaches. The doctor can find nothing wrong, and recommends a strong painkiller. Eventually it transpires that the man has a brain tumour. Can it really be said that he received advice for his brain tumour when he first went to see his doctor? Clearly not. Nor, I think, can it be said that he received advice for his condition. At the other end of the scale one might take the case of a man with a very high temperature who is taken to an isolation hospital suffering from Cape Congo Fever or some other rare disease. Obviously he is receiving treatment within the meaning of the exclusion clause from the

moment of his arrival in hospital, even though the disease cannot at first be diagnosed… In the present case the plaintiff signed a declaration that he had not consulted a doctor other than for minor illnesses. When he came to read the exclusion clause he was entitled to assume that it related only to major illnesses for which he had consulted a doctor. It could not relate to minor illnesses with which, as the insurers had made clear from the form of the declaration, they were not concerned…I would allow the appeal.’

4.1.6 Moral Hazard Previous convictions of the insured and connected persons [414] Roselodge Ltd v Castle [1966] 2 Lloyd’s Rep 113 [The insureds who were diamond merchants effected an all risks policy with the insurers. The proposal form did not ask, and the insureds did not disclose, whether any of their employees had previous convictions. When the insureds sought to recover under the policy on the ground that R, their principal director, had been robbed of diamonds valued at some £304,590, the insurers repudiated liability on the basis of non-disclosure in respect of two material facts. First, R. had been convicted of bribing a police officer in 1946 and was fined £75. Secondly, M, the insureds’ sales manager, had been convicted of smuggling diamonds into the USA in 1956, and had

been employed by the insureds within a year of his release from prison.] McNair J: ‘In the course of time it was found that in many cases the evidence of underwriters if fully accepted would work serious hardship to assureds, particularly to dependents suing upon life policies, unless some check was imposed. Accordingly, though in some of the earlier cases to which I have been referred there are certain rather oblique references to the point, it was not until the case of Joel v Law Union and Crown Insurance [1908] 2 KB 863, that one finds in the judgment of Fletcher Moulton LJ, at p 883, a passage (which has been much debated before me and which learned Counsel for the defence submitted was wrong in law) in which the learned Lord Justice says this…: “…There is, therefore, something more than an obligation to treat the insurer honestly and frankly, and freely to tell him what the applicant thinks it is material he should know. That duty, no doubt, must be performed, but it does not suffice that the applicant should bona fide have performed it to the best of his understanding. There is the further duty that he should do it to the extent that a reasonable man would have done it; and, if he has fallen short of that by reason of his bona fide considering the matter not material, whereas the jury, as representing what a reasonable man would think, hold that it was material, he has failed in his duty, and the policy is avoided. This further duty is analogous to a duty to do an act which you undertake with reasonable care and skill, a failure to do which amounts to negligence, which is not atoned for by any amount of honesty or good intention. The disclosure must be of all you ought to have realized to be material, not of that only which you did in fact realize to be so.”

…In my judgment…the judgment of Fletcher Moulton LJ in Joel’s Case contains, if I may respectfully say so, a correct statement of the law on the topic. It has the merit…of emphasising that even under the present practice of admitting expert evidence from underwriters as to materiality, the issue as to disclosability is one which has to be determined as it was in Lord Mansfield’s day by the view of the Jury of reasonable men. …Each of [the expert] witnesses was emphatic in the view that in a jewellery insurance of this kind the moral hazard is important. Mr Archer defined the moral hazard as the risk of honesty and integrity of the assured, and, in the case of a company, the honesty and integrity of any executives or key personnel (though I think he meant the risk of dishonesty and lack of integrity). The moral hazard he considered of particular importance in the case of jewellery insurance, “because of the smallness and little weight of the jewellery and because in jewellery insurance there is often a lack of adequate documentation and jewellery is very easily disposed of.” This seems to me to be a reasonable view… Turning now to the evidence of Mr Lindley and Mr Archer as to the materiality of Mr Rosenberg’s conviction 20 years before, it is true that both these witnesses stated in plain terms that they would not have written the risk had that fact been disclosed; but they were driven in cross-examination to state such extreme views that I am unable to accept their evidence on this point. It is not necessary to cite specific examples of their extreme views. But I would mention one. Mr Archer stated that in his view a man who stole apples at the age of 17 and had lived a blameless life for 50 years is so much more likely to steal diamonds at the age of 67 that if he had told him this when putting forward a proposal at the age of 67, he would not have insured him. Many other instances of the like character can be cited from the transcript…

In the result, I have come to the conclusion that it is not established to my satisfaction that Mr Rosenberg’s offence and conviction on a matter which has no direct relation to trading as a diamond merchant was a material fact which would have influenced a prudent underwriter. Furthermore if the test be that laid down by Fletcher Moulton LJ in Joel’s Case, sup., I am satisfied beyond any doubt that a reasonable business man would not have imagined for a moment that this was a matter which the proposer should have disclosed as material. If any relevant question had been asked in the proposal form and untruthfully answered, the position would clearly be quite different. I now turn to the question of Mr Morfett’s conviction and engagement. In connection with this matter I find myself in some difficulty. Though Mr Lindley and Mr Archer and Mr Spratt gave very emphatic evidence as to their views of the materiality of this fact, no one of them gave evidence as to what their attitude would have been if they had been told the full story of Mr Morfett’s engagement and subsequent rehabilitation… As it seems to me, the position must be viewed as at the date when the 1964 insurance or possibly the 1963 insurance was put forward. Would a prudent underwriter, having heard the whole story, have declined the risk or altered the premium, or, applying the Joel test, would a reasonable man at that date have thought that this whole story was a matter which was material to be disclosed? In the course of the case and the submissions which followed it, Mr Caplan has sought to draw a distinction between smuggling goods through Customs and other offences of dishonesty…I do not imagine any reasonable person would suppose that when insuring his property against burglary he ought unasked to disclose to his underwriters that he or one of his trusted employees had on occasions brought through the Customs a bottle of brandy

without declaring it, though this may involve a criminal offence. But the matter involved here is different. Mr Morfett had been convicted of smuggling a large quantity of diamonds worth some $40,000 through the American Customs. It may be he was a mere carrier, but he was being party to a dishonest transaction. After anxious consideration of the matter in all its aspects, I have reached the conclusion and so find that the average reasonable business man, though no doubt impressed by Mr Rosenberg’s charitable act in attempting and apparently succeeding in rehabilitating a man who had paid his penalty, would appreciate that Mr Morfett remained or might remain a security risk and that underwriters should have been given the opportunity to decide for themselves whether the story as a whole was one which would have influenced them in accepting the risk as offered for fixing the premium… Though with great reluctance, in view of the conclusion I have reached as to the honesty of the claim and as to Mr Rosenberg’s charitable action towards Mr Morfett, I find that this plea of non-disclosure succeeds.’

[415] March Cabaret Club & Casino Ltd v London Assurance [1975] 1 Lloyd’s Rep 169 [The insureds, Mr and Mrs Skoulding, had effected a fire policy covering the premises of a club and restaurant owned by them. Upon renewal of the policy in April 1970, Mr Skoulding failed to disclose that he had committed the offence of dishonestly handling stolen goods in June 1969 for which he was

convicted at the Old Bailey in June 1970. He was fined £2,000.] May J: ‘Be it noted also that whereas there is a presumption that matters dealt with in a proposal form are material, there is no corresponding presumption that matters not so dealt with are not material. If any authority were required for that proposition one can find it in the case of Schoolman v Hall [above, [409]]… In the light of some of the evidence, particularly that of Mr Edmunds, I was concerned at one stage in this case about how one could reconcile the presumption of innocence and the privilege of non-incrimination with the duty of disclosure on the facts as I have outlined them. After argument I realise that my doubts were based upon a fallacy. One must remember that there is no estoppel by acquittal save as between the Crown and the person acquitted. There is nothing to prevent one party to civil proceedings, if the fact be material and relevant, attempting to prove that another party to those proceedings has in truth committed a crime of which that other party has been previously acquitted in a criminal Court. See Gray v Barr [1971] 2 QB 554 [chapter 10]…Thus, even if Mr Skoulding had been acquitted prior to the renewal in April, 1970, there would in this case have been nothing to prevent insurers attempting to prove that he had nevertheless committed the offence. If they had succeeded and if Mr Skoulding had, as here, failed to disclose that he had committed the offences, then this would, notwithstanding his acquittal, have been a material non-disclosure entitling insurers to avoid the policy. No one has a right to a contract of insurance, and if a proposer has committed a criminal offence which is material and ought to be disclosed he must disclose it, despite the presumption of innocence, which is only a presumption, and despite the

privilege of non-incrimination, which is only a privilege — or he must give up the idea of obtaining insurance at all. There is one thing, however, which I would like to add. Had it been material I would have been prepared to hold in this case that in any event Mr Skoulding ought to have disclosed the fact of his arrest, charge and committal for trial at the date of renewal, even though in truth he was innocent. What I do not agree with and would not be prepared to accept, although Mr Edmunds in his evidence sought to say to the contrary, is that if, prior to renewal, Mr Skoulding had been acquitted, there would then have been any duty on him to disclose his arrest, committal and acquittal — unless that acquittal was unjustified because he had in fact committed the offence and insurers were prepared so to allege and to prove it. To suggest that a proposer should disclose an acquittal when insurers do not propose to challenge it is in my judgment erroneous and seeks to point a path which, as at present advised, I firmly decline to tread.’

[416] Lambert v Co-operative Insurance Society [1975] 2 Lloyd’s Rep 465 (CA) [In April 1963 the insured effected an “All Risks” policy covering her own and her husband’s jewellery. At this time she was not asked and did not disclose her husband’s conviction some years earlier for receiving stolen cigarettes for which he was fined £25.00. The policy contained a condition which provided that it would be ipso facto void if there was non-disclosure of a material fact. The policy was renewed each year. In December 1971 the insured’s husband was again convicted for offences involving dishonesty and sentenced to a prison term. This was

not disclosed at the next renewal. In April 1972 the insured claimed for lost or stolen items of jewellery. The insurers repudiated liability]. Cairns LJ: ‘I too would dismiss this appeal. While Mr Lewis has been able to refer to a number of judgments…in which the language suggested that it is only what a reasonable proposer would consider relevant that has to be disclosed, I do not think that in any of those cases the Judges were directing their minds to the problem of whether the test is the mind of a reasonable proposer or that of a reasonable underwriter. They were concerned to dismiss the contention that only the facts which the proposer considered material need be disclosed. One strong pointer to its being the view of a reasonable underwriter which is relevant is that it has for long been the practice, as was said by McNair J in Roselodge Ltd v Castle, at p 129, for evidence to be admitted of underwriters as to what they would consider relevant. If the question were what a reasonable member of the public would consider material, such evidence would not be relevant and it is difficult to see that any expert evidence would be admissible… In providing by statute that the test should be that of the insurer in marine insurance cases, I think that Parliament was doing no more than inserting in its code of marine insurance law what it regarded as the general rule of all insurance law…’

[417] Strive Shipping Corp v Hellenic Mutual War Risks Association (Bermuda) Ltd (The Grecia Express) [2002] 2 Lloyd’s Rep 88 [The facts are immaterial].

Colman J: ‘In my judgment, it is quite clear from section 18 of the Marine Insurance Act, 1906 that the attribute of materiality of a given circumstance has to be tested at the time of the placing of the risk and by reference to the impact which it would then have on the mind of a prudent insurer. In this connection it is for present purposes necessary to distinguish between three types of circumstances: (1) allegations of criminality or misconduct going to moral hazard which had been made by the authorities or third persons against the proposer and are known to him to be groundless; (2) circumstances involving the proposer or his property or affairs which may to all outward appearances raise a suspicion that he has been involved in criminal activity or misconduct going to moral hazard but which he knows not to be the case; (3) circumstances involving him or his business or his property which reasonably suggest that the magnitude of the proposed risk may be greater than what it would have been without such circumstances. As to case (1), if an allegation of criminal conduct has been made against an assured but is as yet unresolved at the time of placing the risk and the evidence is that the allegation would have influenced the judgment of a prudent insurer, the fact the allegation is unfounded cannot divest the circumstance of the allegation of the attribute of materiality. For example, if the proposer had told the insurer of the allegation and also that it was unfounded, the insurer might well have preferred not to trust the word of the assured or might have preferred to conduct his own investigation before agreeing to underwrite the risk. As to case (2), it is, in my judgment, quite unrealistic for underwriters to require disclosure of facts, which the proposer knows to have no bearing on his honesty or integrity, on the basis that a suspicious person when told of

those facts might believe that it did have such a bearing. Unlike case 1 where a third party has made a specific allegation against the proposed assured, case 2 involves that the assured should evaluate for himself perfectly innocent facts to see whether they might be misconstrued by an underwriter as indicating his dishonesty. I do not consider that the duty of the utmost good faith involves as rigorous an approach as this. Nor, indeed, did the [insurers’] expert, Mr Hunt…Provided that there has been no outward allegation material to the proposer’s integrity and that he is in truth innocent, the mere suspiciousness of the facts does not render them disclosable. As to case (3) by parity of reasoning, if the assured knows of facts which, when viewed objectively, suggest on the face of it that facts might exist (“the suggested facts”) which would increase the magnitude of the risk and the known facts would have influenced the judgment of a prudent insurer, the known facts do not cease to be material because it may ultimately be demonstrated that the suggested facts did not exist. That which invests the circumstances with materiality is emphatically not the existence of the suggested facts, but the existence of the known facts, for the underwriter is entitled to take into account the risk that the suggested facts may be true and the proposer is not entitled to deprive the underwriter of that opportunity because he personally believes albeit he does not know for certain that the suggested facts are untrue… However, the authorities suggest that the rumours have to have at least some real substance and reliability when objectively viewed. Thus, in Durrell v Bederley, (1816) Holt NP 283 in the Court of Common Pleas at Nisi Prius…Gibbs LJ concluded…: “The question is, did the plaintiff know any facts injurious to the adventure, which ought, in common honesty, to have

been communicated to the underwriters; I mean substantial facts, which were likely to change their opinion as to the magnitude of the risk. Loose rumours which have gathered together, no one knows how, need not be communicated. Intelligence, properly so called, and as it is understood by mercantile men, ought to be disclosed when known. The materiality of the facts known and suppressed are for the decision of the jury. If the concealment be of a material fact, whether a rumour, report or an article of intelligence, it ought to be communicated; if immaterial, it may be withholden.” …That, however, is far from being the end of the matter. I refer at the outset to the judgment of Staughton LJ in Kausar v Eagle Star Insurance Co Ltd [2000] Lloyd’s Rep IR 154 at p 157: “Avoidance for non-disclosure is a drastic remedy. It enables the insurer to disclaim liability after, and not before, he has discovered that the risk turns out to be a bad one; it leaves the insured without the protection which he thought he had contracted and paid for. Of course there are occasions where a dishonest insured meets his just deserts if his insurance is avoided; and the insurer is justly relieved of liability. I do not say that non-disclosure operates only in cases of dishonesty. But I do consider that there should be some restraint in the operation of the doctrine. Avoidance for honest non-disclosure should be confined to plain cases.” However, one should not lose sight of the fact that were the evidence before the Court, upon which underwriters rely to avoid the policy, to establish that, although the known facts were not disclosed, the suggested facts did not in truth exist, underwriters would be seeking to avoid liability in respect of a risk which, had they been in possession of the

true facts, as distinct from the allegations of suggested facts, they would have written without hesitation. In so doing they would, in effect, be utilising loss of the opportunity of forming an unfounded suspicion of nonexistent facts in order to avoid paying a loss under a policy which, had the truth been made known to them when they wrote the risk, they would not have hesitated to underwrite. To persist in such a course in the face of evidence before the Court that the suggested facts never existed would, in my judgment, be quite contrary to their duty of the utmost good faith. Such a course would be so starkly unjust that I would hold that in such a case it would be unconscionable for the Court to permit the insurers to avoid the policy on the grounds of nondisclosure. Having regard to the equitable origin of the jurisdiction to avoid a policy for breach by the assured of the duty of the utmost good faith, the Court should not be inhibited from giving effect by appropriate orders to the insurers’ countervailing duty of the utmost good faith to the assured. The breach of that duty by the insurers would be so unconscionable as to disentitle the insurers from invoking the equitable jurisdiction of the Court to avoid the contract on the grounds of non-disclosure by the assured. The procedural and evidential consequences which flow from this conclusion are, in my judgment, as follows: (1) In the field of moral hazard, a failure by the assured to disclose an existing allegation against him of dishonesty or relevant criminal conduct or a criminal charge will normally be nondisclosure of a material fact which prima facie entitles the insurer to avoid the policy. (2) If, in proceedings in which the insurer seeks to avoid the policy for such non-disclosure, the assured proves that the allegation or charge was unfounded and that there has been no dishonesty or criminal conduct on his part, the insurers will not normally be entitled to

avoid the policy. For example, where the assured has been charged with a criminal offence and subsequently acquitted at a trial, he can deploy his acquittal as some evidence, but not conclusive evidence, of his innocence. Similarly, if he has been charged but not yet convicted, he can prove his innocence in order to displace the entitlement of the insurers to avoid for his failure to disclose the charge against him. (3) If I am wrong in concluding that an assured is under no duty to disclose facts merely because they are objectively suspicious as to his own wrong-doing when he knows that the suggested facts do not exist, it must by parity of reasoning be open to the assured to displace the underwriters’ entitlement to avoid for non-disclosure of circumstances because they are objectively suspicious by proving that the suspicion was misplaced and that the facts of the existence of which there was suspicion never in truth existed. (4) If the facts objectively raise suspicions going to the magnitude of the risk, the assured is under a duty to disclose them but if at the trial he establishes that there was in truth no basis for those suspicions it is not open to the insurers to invoke the Court’s equitable jurisdiction to avoid the policy.’

Notes: 1. Thus, following March Cabaret Club Colman J held that outstanding criminal charges and acquittals are to be viewed as material facts (see also, Inversiones Manria SA v Sphere Drake Insurance Co plc, The Dora [1989] 1 Lloyd’s Rep 69).

2.

Colman J’s reasoning was subjected to considerable scrutiny by the Court of Appeal in Brotherton v Aseguradoa Colseguros SA [2003] EWCA Civ 705. Columbian media reports carried allegations of serious misconduct and related investigations involving the business activities of the Columbian reinsureds that had not been disclosed by them. The issue in this appeal by the reinsureds from the decision of Moore-Brick J concerned the question of whether the materiality of the media reports and the validity of the avoidance by the reinsurers on the basis of non-disclosure depended upon the correctness of the allegations. The appeal was heard before the trial set for determining whether there was in fact misconduct. Mance LJ drew the distinction between material intelligence that might ultimately be demonstrated as unfounded but which should nevertheless be disclosed and immaterial idle rumours which need not be disclosed by an insured or his or her agent (citing Lynch v Hamilton (1810) 3 Taunt 15, Lord Ellenborough CJ). Significantly, Mance LJ disagreed with Colman J’s analysis in The Grecia Express (above, [417]) that avoidance is an equitable remedy that is, therefore, discretionary. Colman J had taken the view that where insurers who have avoided a policy subsequently learn, say at the trial, that the non-disclosed fact was not actually material they may be held to be in breach of their own

duty of utmost good faith on the basis of their inequitable behaviour. The Court of Appeal in Brotherton rejected this reasoning on the basis that the right to avoid was a self-help remedy that could be exercised without the court’s authorisation. Thus, avoidance which can be justified at the time the remedy was exercised by (re-)insurers cannot subsequently be challenged. Mance LJ: ‘…I cannot see that the decision in Pan Atlantic that avoidance depends on inducement as well as materiality lends support to a conclusion that avoidance for nondisclosure of otherwise material information should depend upon the correctness of such information, to be ascertained if in issue by trial. In my judgment, neither principle nor sound policy supports such a conclusion. The assumed starting point is that an insurance has actually been induced by the nondisclosure of matters within an insured’s knowledge which would have influenced the judgment of a prudent insurer. Had the insured made the disclosure which Colman J himself accepts should have been made, the insurance would either not have been written at all, or it would have been written on different terms (including as to premium), and the insured could not done anything about this in either case by later showing the incorrectness of any material intelligence which induced the insurer to refuse the insurance or to insist on more stringent terms. Moreover, had due disclosure been made, there would have been no call for any subsequent investigation or litigation about the correctness or otherwise of the intelligence. The insured has failed to make the disclosure he should have made. That carries with it the risk that underwriters would never learn of the intelligence at

all, and never realise that there was anything to investigate… Further, if no disclosure was made, and underwriters did discover the intelligence later, then on Mr Millett’s case [counsel for the reinsureds] the matter does not end there. The position is not restored to that which would have applied, had there been timely, pre-contractual disclosure. On the contrary, underwriters are bound to be prepared to investigate and litigate what might in some cases, and certainly would in the present case, be matters of the most difficult and sensitive nature, both from an evidential and from a substantive viewpoint. In some cases it is possible (as Colman J suggested in The Grecia Express [above, [417]]) that underwriters might have conducted some form of pre-placement investigation of intelligence, if it had been disclosed to them. But it is implausible to think that this would compare with the investigation which would occur prior to and at trial of an issue finally to determine the correctness of such intelligence. The present case illustrates this implausibility. A very substantial public enquiry or trial would probably be necessary to form any definite view as to the correctness of allegations like those reported in the Columbian media and the subject of the Columbian investigations. In summary, it would be an unsound step to introduce into English law a principle of law which would enable an insured either not to disclose intelligence which a prudent insurer would regard as material or subsequently to resist avoidance by insisting on a trial, in circumstances where: i) if insurers never found out about the intelligence, the insured would face no problem in recovering for any losses which arose — however directly relevant the intelligence was to the perils insured and (quite possibly) to the losses actually occurring; and ii) if insurers found out about the intelligence, then (a) they would in the interests of their syndicate members or

shareholders have normally to investigate its correctness, and (b) the insured would be entitled to put its insurers to the trouble, expense and (using the word deliberately) risk of expensive litigation, and perhaps force a settlement, in circumstances when insurers would never have been exposed to any of this, had the insured performed its prima facie duty to make timely disclosure… If, as I consider, both the second and the third strands of the reasoning in The Grecia Express are unsound, that is the end of this appeal. Unless the reinsureds are entitled to a trial to determine whether there was any actual misconduct justifying the allegations and investigations relating to the original insured and its officers, the only relevant issues for trial are…[(i) whether, as at the time of the placements in November 1997 (or, as the case may be, the extensions in November 1998), the reports (or the reports coupled with the fact of the investigations) were or ought to have been known either to the reinsureds or to all or any of the reinsurers; (ii) whether, at that time, their mere existence constituted a matter which a prudent reinsurer would have regarded it as material to know. On that issue expert underwriting evidence will, in accordance with modern practice, be admissible; the issue will raise for consideration whether the reports (or the reports and investigations) amounted to intelligence, or were mere “loose” or “idle” rumours; (iii) whether, if the actual reinsurers had known of the reports (or the reports and investigations) at that time, such knowledge would have induced all or any of them to act differently, either by not entering into (or extending) the reinsurances, or by only doing so on different terms (including a different rate); some light may be thrown on this by the answer to (ii), but the evidence of the actual reinsurers is likely to be more important]. Absent such a trial and determination, there can be no conceivable basis for complaining about reinsurers’ avoidance for non-disclosure

of the reports (or the reports and investigations), assuming that such matters are shown at trial to have been material and to have induced reinsurers in the sense identified in Pan Atlantic… However, I add some further words on the first strand. Firstly, rescission under English law is not generally subject to any requirement of good faith or conscionability. It is unnecessary to address the academic chestnut, delicately handled by Lord Mustill in Pan Atlantic at p 544, of the juristic origin of the duty of disclosure in insurance law, in particular whether or to what extent the origin is equitable and what role the common law played: cf Carter v Boehm. The mere fact that a right to rescind has an equitable origin does not mean that its exercise is only possible if that is consistent with good faith or with a court’s view of what is “conscionable”. Secondly, recent authority has in any event tended to limit the scope of any post-contractual duty of good faith to circumstances of repudiatory breach or fraudulent intent: cf The Star Sea [above, [425]]; The Mercandian Continent [see chapter 11, [1103]]; The Aegeon [2002] EWCA Civ 247 [see chapter 11]…’ For the reasons I have given, I consider that Moore-Bick J’s judgment, with which I agree in its entirety, was correct, and that this appeal fails.’

Notes: 1. By virtue of section 4(3) of the Rehabilitation of Offenders Act 1974 an insured is under no duty to disclose a “spent” conviction. A conviction which carries a sentence of two and a half years imprisonment or more can never become spent. Convictions that carry custodial sentences of less than six months become spent after seven years and those that carry

sentences of between six months and two and a half years become spent after ten years. 2. Where a conviction is “spent”, section 4(2) of the Act provides that any question in a proposal form regarding previous convictions is to be treated as not referring to such a conviction. However, section 7(3) of the Act confers a discretion on the court to admit evidence as to spent convictions if the court is satisfied that “justice cannot be done in the case except by admitting it.” [418] Reynolds v Phoenix Assurance Co [1978] 2 Lloyd’s Rep 440 [(See also, above [412] and chapter 13, [1304]). A further issue in this case was whether the insured’s conviction in 1961 for receiving stolen goods was a material fact that should have been disclosed when effecting the fire policy in 1972. The insurers argued, inter alia, that under section 7 of the Rehabilitation of Offenders Act, 1974, the judge had a discretion whether or not to admit the conviction]. Forbes J: ‘The receiving offence …It is an offence of dishonesty. There are only two factors which it seems to me to require consideration, first the extent of the dishonesty and secondly the age of the conviction; as I have indicated this appeared to be the general view of most of the [expert] witnesses… …I can find no special facts in this case to cause me to change my first impression which was similar to that of Lord

Pearson, with this added fact that the conviction only resulted in a fine, the size of which might quite properly have been designed to reflect not the gravity of the offence but the fact that Mr Reynolds was a man of considerable means. Nor is there any unanimity among the experts. I conclude that the defendants have failed to prove to my satisfaction that this particular conviction 11 years previously was a material fact which would have affected the judgment of a reasonable or prudent insurer in fixing the premium or determining whether he will take the risk.

The Rehabilitation of Offenders Act, 1974 In view of the conclusion to which I have come about the materiality of the conviction it is probably unnecessary for me to consider the position under the 1974 Act. However I feel that I should indicate the course I would have taken had I decided that the conviction was a material fact which should have been disclosed. This is because, it seems to me, that the terms in which the discretion to admit evidence concerning a spent conviction is given by the Statute are such that it is virtually incumbent upon a Judge of first instance to pass upon this matter. The relevant provision is section7(3) of the 1974 Act. So far as is material it is in these terms: “…If at any stage in any proceedings before a judicial authority in Great Britain — the authority is satisfied in the light of any considerations which appear to it to be relevant including any evidence which has been or may thereafter be put before it that justice cannot be done in the case except by admitting or requiring evidence relating to a persons spent convictions or to circumstances ancillary thereto, that authority may admit or as the case may be require the evidence in question notwithstanding the provisions of subsection 1 of section 4 above and may determine any issue

to which the evidence relates in disregard, so far as necessary, of those provisions.” The provisions of section 4(1) are those which prohibit the giving of evidence relating to a spent conviction or the fact that the person so convicted committed the offence with which he had been charged. It is the reference to the evidence which I have emphasised in section 7(3) which seems to me to make it incumbent upon a Judge of first instance to deal with this matter. Had I considered that the defendants had proved that the conviction was a material fact it would have been because I would have accepted the evidence of those of the expert witnesses who maintained that the conviction was material. This in its turn would be because I accepted that it was the general practice among insurance companies to require such matters to be disclosed, to consider themselves entitled to refuse cover in such circumstances, and, and this is important, to avoid a policy on the ground of material non-disclosure in cases where no such disclosure was made. It would be against that background that I would have had to have judged whether or not I was satisfied that justice could not be done in the case except by admitting or requiring evidence of the spent conviction. It seems to me on those hypotheses that there is really only one conclusion to which I could have come. If the universal practice of insurance companies would involve the probable refusal of cover if the fact of a previous conviction had been disclosed, and in this case a material conviction was not so disclosed, then there would be no real injustice to the plaintiffs in requiring the conviction to be disclosed now because on this view they were bound to disclose it in 1972, did not do so, and therefore obtained a policy which otherwise they would probably never have obtained. On the defendants’ side on the other hand there would be the gravest injustice because they would be prevented from avoiding a policy, which on

this view of the evidence, it would be the universal practice of insurers to avoid in such circumstances, and would be bound to pay insurance moneys on a policy relating to a risk which, again on this view of the evidence, they would, by universal practice, have been entitled to decline.’

Insurance history: prior refusals and claims record [419] Glicksman v Lancashire and General Assurance Co Ltd [1927] AC 139 (HL) [The facts appear from Viscount Dunedin’s speech]. Viscount Dunedin: ‘My Lords, one Sapsy Glicksman, a small ladies’ tailor, insured against burglary his Stock in trade. A burglary happened and a large portion of his stock in trade was taken away, but upon his applying to the insurance company for the insurance money he was met by the allegation that there had been no burglary and no stock in trade. They went to arbitration, and here is what the learned arbitrator said: “On the hearing of the reference during the opening of the case for the claimant, counsel for the respondents stated to me that the only point he intended to raise was that there had been no burglary as alleged by the claimant and that the goods for which the claim was made were not upon the said premises at the date of such alleged burglary and had not been removed or stolen by burglars as alleged.” That was a very serious accusation. It was an accusation which, if it were true, would have put the man in prison…Here is what the arbitrator said about it: “I find that the goods in respect of which the claim was made were upon the said premises at such date and were stolen and removed by burglars as alleged by the claimant, and that the claimant thereby suffered loss and damage to the

amount of £1,656. 6s 3d.” But, in the course of the examination of the claimant, in answer to some more or less casual questions, it seems that he said that he had been turned down by another office, and thereupon the insurance company remembered that he had, like other people, signed a paper when he made application for insurance, and accordingly they asked leave and got leave to put in an amended point of defence. The amended point of defence was: “It was warranted by the policy that the statements made by the applicant in his proposal in writing dated 9 November 1922, were true in all respects, and that if the policy should be obtained through any misrepresentation, suppression, concealment, or untrue averment” it should be absolutely void. Then it was said that he had, as a matter of fact, in answer to a question: “Has any company declined to accept or refused to renew your burglary insurance? “said: “Yorkshire accepted, but proposers refused on account of fire proposal”; whereas, in fact, in a written proposal dated 19 June 1919, the applicant had offered his burglary insurance to the Sun Insurance Office and the said Sun Insurance Office had declined it. It was not quite plain sailing even then, because when the proposal came to be looked at it was found that at the time the proposal was made he was in partnership. The word “you “in English in either singular or plural, and when you come to the answers to the questions there is, what I may call, a somewhat inextricable confusion between the singular and the plural. Of course, literally speaking, if the word “you “is used in the plural, as naturally it should have been because two people were applying, then it was quite true that there had not been any refusal of an insurance; but it was not true if you take it in the singular. The arbitrator came to the conclusion that it voided the policy and an appeal was taken on a stated case to Roche J Roche J came to an opposite conclusion…

My Lords, for the reasons that I shall presently state, I am unable to agree with Roche J…I come to the law of it. The law has often been stated, but perhaps it is just as well to state it again. A contract of insurance is denominated a contract uberrimae fidei. It is possible for persons to stipulate that answers to certain questions shall be the basis of the insurance, and if that is done then there is no question as to materiality left, because the persons have contracted that there should be materiality in those questions; but quite apart from that, and alongside of that, there is the duty of no concealment of any consideration which would affect the mind of the ordinary prudent man in accepting the risk. Now, as I have said, upon this proposal two questions arose. First, the question arose upon what I call the plural and the singular. One of the learned judges in the Court of Appeal has said that he would like further to consider this. Roche J decided it in the sense that the question was really put in the plural, and that therefore there was no untrue answer. There were certain cases quoted to us which go to the same view. Two of the learned judges in the Court of Appeal took the other view…But here the whole point really comes to turn upon this — and this is the ground of the judgment of the learned judges in the Court of Appeal — that, never minding the singular or the plural, the fact that a question of this sort was put showed that the insurance company thought it was material whether a proposal had been refused or not, and that that was brought to the knowledge of the claimant. My Lords, under the circumstances I have considerable doubts, but then I am not entitled to take any view of my own on that, because that is a fact and the arbitrator has found it as a fact and I cannot get beyond the arbitrator’s finding, I think that the reasoning of the learned judges in the Court of Appeal is impeccable. This was brought to the knowledge of the claimant that it was a material fact, and he certainly did not disclose it, and, therefore, the policy is void.

Therefore, my Lords, with unfeigned regret, I move your Lordships that this appeal be dismissed with such costs as there are in a case in forma pauperis.’

Lord Wrenbury: ‘My Lords, it is with the very greatest reluctance that I concur in the motion which is proposed from the Woolsack. I think it a mean and contemptible policy on the part of an insurance company that it should take the premiums and then refuse to pay upon a ground which no one says was really material. Here, upon purely technical grounds, they, having in point of fact not been deceived in any material particular, avail themselves of what seems to me the contemptible defence that, although they have taken the premiums, they are protected from paying.’

[420] Locker and Woolf Ltd v Western Australian Insurance Co Ltd [1936] 1 KB 408 (CA) [In a proposal for fire insurance, the insured, in answer to the question: “Has this or any other insurance of yours been declined by any other company?” answered “No.” A fire occurred at the premises and the insurers repudiated liability. Two years prior to effecting the fire policy, the insured had been declined motor insurance on the grounds of misrepresentation and non-disclosure]. Slesser LJ: ‘It is elementary that one of the matters to be considered by an insurance company in entering into contractual relations with a proposed insurer is the question of the moral integrity of the proposer — what has been called the moral hazard. In the present case it is quite impossible to say that the non-

disclosure by those proposing to take out a policy against fire risks that they have had an insurance on motors declined on the ground of untrue answers in the proposal form is not the non-disclosure of a fact very material for the insurance company to know — a fact which if known to the company might lead them to take the view that the proposers were undesirable persons with whom to have contractual relations. In those circumstances there can, in my opinion, be no doubt that on the general law of insurance the company were perfectly entitled to repudiate the contract on the ground of the non-disclosure of a material fact.’

[421] London Assurance v Mansel (1879) 41 LT 225 (CA) [In a proposal for life assurance the insured, in answer to the question, “Has a proposal ever been made on your life at any other office or offices? If so, where? Was it accepted at the ordinary premium, or at an increased premium, or declined?” answered “Insured now in two offices for £16,000 at ordinary rates. Policies effected last year.” At the foot of the proposal the insured signed the following declaration: “I declare that the above written particulars are true, and I agree that this proposal and declaration shall be the basis of the contract between me and the London Assurance.” In fact five life companies had declined him cover notwithstanding that he had passed the medical examinations]. Jessel MR: ‘The first question to be decided is, what is the principle on which the Court acts in setting aside contracts of

assurance? As regards the general principle I am not prepared to lay down the law as making any difference in substance between one contract of assurance and another. Whether it is life, or fire, or marine assurance, I take it good faith is required in all cases, and, though there may be certain circumstances from the peculiar nature of marine insurance which require to be disclosed, and which do not apply to other contracts of insurance, that is rather, in my opinion, an illustration of the application of the principle than a distinction in principle… Now I come to the facts of the case, which certainly appear to me to be very plain and clear indeed…The question was, “Has a proposal been made at any office or offices; if so, where?” He does not state, “I proposed to half a dozen offices,” which was the truth, but simply says, “Insured now in two offices,” which of course must have been intended to represent an answer, and therefore would mislead the persons receiving it, who did not look at it with the greatest attention, into the belief that he was insured in two offices, and that they were the only proposals that he had made. “Was it accepted at the ordinary premiums or an increased premium?” His answer is, “At ordinary rates.” That is the answer to the second branch of the inquiry, but he has not answered the question, “or declined?” The inference, therefore, which must have been intended to be produced on the mind of the person reading the answer was that it had not been declined. And in my opinion that is the fair meaning of the answer; and the assured is not to be allowed to say, “I did not answer the question.” But if it were so it would make no difference, because if a man purposely avoids answering a question, and thereby does not state a fact which it is his duty to communicate, that is concealment. Concealment properly so called means nondisclosure of a fact which it is a man’s duty to disclose, and it was his duty to disclose the fact if it was a material fact.

The question is whether this is a material fact? I should say, no human being acquainted with the practice of companies or of insurance societies or underwriters could doubt for a moment that it is a fact of great materiality, a fact upon which the offices place great reliance. They always want to know what other offices have done with respect to the lives…We have an admission by the Defendant that no less than five insurance offices had declined to accept his life. Now, to suppose that any one who knows anything about life insurance, that any decent special juryman could for a moment hesitate as to the proper answer to be given to the inquiry, when you go to the insurance office and ask for an insurance on your life, ought you to tell them that your proposals had been declined by five other assurance offices? is, I say, quite out of the question. There can be but one answer — that a man is bound to say, “My proposals have been declined by five other offices. I will give you the reasons, and shew you that it does not affect my life,” as he admits it to be by this answer; but of that the office could judge. There can be no doubt, as a proposition to be decided by a jury, that such a circumstance is material. But in fact I have elements here admitted on the pleadings for deciding that question quite irrespective of the ordinary knowledge of the practice of mankind in respect of these matters which is to be imputed to a good special juryman, because I have here two things admitted, first of all that the proposal which forms the basis of the contract asks a question — Has a proposal been declined? …So here we have the proposal as the basis of the contract. It is impossible for the assured to say that the question asked is not a material question to be answered, and that the fact which the answer would bring out is not a material fact.’

Notes: Given the all or nothing consequences of nondisclosure, the Insurance Ombudsman may require the insurers in consumer insurance to pay a proportion of a claim based on the difference between the actual premium charged and the premium which would have been charged had the material fact been disclosed. [422] Insurance Ombudsman Bureau Digest ‘All or nothing’ decisions are not always fair

Proportionality Insurance policies tend to be printed in black and white. Even if colours are introduced on the printed page for added emphasis, the objective of those who draft the policies tends to remain the same…Either the claim will succeed, and the policyholder will be paid in full: or the claim will fail and the policyholder will receive nothing. In the Bureau, we sometimes have to ask whether such an approach leads to a fair and reasonable solution. We introduced the principle of proportionality to deal with case of unintentional non-disclosure and misrepresentation (Annual Report for 1989 para 2.16–7). The Annual Report for 1994 (para 2.10), we illustrated how we have been applying a principle of proportionality to deal with the interplay of pre-existing medical conditions and accidental injuries in the case of personal accident policies covering permanent and temporary total disability… Limits of proportionality ‘Splitting it down the middle’ works well in some insurance disputes, but we have to ensure that it does not become a

cop-out from making a difficult decision in others… Something less than all will be quite unfair if the policyholder is entitled to his claim in full, or if the insurer has reasonable grounds for declining to make any payment whatsoever. Adopting a proportionate solution must involve no less an exercise of judgement than deciding one way or the other. In a claim under a travel policy, raising this issue, the balance went in favour of the insurer. A provision in the policy entitled the policyholder to payment of £30,000 in the event of an accident resulting in total permanent disability. We decided that this did not entitle the policyholder to payment of 50 per cent in the event of an accident resulting in partial total disability. Similarly, in such policies, the provision that a delay in departure of more than 12 hours will entitle the policyholder to a payment of £20 does not mean that in the event of a delay of only six hours the policyholder will be entitled to £10. A case involving permanent health insurance shows the balance going in favour of the policyholder. The policy defined incapacity as: “the total inability of the Insured, by reason of sickness or injury, to follow his Occupation.” The policyholder had suffered from crippling anxiety and depression. Initially, the insurer was willing to meet his claim, and for two years it continued to do so. In 1994 the policyholder’s condition began to improve, and the insurer stopped payments on the basis that the policyholder was now fit to go back to work. His doctors did not agree. The problem was the nature of the work. The policyholder had been an “Insurance Inspector” or, less euphemistically, a salesman. His employer said that he was “too much of a perfectionist, which hampers him in the demanding occupation of selling life insurance.” The PHI insurer said that this showed that the policyholder was not disabled by any reasonable standards. It suggested that a salesman in the policyholder’s condition, but with a more realistic approach,

would be quite well enough to sell life insurance. As we deal in the Bureau will continual complaints about life insurance salesmen whose standards are too low, rather than too high, we could not help noting this unusual turnaround. The case itself, of course, had to be determined on objective grounds. In the end, the medical evidence was conclusive. A consultant psychiatrist confirmed that the policyholder was not totally incapacitated. He could do some work. But he was not fit to resume his former occupation as an insurance salesman ‘because it is probably a very stressful job which requires robust ability to cope with the world’s demands and rebuffs’. If the policyholder could do some work, why not give him a proportion of the benefit? This would not have been fair to him. He was insured against incapacity to do his job. The medical evidence showed that he was not fit to cope with the essential demands of the job. That was the substance of the matter. After further considerations, and some straight talking from the Bureau, the insurer agreed to go on paying full benefit under the policy until it was due to terminate in 1998 [AR (95) para 2.5.5 p 39–41]… IOB Annual Report 1994 (vii) Where the insurer’s underwriting guide or other evidence satisfies me that the facts withheld or misrepresented would have had a bearing on the premium or acceptance of risk, I may apply the principle of proportionality. This involves my requiring the same proportion of the claim to be met as the premium paid…if the premium would have been loaded by 50 per cent, my award will be two-thirds of the amount otherwise payable. The House of Lords confirmed that so far as the common law is concerned the principle of proportionality has no application in these cases, but dicta suggest that it may not be inappropriate in the field of consumer insurance. The

observations on this point of Sir Donald Nicholls VC in the Court of Appeal in Pan Atlantic were not disapproved of in the House of Lords [above, [405]]. He made a strong indictment of the harshness of the ‘all or nothing’ result of the English common law rules, and provided an affirmation of the essential fairness of the principle of proportionality in appropriate cases.’

4.1.7 The Conceptual Basis of the Doctrine of Utmost Good Faith The scope and conceptual basis of the disclosure duty has given rise to considerable judicial debate particularly in relation to moral hazard. The question can be put simply: is the duty based upon an implied term of the contract, or does it rest upon a fiduciary relationship or a duty in tort? [423] March Cabaret Club & Casino Ltd v London Assurance [1975] 1 Lloyd’sRep 169 [The facts are set out above, [415]]. May J: ‘Even the common law duty of disclosure I find difficult to explain fully on the theory of its resting only on an implied term of the contract. If it did, it would not arise until the contract had been made; and then its sole operation would be to unmake the contract. Although the question has not been decided judicially, it is worthy of note that sections 17 and 18 of the Marine Insurance Act 1906 seem to treat the twin duties of

disclosing all the material facts, and of misrepresenting none, as existing outside the contract, and not as mere implications inside the contract; for that Act was intended to be declaratory of the common law; and I see nothing in the language of these particular sections to justify interpreting them as being anything but declaratory…’

[424] Banque Keyser Ullmann SA v Skandia Insurance Co [1990] 1 QB 665 (CA) [The facts are summarised below, [426]: Banque Finanière de la Cité Sa v Westgate Insurance Co Ltd [1991] 2 AC 249. The issue here concerned the scope of the disclosure duty borne by insurers and the remedy available to the insured for its breach]. Slade LJ ‘If, however, this obligation does not arise under contract or statute and no fiduciary relationship between the parties is asserted, a breach of the obligation must, in our judgment, itself constitute a tort if it is such as to give rise to a claim for damages. There is no authority whatever to support the existence of such a tort and, quite apart from such lack of authority, there are in our judgment at least four reasons why this court should not by its present decision create a novel tort of this nature. First, the powers of the court to grant relief where there has been non-disclosure of material facts in the case of a contract uberrimae fidei stems from the jurisdiction originally exercised by the courts of equity to prevent imposition. The powers of the court to grant relief by way of rescission of a contract where there has been undue influence or duress stem from the same jurisdiction. Since duress and undue influence as such give rise to no claim for

damages, we see no reason in principle why non-disclosure as such should do so. Secondly, the decision in CTI [see above, [403]] establishes that where an underwriter is seeking the conventional remedy of avoidance of the policy, the actual effect of the nondisclosure on his mind is irrelevant…The same approach must, in our judgment, apply in a case where an insured is seeking avoidance of the policy. The court will be concerned not so much with the effect of the non-disclosure on his mind as that of the mind of a prudent notional insured in his position. Steyn J rightly recognised the difficulties involved in translating this approach to a case where the insured is seeking damages. He said… Assuming therefore that…the test is the effect on the notional insured only, it could legitimately be asked how damages could be awarded if the non-disclosure had no effect on the insured. In my judgment the only conceivable answer is that the requirements for avoidance are less than for an action for damages. We agree that this is the only conceivable answer, but think that the problem posed by the judge is another illustration of the conceptual difficulties involved in a decision that a remedy by way of damages lies in this class of case. Thirdly, section 17 of the Act of 1906, which imposes reciprocal obligations of good faith on both parties to such a contract, specifically gives the injured party the remedy of avoidance of the contract (and no other remedy). Likewise, section 18, which specifically defines the duty of disclosure falling upon the assured, concludes by stating the insurer’s remedy as follows: “If the assured fails to make such disclosure, the insurer may avoid the contract.” There is not a suggestion in any of the succeeding provisions of the Act of 1906 that a breach of the obligation of good faith will, as such, give rise to a claim for damages…

[W]e think the clear inference from the Act of 1906 is that Parliament did not contemplate that a breach of the obligation would give rise to a claim for damages in the case of such contracts. Otherwise it would surely have said so. It is not suggested that a remedy is available in the case of non-marine policies which would not be available in the case of marine policies. Fourthly…in the case of a contract uberrimae fidei, the obligation to disclose a known material fact is an absolute one. It attaches with equal force whether the failure is attributable to “fraud, carelessness, inadvertence, indifference, mistake, error of judgment or even to [the] failure to appreciate its materiality”: see ER Hardy Ivamy, General Principles of Insurance Law, 5th edn (1986), p 156 and the cases there cited. A decision that the breach of such an obligation in every case and by itself constituted a tort if it caused damage could give rise to great potential hardship to insurers and even more, perhaps, to insured persons. An insured who had in complete innocence failed to disclose a material fact when making an insurance proposal might find himself subsequently faced with a claim by the insurer for a substantially increased premium by way of damages before any event had occurred which gave rise to a claim. In many cases warranties given by the insured in the proposal form as to the truth of the statements made by him might afford the insurers the same remedy, but by no means in all cases. In our judgment, it would not be right for this court by way of judicial legislation to create a new tort, effectively of absolute liability, which could expose either party to an insurance contract to a claim for substantial damages in the absence of any blameworthy conduct.’

[425] Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd (The Star Sea) [2001] 2 WLR 170 (HL)

[For the facts and another part of this decision, see chapter 11]. Lord Hobhouse: ‘Section 17: The legal problems Section 17 raises many questions…[it] is overlaid by the historical and pragmatic development of the relevant concept both before and since 1906. The history of the concept of good faith in relation to the law of insurance is reviewed in the speech of Lord Mustill in Pan Atlantic Insurance Co v Pine Top Insurance Co [above, [405]], and in a valuable and well researched article (also containing a penetrating discussion of the conceptual difficulties) by Mr Howard Bennett in [1999] LMCLQ 165 [see chapter 11, [1101]]. The acknowledged origin is Lord Mansfield’s judgment in Carter v Boehm [above, [402]]. As Lord Mustill points out, Lord Mansfield was at the time attempting to introduce into English commercial law a general principle of good faith, an attempt which was ultimately unsuccessful and only survived for limited classes of transactions, one of which was insurance. His judgment in Carter v Boehm was an application of his general principle to the making of a contract of insurance. It was based upon the inequality of information as between the proposer and the underwriter and the character of insurance as a contract upon a “speculation”. He equated non-disclosure to fraud. He said at p 1909: “The keeping back [in] such circumstances is a fraud, and therefore the policy is void. Although the suppression should happen through mistake, without any fraudulent intention; yet still the underwriter is deceived, and the policy is void.” It thus was not actual fraud as known to the common law but a form of mistake of which the other party was not allowed to take advantage. Twelve years later in Pawson v

Watson (1778) 2 Cowp 786 at p 788, he emphasised that the avoidance of the contract was as the result of a rule of law: “But as, by the law of merchants, all dealings must be fair and honest, fraud infects and vitiates every mercantile contract. Therefore, if there is fraud in a representation, it will avoid the policy, as a fraud, but not as a part of the agreement.” …In relation to insurance Lord Mansfield was specifically addressing “concealments which avoid a policy”. This concept of avoidance most obviously applies to the making of the contract and derives, as he said in Pawson v Watson (sup)…from the application of a rule of law not from the parties’ agreement. Later developments have applied the requirement of disclosure to matters occurring after the making of the contract of insurance, namely, the affidavit of ship’s papers and the making of fraudulent claims…But, apart from some dicta, this has still been as a matter of the application of a principle of law and not through an implied contractual term. Nor was there any case prior to the Act where the principle was used otherwise than as providing a basis for resisting liability; no case was cited where the principle gave a remedy in damages, as would the tort of deceit or the breach of a contractual term. Whether there was a remedy in damages for a failure to observe good faith was finally and authoritatively considered by the Court of Appeal in Banque Keyser Ullmann SA v Skandia (UK) Insurance Co [above, [424]], affirmed by your Lordships’ House [see below, [426]]. In order to answer the question, both Steyn J at first instance ([1990] 1 QB 665 at p 699 et seq) and the Court of Appeal (p 773 et seq.) examined the basis of the requirement that good faith be observed. Having concluded on the authorities that the correct view was that the requirement arose from a principle of law,

having the character I have described, the Court of Appeal held that there was no right to damages…’

Note: For an excellent analysis of the scope of the disclosure duty, see Paul Matthews, “Uberrima Fides in Modern Insurance Law” in FD Rose (ed), New Foundations For Insurance Law, Current Legal Problems (London, Stevens & Son, 1987). See also, J Fleming, “Insurer’s breach of good faith — a new tort?” [1992] LQR 357, in which the author welcomes the decision of the New South Wales Supreme Court in Gibson v The Parkes District Hospital [1991] Austr Torts Rep 81–140, in refusing to dismiss summarily a claim for damages for an insurer’s breach of good faith in processing and paying the claimant’s workers’ compensation claim.

4.1.8 The Duration of the Duty of Ddisclosure: A Post-Contract Duty of Disclosure? It is obvious that the duty of disclosure continues up until the insurance contract is concluded. Thus, if a change of circumstance occurs which is material to the risk before the insurers accept the proposal, the insured must disclose it: see Looker v Law Union and Rock Insurance Co Ltd [1928] 1 KB 554. The duty applies to interim insurance: Mayne Nickless Ltd v Pegler [1974] 1 NSWLR 228.

In the absence of an express term to the contrary, there is no corresponding duty during the currency of the policy: Pim v Reid (1843) 6 M & G 1. In Kausar v Eagle Star Insurance Co Ltd [2000] Lloyd’s Rep 154, a clause in the policy which stated: “You must tell us of any change of circumstances after the start of the insurance which increases the risk of injury or damage…” was restrictively construed by Saville LJ so as not to impose a continuing duty of disclosure on the insured: ‘[A]ll that this Condition does is to state the position as it would exist anyway as a matter of common law, namely that without the further agreement of the insurer, there would be no cover where the circumstances had so changed that it could properly be said by the insurers that the new situation was something which, on the true construction of the policy, they had not agreed to cover. The mere fact that the chances of an insured peril operating increase during the period of the cover would not, save possibly in most extreme of circumstances, enable the insurers properly to say this, since the insurance bargain is one where, in return for the premium, they take upon themselves the risk that an insured peril will operate.’

The duty of disclosure operates more harshly in general insurance than in life insurance. General insurance policies, such as motor or household insurance, are normally short-term contracts that are typically renewed annually — at which time a new contract is entered into. The duty therefore bites at each renewal: Hearts of Oak Building Society v Law Union & Rock Insurance Co [1936] 2 All ER 619; see

Lambert v Co-operative Insurance Society [above, [416]]. While it is settled that the doctrine of utmost good faith applies to the formation of the insurance contract (including renewals), there has been considerable debate over whether the doctrine applies during the claims process and, if so, whether a fraudulent claim entitles the insurer to avoid the contract ab initio. The issue is considered in chapter 11.

4.1.9 The Insurer’s Duty of Utmost Good Faith The mutuality of the duty of utmost good faith is evident both from the judgment of Lord Mansfield in Carter v Boehm (above, [403]) and from the language of section 17 of the 1906 Act. Its content as far as the insurer is concerned was, however, framed in extremely narrow terms by the House of Lords in Banque Financière [below, [426]]. Further, in terms of the consequences following a breach of duty by the insurer there is, in practical terms, an imbalance between the parties. The insured’s breach of the duty of utmost good faith entitles the insurer to avoid the contract ab initio. On the other hand, the insurer’s breach of duty entitles the insured to rescind the contract — in effect, to a return of premiums only. Affirming the decision of the Court of Appeal, the House of Lords held that damages were not available against the insurer.

[426] Banque Financière de la Cité Sa v Westgate Insurance Co Ltd [1991] 2 AC 249 (HL) [For the approach of Slade LJ in the Court of Appeal, see Banque Keyser Ullmann SA v Skandia Insurance Co (above, [424]). This complex case involved a fraudulent scheme being perpetrated against certain banks. The banks had lent large sums of money to Ballestero, a property developer, to finance purported developments in parts of Europe. They had sought to protect their position by effecting credit insurance. Their broker twice deceived them into believing that they had insurance cover to protect them in the event of non-repayment of the loans by Ballestero when in fact they had not. The lead underwriter discovered this fraud. The banks claimed that the failure to pass this information on to them was a breach of the duty of utmost good faith and that, had they known of the fraud, they would not have made further loans. The banks could not claim under the policies when Ballestero defaulted because they contained a fraud exclusion clause. Although the issue of causation occupied much of their lordships’ reasoning, the following extract is confined to the issue of the insurers’ duty of disclosure]. Lord Jauncey: ‘What is said in this appeal is that when Dungate discovered in early June 1980 that Lee had issued fraudulent covernotes in January of that year he, as insurer, came under a duty to disclose this fact to the banks. I do not consider that the obligation of disclosure extends to such a

matter. Although there have been no reported cases involving the failure of an insurer to disclose material facts to an insured the example given by Lord Mansfield in Carter v Boehm [above, [407]] is of an insurer who insured a ship for a voyage knowing that she had already arrived…Indeed the insured would have said that the risk no longer existed. In the present case the risk to be insured was the inability, otherwise than by reason of fraud, of Ballestero and his companies to repay the loan to the banks. Lee’s dishonesty neither increased nor decreased that risk. Indeed it was irrelevant thereto. It follows that the obligation of disclosure incumbent upon Dungate, as the insurer, did not extend to telling the banks that their agent Lee was dishonest. If the obligation of disclosure incumbent upon parties to a contract of insurance could ever per se create the necessary proximity to give rise to a duty of care, a matter upon which I reserve my opinion, it is clear that the scope of any such duty would not extend to the disclosure of facts which are not material to the risk insured. It follows that the appellants’ reliance on the duty of disclosure does not assist them to establish negligence on the part of Dungate.’

Note: See T Yeo, “Of Reciprocity and Remedies: Duty of Disclosure in Insurance Contracts” [1991] LS 131; Kelly, “The insured’s rights in relation to the provision of information by the insurer” [1989] Insurance Law Journal 45; and J Birds [1990] JBL 512.

4.2 Misrepresentation Non-disclosure and misrepresentation are generally treated as one and the same thing by the judges

most probably because, as a matter of practice, insurers frequently raise both by way of defence. Yet there are significant distinctions. Non-disclosure is concerned with the insured’s duty to volunteer material facts; misrepresentation concerns the insured’s duty to accurately answer questions raised by the insurer which, as seen above in relation to waiver, are generally contained in proposal forms (if the insured’s answers are made the “basis of the contract” they are converted into warranties in which case the issue of misrepresentation does not arise (see chapter 8, below), although for consumer insurance contracts note the effect of the ABI’s Statements of Practice: General Insurance, para 1(a) (below, [433]); Long Term Insurance, para 1(b) (below, [434]). Further, for non-disclosure the law does not distinguish between innocent, negligent and fraudulent intent whereas for misrepresentation the categorisation can be crucial. Although section 20(1) of the Marine Insurance Act 1906 (above) provides that the insurer can avoid the policy in the event of a material misrepresentation, it should also be borne in mind that a fraudulent misrepresentation entitles the innocent party to bring an action for damages in the tort of deceit (see generally, J Beatson, Anson’s Law of Contract (Oxford, OUP, 2002) p 243 et seq; for the meaning of fraud at common law, see Derry v Peek (1889) 14 App Cas 337). While the general law of contract (and, of course, tort law) recognises negligent misrepresentation as distinct, it is now doubtful whether this survives in insurance law

following the decision of the Court of Appeal in Economides v Commercial Union [below, [427]]. Because misrepresentation is generally subsumed under non-disclosure there has been little judicial consideration of section 2(2) of the Misrepresentation Act 1967. This provision holds the potential to prevent insurers avoiding the contract by granting the court the discretion to award damages in lieu of recission or avoidance. Although this power is unlikely to be exercised in commercial insurance [Highlands Insurance Co v Continental Insurance Co [1987] 1 Lloyd’s Rep 109], it may assume greater significance in consumer insurance in the light of Economides (below, [427]). Further, in his Annual Report for 1990, para 2.3, the Insurance Ombudsman noted that in consumer insurance most so-called nondisclosures arise via inaccurate answers to questions in proposal forms (in reality, misrepresentations) and that in such cases (by analogy with section 2(2) of the 1967 Act) he would not allow insurers to avoid the policy but restrict them to partially or wholly avoiding a claim (see further the IOB Digest on “proportionality”, above, [422]). [427] Economides v Commercial Union Assurance Co plc [1998] QB 587 (CA) [The insured effected a household contents policy with the defendants in 1998. At that time he was an 18 year old student. The total sum insured was £12,000 (index linked) and the maximum recoverable for valuables (as defined in the policy) was one-third

of that amount. The proposal form which was completed and signed by him stated that the answers given were to the best of his knowledge and (notwithstanding the Statements of Practice) that it formed the basis of the contract between him and the insurers. At that time the answers given by the insured were true. In 1990 the insured’s parents left Cyprus and came to live permanently in England. They moved in with him bringing with them a considerable quantity of valuables including jewellery worth some £30,000. The insured, now aged 21, saw some of the jewellery as and when his mother wore it but showed little interest. However, his father, a retired police divisional commander, advised him to increase his contents policy by approximately £3,000. The insured contacted the insurers and instructed them to increase cover to £16,000. The next renewal invitation, which contained a disclosure warning modeled on the Statements of Practice (see [433], below), stated that this was the sum insured. In 1991 the insured’s flat was burgled and property worth some £31,000 was stolen, the bulk of which being the parents’ valuables. When the insured claimed under the policy it became clear that the value of his parents property was £30,970 which exceeded the sum insured. Further, the valuables in question exceeded one third of the total sum insured or the total value of the contents which was now estimated to be £40,000. The insurers avoided liability on grounds of misrepresentation and non-disclosure of material facts].

Simon Brown LJ: ‘Misrepresentation The plaintiff has conceded throughout that at the time of the 1991 renewal he represented that to the best of his knowledge and belief (hereafter “he believed that”) the full cost of replacing all the contents of his flat as new (hereafter “the full contents value”) was £16,000. He does not, however, concede, although the judge below understood otherwise, that at the time of renewal, as opposed to the date of inception, he represented that the valuables did not account for more than one-third of that sum… What then was meant by the plaintiff’s representation that, as at January 1991, he believed that the full contents value was £16,000? The judge below considered three possible meanings: (i) that £16,000 was in fact the full value; (ii) that the plaintiff honestly believed that £16,000 was the full value and had reasonable grounds for his belief; (iii) that he honestly believed that £16,000 was the full value. The judge understood Ms Kinsler for the defendants to be contending for both (i) and (ii) and found in her favour on both, i.e. on (i), alternatively (if that went too far) on (ii). He rejected the plaintiff’s argument in favour of (iii)…In the result the issue on appeal is between (ii) and (iii): when making a representation such as this, is the assured stating merely that he honestly believes the accuracy of his valuation or, is he going further and impliedly stating too that he has reasonable grounds for that belief? That issue was, I should note, critical because whereas the judge appears to have accepted that “looking at the matter from the plaintiff’s own subjective point of view [he] was entitled to accept the figure which his father put forward” — ie he honestly believed that £16,000 was the full contents value — he concluded:

“it is clear that the plaintiff did not have reasonable grounds for the representations that he made. Knowing as he did that his parents had introduced into the flat a quantity of jewellery and silverware, it would have been necessary for him to make substantially more inquiries than he did make before he could be said to have reasonable grounds for his belief. It is not necessary to specify what those inquiries might have involved.” In short, the judge below held that “commercial reality and common sense “required the plaintiff here as the representor to have objectively reasonable grounds for his belief; honesty alone was not enough… Mr Bartlett submits that the approach adopted by the judge below and urged afresh by Ms Kinsler on appeal is fundamentally flawed. His starting point is section 20 of the Marine Insurance Act 1906 — one of a group of sections which it is now established apply equally to non-marine as to marine insurance…The relevant subsections of section 20 are: “(3) A representation may be either a representation as to a matter of fact, or as to a matter of expectation or belief. (4) A representation as to a matter of fact is true, if it be substantially correct, that is to say, if the difference between what is represented and what is actually correct would not be considered material by a prudent insurer. (5) A representation as to a matter of expectation or belief is true if it be made in good faith.” Mr Bartlett relies in particular upon subsection (5)…He accepts, as inevitably he must, that the plaintiff had to have some basis for his statement of belief in this valuation; he could not simply make a blind guess: one cannot believe to

be true that which one has not the least idea about. But, he submits, and this is the heart of the argument, the basis of belief does not have to be an objectively reasonable one. What the plaintiff’s father told him here was a sufficient basis for his representation: he was under a duty of honesty, not a duty of care. In my judgment these submissions are well founded… I accept, of course, that…what may at first blush appear to be a representation merely of expectation or belief can on analysis be seen in certain cases to be an assertion of a specific fact. In that event the case is governed by subsections (3) and (4) rather than (5) of section 20 and I accept too, as already indicated, that there must be some basis for a representation of belief before it can be said to be made in good faith…In my judgment the requirement is rather, as section 20(5) states, solely one of honesty. There are practical and policy considerations too. What, would amount to reasonable grounds for belief in this sort of situation? What must a householder seeking contents insurance do? Must he obtain professional valuations of all his goods and chattels? The judge below held that: “it would have been necessary for him to make substantially more inquiries than he did make before he could be said to have reasonable grounds for his belief. It is not necessary to specify what those inquiries might have involved.” The problem with not specifying them, however, is that householders are left entirely uncertain of the obligations put upon them and at risk of having insurers seek to avoid liability under the policies. There would be endless scope for dispute. In my judgment, if insurers wish to place upon their assured an obligation to carry out specific inquiries or otherwise take steps to provide objective justification for their valuations, they must spell out these requirements in the proposal form.

I would hold, therefore, that the sole obligation upon the plaintiff when he represented to the defendants on renewal that he believed the full contents value to be £16,000 was that of honesty. That obligation the judge apparently found him to have satisfied. Certainly, given that the plaintiff was at the time aged 21, given that the figure for the increase in cover was put forward by his father, and given that father was a retired senior police officer, inevitably better able than the plaintiff himself to put a valuation on the additional contents, there would seem to me every reason to accept the plaintiff’s honesty…

Non-disclosure …During argument before us, however, it became apparent that what is really being said here is that the plaintiff was bound to disclose: (i) that the full cost of replacing the contents was substantially more than £16,000, and (ii) that the valuables were worth very considerably more than £5,333 or, indeed, very substantially more than one-third of the actual total value of the contents… It seems to me that the governing principle is that to be found in section 18(1) of the Act of 1906 [above]… It is clearly established that an assured such as this plaintiff, effecting insurance cover as a private individual and not “in the ordinary course of business,” must disclose only material facts known to him; he is not to have ascribed to him any form of deemed or constructive knowledge… And that, indeed, as I understand it, had earlier been the position at common law. In Blackburn Low & Co v Vigors (1887) 12 App.Cas. 531, 543 Lord Macnaghten said: “it would, in my opinion, be a dangerous extension of the doctrine of constructive notice to hold that persons who are themselves absolutely innocent of any concealment or misrepresentation, and who have not wilfully shut their eyes or closed their ears to any means of information, are to be

affected with the knowledge of matters which other persons may be morally though not legally bound to communicate to them.” and as was said by Fletcher Moulton LJ in Joel v Law Union and Crown Insurance Co [1908] 2 KB 863, 884: “The duty is a duty to disclose, and you cannot disclose what you do not know. The obligation to disclose, therefore, necessarily depends on the knowledge you possess.” In short, I have not the least doubt that the sole obligation on an assured in the position of this plaintiff is one of honesty. Honesty, of course, requires, as Lord Macnaghten said in the Blackburn Low case,12 App Cas 531, 543 that the assured does not wilfully shut his eyes to the truth. But that, sometimes called Nelsonian blindness — the deliberate putting of the telescope to the blind eye — is equivalent to knowledge, a very different thing from imputing knowledge of a fact to someone who is in truth ignorant of it. The test, accordingly, for non-disclosure was in my judgment precisely the same as that for misrepresentation, that of honesty. and by the same token that the plaintiff was under no obligation to make further inquiries to establish reasonable grounds for his belief in the accuracy of his valuations, so too he was not required to inquire further into the facts so as to discharge his obligation to disclose all material facts known to him. Indeed the plaintiff’s case on nondisclosure seems to me a fortiori to his case on misrepresentation. The Association of British Insurers’ “Statement of General Insurance Practice” (1986) [see below, [433]] states with regard to proposal forms: “(d) Those matters which insurers have found generally to be material will be the subject of clear questions in proposal forms.” Where, as here, material facts duly are dealt with by specific questions in the proposal form and no sustainable case of misrepresentation arises, it would be remarkable

indeed if the policy could then be avoided on grounds of non-disclosure. What, then, of the judge’s conclusions of fact on this part of the case? I have, I confess, great difficulty in understanding how the judge concluded that “there was here a wilful shutting of the plaintiff’s eyes to the reality of the situation.” That, as stated, is tantamount to a finding of dishonesty and yet that seems to me not merely unjustifiable on the facts but positively inconsistent with what I understand the judge to have found on the issue of misrepresentation… By way of footnote I wish to add this. The issue of nondisclosure has throughout been dealt with, as stated, upon the plaintiff’s concession as to materiality. Certain aspects of this concession have, however, made me uneasy. In the first place I note these paragraphs in MacGillivray and Parkington on Insurance Law, 8th edn. (1988), p 777: “1730. Under-insurance. Under a non-marine policy of insurance the insured can recover the whole amount of his loss up to the limit of the sum insured. He may, therefore, obtain insurance at a small premium by understating the value of the subject matter insured, but nevertheless make recovery in a sum up to the amount insured; where there is a partial loss he may even be able to recover the full amount of his loss and suffer no penalty for being underinsured. “1731. It has therefore become the almost invariable practice for insurers to declare that the policy is ‘subject to average’ or ‘subject to the under-mentioned condition of average’ which means that, if the sum insured does not represent the value of the property insured at the time of the loss or damage, the insured is to be his own insurer for the requisite proportion of the insurance and must therefore bear a part of the loss accordingly. In Careers Ltd v Cunard Steamship Co [1918] 1 KB 118 where the plaintiff company

warehoused goods with the defendant company at a fixed rental to include insurance against loss or damage by fire, Bailhache J. held that the so-called pro-rata condition of average was so common in fire insurances on merchandise that it must be implied as a term of the warehouse agreement. The average clause now occurs in almost all policies, except those relating to private dwelling-houses and household goods, and to buildings (and their contents) used wholly or mainly for religious worship.” Ordinarily, therefore, it appears, under-insurance, so far from being regarded as material nondisclosure justifying the avoidance of the policy, results instead in averaging, or indeed in full recovery without penalty. Why then should the position be so very different in the present case, not least given that the policy itself expressly envisages at least some degree of underinsurance: “If at the time of any loss or damage the cost of replacing all the contents as new is greater than the capital sum insured then any payment under the home contents section will be made after a deduction for any wear or depreciation.” And that leads me to the second point. Just how substantial must be the extent of underinsurance (or the excess beyond one-third in the proportion of valuables to the total) before it is said, assuming always that the assured had knowledge of these facts, that the policy can be avoided on grounds of non-disclosure? None of these questions were addressed before us, nor indeed, having regard to my conclusions on the central issues, did they need to be. I raise them, however, because in other circumstances it seems to me that they are likely to have considerable importance and accordingly should not be lost sight of. For the reasons given earlier, however, I would allow this appeal and enter judgment for the plaintiff against the defendants in the sum of £7,815.38 together with interest.’

Note: For comment, see See H Bennett [1998] MLR 886; and N Hird [1998] JBL 279

4.2.1

Non-Disclosure and Misrepresentation in Composite Insurance

As will be seen in chapter 6 in relation to construction insurance, it is not uncommon for one insurance policy to cover the separate interests of a head contractor and all the sub-contractors involved in a building project. Similarly, one policy will often cover the separate interests of a mortgagor and mortgagee in the same property. The issue that arises in such coinsurance situations is whether the non-disclosure or misrepresentation on the part of one co-insured will entitle the insurer to avoid the contract as against all parties (ie including the innocent co-insureds) or merely against the guilty co-insured. The solution depends upon whether the policy is construed as separate contracts or as a single contract. Rix J in the Arab Bank case (below, [428]) reasoned that composite policies should be viewed prima facie as ‘a bundle of separate contracts’ between the insurers and the co-insureds so that, therefore, dishonesty by one co-insured did not permit the insurers to avoid the policy against all the other parties. This approach has been criticised as going too far [see J Birds, [1999] JBL 151], although it has been tacitly endorsed by the Court of Appeal in FNCB Ltd v Barnet Devanney (Harrow) Ltd [1999] Lloyd’s Rep IR 459.

[428] Arab Bank plc v Zurich Insurance Co [1999] 1 Lloyd’s Rep 262 [Browne, (B), was the managing director of John D Wood Commercial Ltd (JDW), an incorporated firm of professional estate agents and valuers. He was at all material times a substantial shareholder in the company. B prepared valuations for banks which were fraudulently high in that the valuation figures were deliberately or recklessly provided and did not represent the open market value of the properties: the figures were in each case grossly in excess of the true open market value and/or recent sale price. On occasions B was assisted by another director and a (relatively minor) shareholder, Pitts (P). The company received the valuation fees. The other directors of JDW were innocent and free of any fraudulent conduct or intent to deceive. The claimants, Arab Bank and Banque Bruxelles Lambert SA, obtained judgments against JDW in negligence but when the company went into liquidation they sought to enforce those judgments directly against the company’s underwriters, Zurich, under the Third Parties (Rights against Insurers) Act, 1930. Zurich argued that B’s fraud relieved them from liability. The indemnity insurance in question had been effected in August 1990. B had completed the proposal form. Question 14(a) of the proposal asked: “Is any Partner, Director, Principal, Consultant or employee, AFTER ENQUIRY, aware of any circumstances/incidents which might:

(i) give rise to a claim against the Proposer or his predecessors in business or any of the present or former Partners, Directors, Principals?… (iii) otherwise affect the consideration of this proposal for Professional Indemnity insurance?”

B answered yes to question (i), but no to question (iii), and in explanation of his answer to question (i) merely referred to a minor issue concerning a possible loss of rent and a possible claim under £10,000. This was irrelevant to the present disputes. The proposal concluded as follows: “I/We warrant that the above statements made by me/us or on my/our behalf are to the best of my/our knowledge true and complete and I/we agree that this proposal shall be the basis of the contract between me/us and the Insurer. I/We further warrant that no higher limits(s) Insurance have been, or will be, effected by me/Us unless agreed.”

The insurers contended that B had failed to disclose material facts and that his answers constituted a breach of warranty. It was material that the proviso in the ‘basis of the contract clause’ that the answers were true to the best of B’s knowledge meant that they were warranties of opinion not absolute guarantees as to their accuracy. Part I of the policy defined ‘the insured’ as the ‘firm,’ including its directors and employees with the proviso that ‘such definition of the term ‘Insured’ shall NOT be construed to mean that the Company shall indemnify any person knowingly committing, making or condoning any dishonest, fraudulent or

malicious act or omission.’ Other conditions in the policy included, among others, a fraudulent claim clause (condition 1), a waiver of the insurers rights in the event of innocent non-disclosure (condition 2), a waiver of subrogation (condition 5) and a term requiring notification of any circumstance arising during the currency of the policy which might give rise to a claim (condition 6). The primary issue was whether JDW, the principal insured, could recover under its professional indemnity policy on the basis that the dishonest mind and knowledge of its managing director could not be attributed to it]. Rix J: ‘The construction of the policy …In my judgment, there are three interlinked questions which have to be resolved. One is a question of construction, one is a question of the conceptual analysis of the nature of a composite policy such as the one before me, and the third is a question of attribution. Because the three are interlinked, it is not easy to know which is the one to start with: but probably the order in which I have mentioned them will do as well as any other. The question of construction, the essential question of construction, is whether the policy will respond in the case of the dishonesty of any of the insureds in favour of another insured who is not complicit in that dishonesty. The answer to that question is perhaps common ground, but I will in any event state that in my judgment the policy not only does respond in such a case, but has been specifically designed so to do. Normally, a policy does not deal specifically with the dishonesty of an assured, save possibly to include an

express term, which would otherwise be implied, to say that fraud in the making of a claim would render the policy forfeit…It is likewise implicit in the nature of insurance that a loss caused by the deliberate dishonesty of an assured is not covered: this is reflected in section 55(2)(a) of the Marine Insurance Act 1906 which provides that the insurer is not liable for any loss attributable to the wilful misconduct of the assured. Even so, it is implicit in the nature of a composite policy that one assured is not prejudiced by the dishonesty of another, provided that the other is not a joint assured: Samuel & Co Ltd v Dumas [1924] AC 431… In the present case, however, the policy goes much further than is normally done (at any rate outside the context of professional indemnity insurance) in emphasising that the dishonesty of one insured will not be held against another insured who is not complicit. This is seen in a number of places within the policy. First, in the proviso to the insuring clause of the professional indemnity section: when read together with the cover “in respect of any Civil Liability whatsoever”, which prima facie is wide enough to embrace liability for dishonesty, the proviso by excluding cover for “any person knowingly committing, making or condoning any dishonest, fraudulent or malicious act or omission” impliedly confirms that there is cover for a liability for dishonesty in favour of an insured who is not complicit in that dishonesty within the terms of the proviso. There is, secondly, a similar provision in the insuring clause of the infidelity cover under sub-section B of section 2. Thirdly, the subrogation provisions in general condition 5 make it plain that Zurich will pay claims even where an insured partner, director or employee has been guilty of a “dishonest, fraudulent, criminal or malicious act or omission” — in the absence of payment there could of course be no question of subrogation — but can only recover under rights of subrogation against guilty insureds. All this is, as I believe, common ground: and it is common ground that in the case

of an archetypal instance of this policy being taken out by the partners of a firm, none of the innocent partners would be affected by the dishonesty of the guilty. Therefore, this policy is not merely a composite policy with the normal attributes of such, but has been specifically designed to provide cover to innocent insureds despite the guilt of their close associates and agents. A partner is, after all, at root an agent for the rest of his partners…As a matter of construction, therefore, I do not see that there is any difference in principle for these purposes between the case of a partnership and the case of a company. Whether rules of attribution will require a different approach will have to be considered below: but that consideration will have to take place in the context of these preliminary thoughts about the policy’s construction… In the context of construction, there are however two further provisions of the policy which I have not so far mentioned where it may be said that questions perhaps remain, owing to the failure of the clauses’ language to be sufficiently specific. The first is the fraud forfeiture provision at general condition 1, and the other is the innocent nondisclosure provision at general condition 2. In neither case is it made clear by the terms of those clauses whether the clause operates for and against each insured separately or whether dishonesty on the part of any insured whether in making a claim or in non-disclosure at the time of making the contract renders the policy liable to forfeiture or avoidance once and for all. These questions of construction are closely bound up with the analysis of composite policies and rules of attribution, but I shall approach them initially as a matter of pure construction. General condition 1 is perhaps the easier of the two. I shall repeat it for convenience: “If any claim under this Certificate of Insurance shall be in any respect fraudulent or if any fraudulent means or devices

are used by the Insured to obtain any benefit under this Certificate of Insurance all benefit thereunder shall be forfeited.” It seems to me that the clue is to be found in the words “or if any fraudulent means or devices are used by the Insured”. If one insured is innocent and another guilty, it seems to me that those words can only apply to the guilty insured. It is only the guilty insured who can be “the insured” for such purposes, for where an insured is innocent, it cannot be said of him that “fraudulent means or devices are used by the Insured”. If therefore the underwriters had intended to forfeit the policy against all insureds, the innocent as well as the guilty, then they should have drafted the clause at least in terms of “if any fraudulent means or devices are used by any Insured”. It is I suppose a possible, albeit unlikely and exceptionally draconian remedy, for which underwriters might stipulate, that the whole policy should be forfeit for any fraud by any insured: but as the authorities on composite policies cited above demonstrate, the Court will not in the ordinary case construe a composite policy as being rendered potentially valueless let alone completely destroyed by the fraud of only one insured. If, therefore, underwriters wish to stipulate for such a draconian remedy, they should make their intent perfectly clear… As for general condition 2, I repeat that too for my reader’s convenience: “The Company will not exercise its right to avoid the Certificate of Insurance where it is alleged that there has been non-disclosure or mis-representation of facts or untrue statements in the proposal and in conjunction with any subsequent proposal form(s) provided always that the insured shall establish to the Company’s satisfaction that such alleged non-disclosure, mis-representation or untrue

statement, was innocent and free of any fraudulent conduct or intent to deceive.” The issue here is whether this clause, in particular the benefit granted to the insureds under its proviso, operates in favour of each insured separately, or whether, as Mr Tomlinson submitted, it is only concerned with the quality of the non-disclosure etc, so that lack of innocence on the part of any insured will entitle avoidance. In the former case, it is as though the clause ended with the words “on his part”. It seems to me that Mr Tomlinson’s construction would be all very well in a different context, but that in the context of this policy the term “the insured” should again be regarded as applying to each of the insureds separately. Therefore any insured who is personally innocent of an intent to deceive should be entitled to resist avoidance. Mr Tomlinson argued that if there was only one composite contract, then the guilt of any insured would entitle avoidance, since a contract was either avoided or it was not. In this connection he relied upon a passage in MacGillivray, 9th edn, 1997 at paras. 17–28. I shall have to return to this argument in discussing below the analysis of the concept of composite contracts. For the present, however, I would remark that the same argument if applied to general condition 1 would have led to the forfeiture of the whole contract for the fraud of only one insured… In this context too there is an authority which is relevant, which the plaintiffs have strongly relied upon, but Mr Tomlinson has said should be distinguished. It is a case in the British Columbia Court of Appeal, Fisher v Guardian Insurance Co of Canada [1995] 123 DLR (4th) 336. The policy there was a lawyers’ errors and omissions insurance procured on the false application of a dishonest lawyer, Cowan, in favour of himself and his former entirely innocent partners, Shaver and Fisher. A previous judgment had held the three partners liable to a third party, and the question

was whether Shaver and Fisher were entitled to be indemnified under the Guardian policy. Cowan had fraudulently stated in his application that he had no reason to anticipate claims against him, when he had every reason, so much so that he ended up in prison. Guardian argued that Cowan’s false declaration should be imputed to Shaver and Fisher. It also relied on an exclusion of any claim arising out of any act committed by “the Insured” with actual dishonest intent. Shaver and Fisher, on the other hand, relied on a “waiver of exclusions and breach of conditions” clause as follows: “Whenever coverage under any provision of this Policy would be excluded, suspended or lost: (i) because of any dishonest, fraudulent or criminal act or omission of any Insured…the Insurer agrees that such insurance as would otherwise be afforded under this policy shall continue in effect, cover and be paid with respect to each and every Insured who did not commit or personally participate in or acquiesce in such activity…” I shall return to the Court of Appeal’s judgment in considering the question of attribution below: for the present I am primarily concerned with questions of construction. The Court of Appeal founded itself in turn on a judgment of the Supreme Court of Canada in Panzera v Simcoe & Erie Insurance Co [1990] 74 DLR (4th) 197, where a mortgagee claimed similarly not to be affected by the misrepresentation of the mortgagor in procuring the insurance, and where the policy included a “standard mortgagee clause” providing that: “This insurance…AS TO THE INTEREST OF THE MORTGAGEE ONLY THEREIN — is and shall be in force notwithstanding

any act, neglect, omission, or misrepresentation attributable to the mortgagor…” The Supreme Court held that this clause protected the mortgagee against the mortgagor’s misrepresentation even in the formation of the contract: in effect there was a separate contract of insurance between mortgagee and insurer. Mr Justice La Forest, who gave the majority judgment, said (at p 200): “It should also be noted that the American jurisprudence dealing with the narrow issue raised by this appeal is all but unanimous in concluding that by virtue of the two-contract theory, the insurance of the mortgagee cannot be invalidated by any act or neglect of the mortgagor, be it at the inception of the policy, or subsequent to its formation… Thus the overwhelming majority of the decisions are in essential agreement with the interpretation of the clause that would seem to have first emerged in the decision of the New York Court of Appeal in Hastings v Westchester Fire Ins Co 73 NY 141 (1878). There Rapallo J stated the following, at p 153: To hold otherwise would, I think, defeat the purpose intended, and deprive the mortgagees of the protection upon which they had a right to rely. Although the clause might be construed so as to exempt the mortgagees from the consequences only of acts of the owners done after the making of the agreement, I do not think, in view of its apparent purpose, that any such distinction was intended.”

On the question of the interplay between the concept of attribution and the construction of the standard mortgagee clause, Mr Justice La Forest said this (at pp 214–215): “I noted earlier that by the terms of the standard mortgage clause the mortgagor, when insuring its own interest in the property, assumes a mandate to take out a separate contract of insurance to insure the mortgagee’s interest.

This raises the question whether it could be argued that because the mortgagor is acting as the mandatory of the mortgagee when it insures the mortgagee’s interest, it therefore follows that any false representations made by the mortgagor in effecting its mandate should be held to be those of the mortgagee. On this logic, the invalidity of the mortgagor’s contract would entrain the invalidity of the mortgagee’s contract as well. I do not see how one can reasonably infer that the law of mandate operates so as to have this effect in the context of the standard mortgage clause…As put by Miller J in Hastings, supra, at p 150: The mortgage clause was agreed for this very purpose, and created an independent and new contract, which removes the mortgagees beyond the control of the effect of any act or neglect of the owner of the property, and renders such mortgagees parties who have a distinct interest from the owner, embraced in another and a different contract.”

Finch, JA, who gave the judgment of the Court in Fisher, followed the logic of the Supreme Court in giving effect to the waiver of exclusions clause as superseding any doctrine of attribution, and added (at p 350): “Guardian had the means to protect itself either in the way it chose to issue the coverage, or by the choice of language in the policy. It seems more realistic, in these circumstances, to resolve disputes over the rights of multiple insureds under the contract on the basis of the language the insurer chose to employ in the policy, than to impute wrongdoing to an innocent insured on the basis of a notional and wholly artificial “agency”.

Such an approach is also more in accord with the realities of modern law practice. Modern firms frequently comprise dozens, sometimes hundreds, of lawyers. Some are partners, some are employees. The members of the firm in both categories change from time to time, as partners and associates retire, new partners are created, and new associates are employed. The only practical means of insuring against liability, in these circumstances, is for one application to be made by a responsible member of the firm, acting on behalf of all the others. If insurers could deny coverage to the hundreds of Canadian lawyers insured in this way, because of the misrepresentation of the individual who filled out their application on their behalf, the consequences to the public and to the profession would be enormous, quite unanticipated, and entirely inconsistent with the practical realities faced by the legal profession and the insurance industry.” Mr Tomlinson submitted that Fisher was of no assistance because it concerned partnership and because, like Panzera, it was based on the construction of a special clause, which in both cases went much further than general condition 2. I would agree that in certain respects the clauses in both cases are more explicit than general condition 2 taken by itself. But they are not more explicit than the policy terms which I have been considering as a whole; and with respect to the formation of the contract of insurance, which was the focus of the issue in both cases, those clauses were very much less explicit. The Panzera clause referred to “any misrepresentation” without stating expressly that that referred to misrepresentation before as well as after the making of the contract; and the Fisher clause did not refer to misrepresentation at all. In the present case on the other hand, general condition 2 is clearly dealing with dishonesty and innocence in the making of the contract of insurance, and the question is simply whether that applies separately

to each of the insureds. The lesson of the Canadian case is that such clauses should be regarded as reflecting separate contracts of insurance for the various insureds, and that where there are separate contracts, each insured is entitled to be judged in matters germane to the making of the contract separately. That is the language of composite policies, and it is to the analysis of that concept that I now turn.

Composite policies In this second context, Mr Tomlinson points out, correctly, that Samuel v Dumas was concerned with fraud in the performance of the insurance contract, and not with fraud or non-disclosure in the formation of it. On the basis of a passage in MacGillivray at paras 17–28, he submits that it is only where a composite policy is in truth a bundle of entirely separate contracts that the right to avoid for one assured’s non-disclosure or misrepresentation in the formation of the contract does not automatically bring the whole policy down with it. The present policy, he submits, with its single premium for each section, is not such a bundle of contracts. The practical difficulty of that submission, however, is that in my judgment it is at odds with the Court of Appeal’s holding in New Hampshire Insurance Co v MGN Ltd [1997] LRLR 24. That case concerned fidelity insurance policies under which member companies of the Maxwell group were insured. Various companies made claims under them in respect of losses alleged to have been suffered as a result of dishonest acts on the part of Mr Robert Maxwell. Among the issues litigated was so-called issue G, which raised the question whether a non-disclosure, misrepresentation or breach of the duty of utmost good faith by one assured of itself placed all assureds in the same boat and entitled the underwriters to avoid against all. At first instance Potter J having held that the policies were composite by nature (issue F), went on to hold (at p 42) that the answer to issue

G was No. He accepted albeit only “in principle” the submission that – “…where an independent interest is separately insured, there can be no question of avoiding the policy for nondisclosure quoad that interest unless the person so insured was privy to the non-disclosure.” He added: “Nor do I consider that there is any wording apposite to alter or detract from the application of that principle under the policies before me.” However, Potter J sounded a warning as to whether his answer as a matter of principle would solve the factual questions which arose in the case, saying (at p 43): “However, in the context of the Maxwell group, the interrelationship of various of the companies and the overlapping employment and functions of a number of their servants and officers, are likely to have created situations whereby an officer of company A, as well as exercising functions in company B, would also have had knowledge of the affairs of company C and/or the actions or intentions of its officers of such a kind that he would have been under parallel duties of disclosure and/or obligations of good faith in respect of all three.” The Court of Appeal, whose judgment was given by Staughton LJ, agreed…they held that the various assureds were “the owners of separate interests which were to be covered by insurance separately”. As for issue G, they said: Technically one ought to enquire whether for each layer in each year there was one contract, or as many contracts as there were companies insured. and if the former, can a

contract be avoided for non-disclosure as against one or some of the insured, but not against the others? We feel that we are relieved from the need to answer those questions by the authority of the House of Lords, in the passage already quoted from P Samuel & Co. Ltd. v Dumas. That, it is true, was not a case of non-disclosure but of wilful misconduct by one of the two persons insured. But in our opinion the principle that the innocent party can still recover if it is a separate insurance must equally apply. …It seems to me that the Court of Appeal were saying that in the typical case of a composite policy where there are several assureds with separate interests, the single policy is indeed a bundle of separate contracts. That is the prima facie position under a composite policy, without any need for a meticulous examination, for instance, to see whether separate premiums have been agreed for the various interests. Indeed, one can well understand that on a practical level it would be unrealistic to expect the separate interests to be divided out and severally assessed… Although Samuel v Dumas was a case of wilful misconduct and not non-disclosure (as Staughton LJ himself remarked), the scuttling of the vessel with the connivance of her owners coupled with the owners’ fraudulent claim (which failed at first instance and was never renewed by way of appeal) was of course a fraud on their insurers which was treated as entitling the latter to avoid the policy. That was the argument pressed on the Court by the insurers…In rejecting that argument on the ground that the mortgagee had a separate interest, Viscount Cave was saying in effect that conduct which would entitle the insurers to avoid against one assured will not avail against another assured with a separate interest, if innocent. That reasoning is directly applicable to a case of non-disclosure or misrepresentation in the formation of the contract. A right to

avoid (or forfeit) does not destroy a composite contract once and for all. The question remains, of course, as Potter J remarked, whether on the facts of any case, even under a composite policy, and, I would add, subject to special language such as found in this case, the breach of good faith in the formation of a contract by one assured is also to be attributed to another assured under the same policy, because the knowledge of one is to be treated as the knowledge of the other. It does not, however, happen automatically… Is there any reason to suppose against this background of authority that the policy in this case is not to be treated likewise as a bundle of separate contracts under which [B] (and [P]) and the company JDW are separately insured for their own separate interests? In my opinion, No. The professional indemnity insuring clause itself makes clear that there are several insureds. Obviously, the “Firm” which is the primary insured may have separate interests from those of any partner, director or employee or former partner, director or employee, and each of these natural persons may have interests different from one another… [T]he policy in this case contains other indications that the various insureds are to be treated as parties to separate contracts, not affected by the dishonesty of another insured if they are themselves innocent. Even in the absence of such clauses, MGN indicates that the rule in principle in the case of a composite policy is that the breach of the duty of good faith by one assured is not automatically to be laid against another innocent assured. The presence of such clauses as the insuring clause proviso and general condition 5 (and in my judgment general conditions 1 and 2 as well) is an alternative route to and a confirmation of the finding in this case of a bundle of separate contracts. The Canadian cases, which proceed on the basis of the separate contract rule where the construction of the policy allows it, are in this connection consistent and supportive…

Rules of attribution I turn, thirdly, to the subject of rules of attribution. The question is whether the dishonesty of [B] (and [P]) and their dishonest knowledge are to be attributed to JDW itself. For if so, then it does not avail JDW to be a separate insured, separately insured. [B’s] dishonesty and dishonest knowledge become JDW’s own… …I have been referred by all parties to what Lord Hoffmann said in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500 about rules of attribution in the context of companies. They can vary, depending on the context, from rules as broad as the general principles of agency or vicarious liability, to those as focused as the requirements of a resolution of the board or of an unanimous agreement of shareholders, the latter being what Lord Hoffmann called a company’s “primary rules of attribution”. At p 507E–F he said: “But there will be many cases in which neither of these solutions is satisfactory; in which the court considers that the law was intended to apply to companies and that, although it excludes ordinary vicarious liability, insistence on the primary rules of attribution would in practice defeat that intention. In such a case, the court must fashion a special rule of attribution for the particular substantive rule. This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc. of the company? One finds the answer to this question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy.” …I think that Mr Boswood and Mr Goldsmith are right in their reliance on the Hampshire Land exception. In In re

Hampshire Land Co [1896] 2 Ch 743 money was lent by a building society to the company. The secretary of both the building society and the company was the same individual, Mr Wills. He knew that there was an irregularity in the consent given in general meeting by the company’s shareholders, in that, although they authorised the borrowing in question, they had not been told in the meeting’s notice, as required, that the borrowing was in excess of the directors’ borrowing powers without shareholders’ consent. The question was whether the building society could prove in the company’s winding-up, or could not do so because Mr Wills’ knowledge of that irregularity was to be attributed, through him, to it. Vaughan Williams J held that his knowledge could not be attributed. He said that the case was no different whether it was regarded as one of breach of duty or fraud (at pp 749–50): “common sense at once leads one to the conclusion that it would be impossible to infer that the duty, either of giving or receiving notice, will be received where the common agent is himself guilty of fraud. It seems to me that if you assume here that Mr Wills was guilty of irregularity — a breach of duty in respect of these transactions — the same inference is to be drawn as if he had been guilty of fraud. I do not know, I am sure, whether he was guilty of actual fraud; but whether his conduct amounted to fraud or to breach of duty, I decline to hold that his knowledge of his own fraud or of his own breach of duty is, under the circumstances, the knowledge of the company [sc. the society].” The rationale of this exception, or as I would prefer to call it, this rule of attribution, was there based on “common sense” and was not confined to fraud, but extended generally to any breach of duty which prevented the inference that the agent would communicate his knowledge to the principal…

[I]n the insurance context, as outside it, a director’s knowledge is not to be attributed to his company, whether as the knowledge of the company itself, or as knowledge which in the ordinary course of business that company is to be inferred or deemed to know, to the extent that his knowledge is of his own acting in fraud of his company; and that for these purposes it does not matter whether the director is to be regarded as an agent to insure or not… In my judgment, [B’s] fault comes within the concept of an agent’s fraud on his principal, but, even if it does not, his fault is such a breach of duty to JDW as in justice and common sense must entail that it is impossible to infer that his knowledge of his own dishonesty was transferred to JDW… It follows that the Hampshire Land doctrine would in any event prevent [B’s] or [P’s] knowledge being attributed to JDW.

The warranty in the proposal There remains the fact that the proposal, completed by [B], contained a warranty that the statements made in the proposal “are to the best of my/our knowledge true and complete” and the agreement that the proposal “shall be the basis of the contract between me/us and the Insurer”. It follows that the truth of those statements “to the best of my/our knowledge” became a condition of the liability of Zurich: Dawsons Ltd v Bonnin [1922] 2 AC 413. Unlike the position in Dawsons Ltd v Bonnin, however, the warranty was not simply as to the statements’ truth, but was qualified by the expression “to the best of my/our knowledge”. [B] of course knew that he had misstated his answers to the questions whether any director was aware of any circumstances which might give rise to a claim or otherwise affect the consideration of the proposal. On the assumed facts, however, none of the other directors, apart from [P],

was aware of the fraudulent valuations or that [B’s] warranty on their behalf was untrue or incomplete… In these circumstances and in the light of my construction of general condition 2, and of the policy as a whole as a bundle of separate contracts, it seems to me to follow that it has to be asked whether the warranty was broken by JDW as well as by [B]. It will only have been broken by JDW if [B’s] knowledge is attributed to JDW: but for the reasons I have already given, I do not believe that his knowledge can be so attributed…’

4.3 Criticisms, Calls for Reform and the ABI Statements of Practice Notwithstanding various calls for reform over the last 50 years or so, insurers have successfully fought a rear guard action to prevent any legislative intervention that might dilute the disclosure duty. In 1957 the Law Reform Committee published its Fifth Report, Conditions and Exceptions on Insurance Policies, Cmnd 62, which considered the harshness of the duty (referred to by the Court of Appeal in Lambert v CIS, above [416]). Its proposals for reform went unheeded ‘probably because the government of the day accepted the insurance industry’s word that, in practice, insurers only relied on their strict legal rights when they suspected, but could not prove, fraud’ (Report on Insurance Law Reform (London, NCC, 1997) at 29). The next major call for reform came in 1980 when the Law Commission published its report, No 104, Insurance Law — Non-Disclosure and Breach of Warranty, Cmnd 8064. The Law

Commission concluded that the disclosure duty was ‘far too stringent’. Eventually the DTI belatedly issued a draft Insurance Bill for consultation. Nothing came of this. In 1986 the government announced that it was satisfied that the Statements of Practice issued by the Association of British Insurers in 1977 (and revised in 1986, see below, [433] and [434]), in return for achieving exemption for the industry from the Unfair Contract Terms Act 1977, struck the appropriate balance for the consumer-insured. More recently, a thorough review of the disclosure duty, among other areas of insurance law, was undertaken by the National Consumer Council in 1997. Its report, Insurance Law Reform — The consumer case for a review of insurance law (written by Professor Birds), took the Australian Insurance Contracts Act 1984 (below, [432]) as its template in framing its proposals for reform of UK insurance law. Finally, in January 2001 the British Insurance Law Association established a sub-committee to examine contentious areas of insurance law and to make recommendations to the Law Commission ‘as to the desirability of drafting a new Insurance Contracts Act….’ Its report, Insurance Contract Law Reform, was published in September 2002 (see below, [438]). [429] R Hasson, “The doctrine of uberrima fides in insurance law — a critical evaluation” [1969] MLR 615 ‘…the so called uberrima fides principle — has been subjected to virtually no critical assessment by either

English courts or commentators. In this paper, an attempt will be made to suggest that the current English principle is thoroughly unsatisfactory in that it does not reflect the “reasonable expectations” of insurer and insured and in that it is a rule that works against “fairness” in the insurance contract. An attempt will also be made to show that the classical doctrine on this subject as stated in the leading case of Carter v Boehm (1766) 3 Burr 1905, has been misunderstood and misapplied by English courts. By way of sharp contrast American courts in the nineteenth century correctly understood and interpreted the case. In Rozanes v Bowen [1928] Ll L Rep 98 Scrutton LJ said that, “It has been for centuries in England the law in connection with insurance of all sorts…[that] it is the duty of the assured…to make a full disclosure to the underwriters without being asked of all the material circumstances…” Since the above passage reflects a very widely held assumption among both English judges and commentators, it would be well to examine its accuracy. It is submitted that the statement quoted above reflects only very recent judicial doctrine and not a rule of great antiquity… All this leads us to Carter v Boehm…A reasonably careful reading of the opinion, however, makes it clear that Lord Mansfield placed the responsibility for obtaining the relevant material information on the insurer. After all, it was the insured, and not…the insurer, who was the successful party in the litigation. The most important concealment alleged by the insurer was with regard to the “condition of the place”. On this point Lord Mansfield said: “The underwriter knew the insurance was for the governor. He knew the governor must be acquainted with the state of the place. He knew the governor could not disclose it, consistently with his duty. He knew the governor, by

insuring, apprehended, at least, the possibility of an attack. With this knowledge, without asking a question, he underwrote. By so doing, he took the knowledge of the state of the place upon himself. It was a matter, as to which he might be informed in various ways: it was not a matter, within the private knowledge of the governor only.” This passage would seem to indicate beyond any doubt that Lord Mansfield conceived of the insured’s duty as being a very narrow one… Twentieth-Century Fundamentalism The conflict between the “broad” and the “narrow” duty of disclosure may fairly be said to have been finally resolved in favour of the former theory by the decision of the Court of Appeal in Joel v Law Union and Crown Insurance [1908] 2 KB 863. Since the date of that decision, the only question has been as to the breadth of the duty to disclose. In Joel itself, the Court of Appeal drew a distinction: the assured was under no duty to disclose facts he did not know of, since, as Fletcher Moulton LJ put it, “you cannot disclose what you do not know”. On the other hand, if the assured knew of a fact, his duty to disclose was not affected by the fact that he (the assured) thought the fact was not a material one. In Australia and New Zealand Bank Ltd v Colonial and Eagle Wharves Ltd [1960] 2 Lloyd’s Rep 241, McNair J remarked obiter that the “trend of opinion” supported the view that the assured was under a duty to disclose not only known facts but also such facts, which in the ordinary course of business he the assured might reasonably be expected to discover.”… It is now proposed to examine some of the case law with regard to the duty to disclose four allegedly material facts. These particular facts have been chosen both for their importance in practice and also because they demonstrate

very clearly the unfortunate results that are liable to occur when it is sought to apply an unsatisfactory rule. (1) The claims history of the insured — including notice of rejection The law in this area shows a remarkable cleavage between marine insurance situations (where the duty to disclose is extremely narrow) and the situation prevailing in other fields of insurance law where an unfairly broad duty of disclosure applies. Thus, although it would be fatal to the assured’s claim in a marine insurance situation to represent untruthfully that previous underwriters have taken the proposed risk at the same or at a lower premium, yet the insured is not bound to disclose the fact that the other underwriters have previously declined to accept the same risk. Similarly, the insured is under no duty to report any apprehensions that may have been expressed about the subject matter of the insurance by other underwriters, or by foreign correspondents. By way of sharp contrast, it is now settled by the decision of the Court of Appeal in Locker & Woolf Ltd v W Australian Insurance Co [1936] 1 KB 408 that an insured must report a rejection with regard to an entirely different type of insurance (for example, fire insurance) from the type he has now applied for (for example, motor insurance). The Court of Appeal in Locker seems to have been so impressed by the incantation of the phrase uberrima fides that it did not bother to deal with the highly relevant argument advanced by counsel for the insured: “If the insurance companies desire to have information as to other insurances, they should make this clear…” Further, the insurer may avail himself of the principle of uberrimae fides, even though he (the insurer) has put his question to the insured with regard to the previous rejections in an ambiguous form. This is the teaching of the

decision in Glicksman v Lancashire and General Assurance Co [1927] AC 139… …In the first place, a distinction should be drawn between on the one hand the insured’s duty to give details of previous refusals to insure him (or his property), and on the other the insured’s duty to give details of previous losses suffered by him (the insured). With regard to the first duty, it is submitted that the marine insurance rule, which does not recognise this duty, should be applied across the entire field of insurance law. This is so because information with regard to a refusal only tells the insurer to investigate his risk with great care. But this, one should have thought, only describes the insurer’s duty at the present time with regard to the investigation of all risks. In short, if an applicant for insurance has been rejected by a previous insurer for arbitrary or capricious reasons, it is monstrous to penalise such a person further by holding that his subsequent insurance is void because of his (the applicant’s) failure to disclose an earlier capricious refusal! On the other hand, if the applicant was rejected by an earlier insurer for good and sufficient reasons, it is presumably open to the subsequent insurer to ascertain by intelligent and searching questions what those reasons were. It does not require much argument to establish that an insured’s accident history will often be of greatest importance to an insurer. This fact, however, does not argue for a broad duty of disclosure; on the contrary, it is submitted that the duty of disclosure should be a very narrow one. In the first place, the information allegedly withheld must be closely related to the circumstances of the present loss in the manner described by Scrutton LJ in Becker v Marshall (1922) 11 Ll L Rep 114. Secondly, an insurer’s failure to ask questions with regard to losses should be regarded as a waiver of this information, as should the insurer’s acceptance of blank replies to questions in the proposal form (regardless of the form of the question).

Further, an insurer should not be allowed to take advantage of ambiguous questions in the proposal form. Finally, the insurer should not be able to render immaterial information material by the simple expedient of using a “basis of the contract clause”. This alternative unhappily appears to be open to an insurer. (2) Criminal convictions The small body of case-law requiring the insured to disclose previous criminal convictions is worthy of note, principally because it illustrates the ludicrously unjust results that are liable to occur from the application of an unsound rule. By way of example, consider the decision of the Court of Appeal in Schoolman v Hall [for the facts see Cohen LJ’s judgment, above, [409]]… Happily, in…Roselodge Ltd v Castle [1966] 2 Lloyd’s Rep 113, some limit seems to have been set to the duty to disclose in this area [the facts are summarised above, [414]]… Essaying his own evaluation of the materiality of the two convictions, McNair J decided that R’s conviction in 1946 was not material, since it had “no direct relation to trading as a diamond merchant”. His Lordship held that in the case of M’s conviction there was such a “direct relationship” and it must be regarded as material. Although this holding obviously represents a more enlightened approach than that demonstrated in the two earlier cases discussed in this section, it is submitted that, on the facts in Roselodge Ltd v Castle, the insurer should have been held to have waived the information relating to M’s previous conviction. Remarkably enough (given the type of insurance involved in this case), the insurer in Roselodge Ltd v Castle did not ask M any questions relating to moral hazard. To require the court to step into the breach, as it were, means that in the first place, the court may have to make an extremely difficult decision with regard to the materiality of a

particular fact when it lacks both the requisite knowledge to make this determination, as well as adequate means for obtaining such knowledge. Secondly, and perhaps even more seriously, permitting a judge to “second guess” an insurer tends to dilute the well established and essential duty of the insurer to make the relevant inquiries of the insured…

Critique It is now possible to summarise briefly the various defects of the uberrima fides as it exists today. In the first place, current doctrine, so far from representing a restatement of classical doctrine as set out in decisions such as Carter v Boehm, sets out an entirely different principle, one largely fashioned during the present century. It is respectfully submitted that Carter v Boehm was correctly read by a number of American courts in the 19th century who read the case as stating a “narrow” rule of disclosure. More seriously, it is clear (in words of the Law Reform Committee Report on Conditions and Exceptions in Insurance Policies) that “…a fact may be material to insurers…which would not necessarily appear to a proposer for insurance, however honest and careful, to be one which he ought to disclose”. Further, the doctrine seems to work harder against laymen than against professionals. The “marine” professional is in the strongest position: in the first place, he does not, as we have seen previously, have to disclose information that has to be disclosed by other classes of applicants. Secondly, it would appear that the courts are more ready to infer a waiver of information by the insurer in a marine insurance situation than in other insurance situations. The land based professional does not occupy as privileged a position as his marine cousin but he would still appear to be in a stronger position with regard to

the working of the doctrine than in the layman who applies for, for example, life insurance. In the first place, the professional is more likely to know that a duty to disclose exists and to know also what information the insurer needs to know, than is likely in the case with a lay applicant for life insurance. Secondly, it is likely that an applicant for life insurance will be asked more questions (some of them relating to his health, a matter in which he has no expertise) than will be true in the case of a businessman taking out a policy against fire or burglary. Thirdly, the doctrine is in error in assessing the strength of the parties with regard to knowledge. The doctrine assumes that the insured is in a stronger position than the insurer because he (the insured) has more knowledge than the insurer. But the possession of greater knowledge, it is submitted, puts the insured in a weaker position, since he (the insured) does not know which parts of that information the insurer wishes to have. It is submitted, however, that it is the insurer who should be seen as the stronger party, since he (the insurer), is aware of what information he seeks to have. As against this, the insured, even though under the limited formulation of the doctrine, requiring him to disclose only facts within his knowledge, may wellbe in the position of either not knowing, or else being uncertain as to the materiality of a particular fact…

Notes on reform It is not within the scope of this paper to offer detailed statutory provisions but some general — if disconnected — remarks on the shape such reforming provisions might take would appear to be in order… …Turning…to the form revised disclosure provisions might take, it is submitted that, while foreign legislation should obviously be consulted, great care be taken in borrowing

statutory provisions. The statutory provisions of many American States, to take but one example, are too brief for English conditions. The brevity of these statutory provisions is to be explained by reference to two very closely connected factors. In the first place, very often the statutory provision will represent no more than codification of the preexisting common law position. But, even where this is not the case, a brief statutory provision will be interpreted in the light of a general judicial solicitude for the position of the insured. The fact that these circumstances are not present in England makes it advisable that any statutory provisions go into far greater detail than any potential foreign model appears to do. Without being exhaustive, a model disclosure statute might well provide for the following. In the first place, it might be desirable to provide that an insured is under no obligation to provide information with regard to certain matters. As examples of such “classified” information could be included an applicant’s race or nationality; further, the insured should be deemed to be under no obligation to reveal that he has previously been refused insurance. The key provision in the statute should state in the clearest possible language that any failure by an insurer to ask of an insured information customarily sought by insurers in the type of policy in question should be deemed a waiver of such information. The burden of proof to show that a particular piece of information was so esoteric as not to have been ascertainable by ordinary inquiry should again clearly be placed on the insurer. The adoption of the above-described waiver principle should reduce the insured’s duty of disclosure to (justly) narrow limits. With regard to the disclosure of this “unascertainable” information, the insured should be penalised only if he acted in “bad faith,” ie, if he knew, or had very good cause to believe that a particular piece of

information would in fact be material to the insurer. The burden of showing “bad faith” should again be placed on the insurer. The insured’s duty of disclosure should also be recognised in another situation, namely, when the insured comes into possession of material information between the time of the application for a policy and the time the policy is issued. If American case law is any guide, disputes arise more frequently over the duty to disclose in this situation than is true of the insured’s duty to disclose “unascertainable” information. The duty to disclose such information should be recognised (as it is in American law), except that the policy should be made to spell out clearly that such an obligation exists. It is, it is submitted, all too easy for an insurance applicant to think that a contract has been concluded at the time the policy was applied for. Again, it might be desirable to expressly provide for the contra proferentem principle in a separate provision. Perhaps more valuable than such a provision would be one stating that the insurer is responsible for any ambiguities in questions asked in the application. Indeed, the situation in Glicksman v Lancashire and General Insurance Co… could be set out, with, of course, a different outcome indicated. Finally, even with a much limited duty of disclosure, it is still desirable to provide that an insurer prove clearly the materiality of some particular piece of information that has been withheld. In particular, serious consideration should be given to reforming the manner in which expert evidence is given, so that the responsibility for ascertaining insurance practice become the responsibility of the court, instead of being left, as at present, to the unequal struggle between the parties. Such a system would not attain complete objectivity since obviously most expert testimony will continue to be given by underwriters, but it will at least make it impossible for an insurer to hand pick his experts or to call “experts” from the insurer’s own company…’

[430] Law Commission Report No 104, Insurance Law — Non-Disclosure and Breach of Warranty, Cmnd 8064 (London, HMSO, 1980) Abolition of the duty with respect to consumers 4.34 Having rejected the suggestion that the duty of disclosure should be totally abolished, we must now consider the proposal, which was advanced by some of those whom commented on our working paper, that it should be abolished with respect to consumers. These commentators urged that consumers as a group should be treated differently from commercial undertakings. In particular, it was suggested that consumers should be under no duty to volunteer material information to insurers and that if insurers wanted such information, they should ask for it. In the paragraphs which follow, we shall adapt the definition of ‘consumer’ used in section 12 of the Unfair Contract Terms Act 1977, in the case of contracts other than contracts for sale or hire purchase: we intend ‘consumer’ to mean a person who neither makes the contract in the course of a business nor holds himself out as doing so. Thus, a shopkeeper living in a flat above his shop would insure his shop and its contents as a businessman, but his flat and its contents as a consumer. 4.35 In our working paper, we rejected any distinction between consumers and non-consumers on the ground that the arguments in regard to ‘sharp practice’ against the total abolition of the duty of disclosure apply equally to the proposal that it be abolished with regard to consumers only. For example, in the absence of any duty of disclosure the insured could apply for cover on his premises without revealing that a threat had been made to bum them down. This result would be unacceptable even if the prospective

insured were a consumer applying for insurance on his house. 4.36 The basis for any differentiation between consumers and nonconsumers must be that the more lenient treatment of a particular category is justified because that category is in need of special protection. As explained in our working paper, there are certain mischiefs in the law of nondisclosure which apply equally whether the insured is a consumer or a businessman who is not constantly concerned in his business activities with the insurance market. Neither consumers nor ordinary businessmen who are not in the insurance market have the knowledge or experience to identify all facts which may be material to insurers. Both are therefore to this extent in need of protection and both may properly be regarded as consumers vis-à-vis insurers. 4.37 It may also be contended that it is unfair to consumers to subject them to a duty of disclosure since they may be totally unaware of the duty or of the consequences of breach of the duty. However, many small businesses are equally unlikely to be aware of the niceties of insurance law when applying for insurance. Similarly, consumers are on the whole considered less likely than businessmen to take advice — for example, from insurance brokers — which might reveal the existence and extent of the duty. But the well off or cautious consumer may as a matter of course seek the advice of an insurance brokers — which might reveal the existence and extent of the duty. But the well off or cautious consumer may as a matter of course seek the advice of an insurance broker when in need of cover, while the small businessman may not. It is however impracticable to draw a line between those who consult brokers and those who do not. This is not to say that a person’s need for protection may not depend on his situation and the circumstances in which he enters into the contract. For example, if a large business corporation enters

into a contract for the supply of goods or services it will usually appreciate the nature and consequences of the transaction far better than a small business or a private individual. Thus, there may well be a sensible dividing line between those insured who are in need of special protection and those who are not, but in our view this dividing line should be between ‘professionals’ and ‘non-professionals’. The exclusion of MAT [marine, aviation. transport] insurance from the scope of our recommendations reflects this distinction. 4.38 Furthermore, if a special regime were devised for consumers, there would be three categories of insured to each of which different rules would apply. Those insured against MAT risks would be excluded from the scope of our recommendations and would be regulated by the present law; non-consumers would be subjected to a modified duty of disclosure, and consumers would be exempted from any duty. This multiplication of legal categories would clearly be complex and undesirable. 4.39 A further reason against differentiating between consumers and non-consumers is connected with the fact that the vast majority of consumer insurance is written on the basis of proposal forms. As we point out below, the present law in relation to proposal forms is defective in certain respects. In particular, we think it likely that many applicants, regardless of whether they are consumers or businessmen, who have completed a proposal form may erroneously believe that they are under no duty to disclose further information, and, in our view, such a belief will usually be perfectly reasonable. For this reason, we have made detailed recommendations in this report in order to protect applicants for insurance who complete such forms. These recommendations are in effect measures of consumer protection. But the use of proposal forms and the mischiefs associated with them are not confined to consumer insurance; to this extent our recommendations also protect

businessmen, and, in our view, it is right that they should do so. 4.40 Finally, if the duty of disclosure were to be wholly abolished for consumers, the granting of provisional insurance cover prior to the completion of a proposal form would give rise to difficulties. This type of cover is often granted to consumers. For example, insurance cover for motor vehicles is often granted over the telephone by a broker and a cover note is then issued. Similarly, house insurance cover is often granted over the telephone where the insured has just exchanged contracts for the purchase of a property. In the absence of any duty it would be open to a prospective insured to conceal any information which he knew to be material but which was unusual in its nature, so that the insurer or broker could not reasonably be expected to ask about it over the telephone. As we pointed out in our working paper, while insurers might not withdraw facilities for such cover they might well increase premiums, and might also insert a greater number of conditions and exceptions into their policies to narrow the scope of the risk covered.

Attenuation of the duty of disclosure with respect to consumers 4.41 It was suggested to us that in relation to cover obtained by consumers, insurers should not be entitled to repudiate a policy unless the non-disclosure was fraudulent. We think that it would only be in exceptional cases that an insurer would be able to discharge the onus of proving that an applicant for insurance omitted to volunteer a material fact with the intention of deceiving him. Even where there has been a misstatement in the proposal form, the onus of proving fraud is difficult to discharge. We think that such an attenuation would be unacceptable. Like the proposal to abolish any duty of disclosure with respect to consumers, it would create three categories of policyholders to each of

which different rules would apply, with resultant multiplicity of legal categories and undesirable complexity… 4.42 In the result, it seems to us that any separate regime for consumers and nonconsumers would lead to anomalous results in practice. This can again be illustrated by a shopkeeper who lives above his shop. He applies for fire and burglary cover in respect of both his shop and his flat at the same time: the former application would be made in the course of a business, but the latter would not. It would be odd, to say the least, if the resulting contracts were subject to different vitiating factors. We are persuaded by all these cumulative considerations that there should be no special category of consumer insurance to which more lenient rules should apply…

The duty of disclosure 4.47 We recommend that the duty of disclosure imposed on an applicant for insurance should be modified as follows. A fact should be disclosed to the insurers by an applicant if: (i) it is material to the risk; (ii) it is either known to the applicant or is one which he can be assumed to know; (iii) it is one which a reasonable man in the position of the applicant would disclose to his insurers, having regard to the nature and extent of the insurance cover which is sought and the circumstances in which it is sought. It will be seen that this formulation departs somewhat from that put forward in our working paper. In the following paragraphs, we will elaborate the elements of the modified duty of disclosure.

A fact which is material to the risk 4.48 A fact must be material to the risk before there can be any question of a duty to disclose it to the insurers. We

propose that the definition of a material fact should remain substantially the same as in the present law. Thus a fact should be considered as material if it would influence a prudent insurer in deciding whether to offer cover against the proposed risk and, if so, at what premium and on what terms. This definition amplifies the present one, which only refers to the prudent insurer’s decision to accept the risk and to his premium rating of the risk. Insurers may, however, react to the disclosure of material facts otherwise than by refusing the risk or altering the premium: they might, for example, insert additional warranties, increase the ‘excess’, or narrow the scope of the risk by exclusion clauses. The revised definition takes these additional factors into account by referring to terms other than the premium upon which the insurers would be prepared to offer cover.

A fact which is known to the proposer or which he can be assumed to know 4.49 No duty to disclose a material fact will arise unless that fact is known to the proposer or can be assumed to be known by him…We do not consider that it would be acceptable for the insured to be required to disclose all material facts without regard to whether such facts were known or ought to have been known by him, since an insurer would then be entitled to repudiate the contract for the non-disclosure of a fact outside the insured’s knowledge or means of knowledge. Equally, it seemed to us in the working paper that it would not be acceptable for the insured to be able to say that he has complied with his duty of disclosure if he did not actually know a fact, even when that fact was obviously relevant and easily ascertainable by him. On consultation, few commentators referred specifically to the question of constructive knowledge and opinion was divided amongst those who did. 4.50 In our view, an insured should not be entitled to say that he did not know facts which were obviously relevant

and easily ascertainable by him. However, the insured should clearly not be obliged to mount elaborate investigations within the whole spectrum of material facts. What we recommend is that he should be assumed to know a material fact if it would have been ascertainable by reasonable enquiry and if a reasonable man applying for the insurance in question would have ascertained it.

A fact which a reasonable man in the position of the proposer would disclose to the insurer, having regard to the nature and extent of the insurance cover which is sought and the circumstances in which it is sought 4.51 Even if a fact is material to the risk and is known to the proposer or can be assumed to be known by him he will only be obliged to disclose it to the insurers if a reasonable man in his position would disclose it. The words, ‘in the position of the proposer’, would allow the courts to have regard to the knowledge and experience to be expected of a reasonable person in the position of the applicant. Thus, more would be expected of the large company with an insurance division than of the small shopkeeper. On the other hand, we would not wish the court to take account of the individual applicant’s idiosyncrasies, ignorance, stupidity or illiteracy in determining whether a reasonable man in his position would disclose a know material fact. Our formulation would only direct the court’s attention to the nature and extent of the insurance cover which is sought and to the circumstances in which it is sought. Thus, a reasonable man applying for life insurance would not disclose facts relevant to his house or his car. Equally, a reasonable man applying for householder’s cover would not disclose facts relevant to his health. The court would also have regard to whether the cover applied for was only provisional or temporary, since a reasonable man would not necessarily disclose the full spectrum of known material facts when applying for merely temporary cover. In addition,

the extent or magnitude of the proposed risk would be relevant. Thus more would be expected of a businessman applying for insurance on a factory full of machinery than would be expected from a householder insuring his house and its contents. 4.52 Our formulation would also concentrate the court’s attention on the circumstances in which insurance cover was sought. Thus a reasonable man applying for insurance over the telephone might well address his mind to the disclosure of material facts to a different extent than if he were making a written proposal for insurance. Equally, in negotiating the cover the insurers may have given the insured the impression that on certain aspects material facts need not be disclosed in full or at all; in such cases the insured may assume that they are waiving disclosure of matters concerning which they appear to be indifferent or uninterested in an illness suffered six years ago. Another example of a case where waiver could be inferred is provided by “coupon” insurance. This type of insurance can be obtained either by inserting the required amount of money into a machine, as happens mainly at airports, or by completing a very simple application form which asks only for the name, address and occupation of the applicant. The “coupon” itself is a document which may either itself be a contract of insurance or an undertaking to issue a policy. In such cases there would seem to be no duty of disclosure, since the applicant is unlikely to have any occasion to disclose anything. By making an offer to the public which is capable of being accepted by anyone, the insurers in such cases in effect indicate that they are willing to insure anyone regardless of his antecedents or characteristics. Another example is provided by the issue of immediate or interim cover, usually in connection with motor vehicles. It is usual in such cases for insurers to require an applicant to complete a proposal form at a later stage, and a reasonable applicant might therefore assume that the insurers were at

this stage not interested in the disclosure of material facts which would be relevant only to the premium-rating and not to the question whether the risk should be accepted. In all such cases, the position is that the insurers have adopted a procedure whereby cover is applied for and granted in such a way that a waiver as to the disclosure of material facts may be inferred. Under our recommendations, all such matters could be taken into account by the courts in determining whether or not there had been a material nondisclosure…

The duty of disclosure in relation to proposal forms 4.56 A major criticism of the present law…is that an insured may well be unaware that he is under a residual duty to disclose material facts to the insurer when he has answered a series of specific questions in a proposal form, because these could naturally lead him to believe that the questions cover all matters about which the insurer is concerned to be informed. Indeed, the very fact that specific questions are invariably asked in proposal forms, which is their essential purpose, may have the effect of creating a trap for the insured under the present law. We have no doubt that this is a mischief which requires reform for the protection of the insured. 4.57 In the working paper, we made the provisional recommendation that this protection should be provided by confining insurers to the answers to specific questions asked in proposal forms and that they should be treated as having waived the disclosure of any information to which no specific question had been directed. Consequentially to this, we also provisionally recommended that no general questions in addition to specific questions should be permitted, such as a question whether there were any other facts which might influence the judgment of a prudent insurer in accepting the risk and fixing the premium The effect of these recommendations would be to confine

insurers to specific questions in all cases in which proposal forms are used and to abolish any residual duty on the insured beyond answering the questions… 4.58 In the comments received on consultation, our provisional recommendations were criticised on the ground that the purpose of proposal forms was to elicit information of a standard nature and not to circumscribe the nature of the risk in all respects. It was pointed out that the effect of our provisional recommendations would be that proposal forms would inevitably have to become far more lengthy, detailed and complex than at present and, further, that proposers might well be aware of facts which any reasonable person would realise should be disclosed but about which insurers could not reasonably be expected to ask specific questions. We accept these criticisms. For instance, a person might take out product liability insurance when it appears to him that his quality control is inadequate but he does not know the reason, or a businessman might effect some special fire cover on his premises when he has reason to believe that they might be burned down. Such cases could not possibly be expected to be covered by specific questions in proposal forms. They would of course be covered by a general question, such as we have instanced above, which is indeed commonly included as normal underwriting practice in many kinds of proposal forms at present. The effect of a general question of this kind is that the insured is placed under a residual duty to volunteer further information, though with the advantage of having had his attention drawn specifically to this duty. On further consideration we see no reason to outlaw such general questions; indeed, it seems to us that they can be said to fulfil a useful purpose, and they may indeed be essential in many cases. This is the first reason why we consider that it would be impracticable to confine the duty of the insured in relation to proposal forms simply to

supplying answers to specific questions and thus to eliminate any residual duty of disclosure. 4.59 The second crucial matter to bear in mind on the question whether it would be right to abolish any residual duty of disclosure in cases where proposal forms are completed is that the effect of the recommendations which we have already made is to reduce the level of the duty of disclosure to that of the reasonable insured in all cases (other than MAT insurances), whether proposal forms are used or not. It follows that, under our recommendations, no insured will have been in breach of his duty of disclosure in any event unless ex hypothesi he has fallen below this standard. The effect of this recommendation is therefore that it also greatly reduces the remaining problems concerning non-disclosure in cases of proposal forms. Nevertheless, there still remains the problem that in cases of proposal forms, particularly where no general question is asked in addition to specific questions, a proposer is likely to be unaware that he may be under a further residual duty to volunteer additional material information. It may well be, of course, that in the absence of a general question the courts might hold in the particular circumstances of some cases that a proposer could reasonably assume that he was under no further duty beyond answering the specific questions; on this basis the effect of our recommendations will be that in such cases he will have discharged his duty of disclosure by answering the questions. However, we do not think that this is sufficient; in our view, the interests of both parties require that various matters concerning the insured’s obligations when he completes a proposal form should be drawn specifically and explicitly to his attention. 4.60 In our view, the solution to the foregoing problem lies in the requirement that all proposal forms should contain certain clear and explicit warnings to the insured, presented in a prominent manner, together with appropriate sanctions wherever such warnings have not been given. In many

cases, proposal forms already contain some warnings of the kind which we have in mind, and we see no administrative or other difficulties in requiring them to be included as a matter of law and providing for appropriate legal consequences if they are omitted. However, before dealing with these matters at greater length we must deal with two further topics; the standard which should be required from an insured in answering questions in proposal forms, and the necessity to supply to the insured a copy of his completed proposal form for future reference, particularly in relation to renewals of the cover.

Standard of answers to questions in proposal forms 4.61…We therefore recommend that an applicant for insurance should be considered to have discharged his duty of disclosure in relation to the answers to specific questions if, after making such enquiries as are reasonable having regard both to the subject matter of the question and to the nature and extent of the cover which is sought, he answers the questions to the best of his knowledge and belief. This formulation would allow the court to take account of the particular topic raised by a specific question when assessing what enquiries ought to have been made into that topic. Further, the nature of the topic itself would be relevant. Thus, enquiries as to the materials of which a factory roof is constructed would obviously need to be more extensive than those concerning the cubic capacity of the engine of a motor vehicle…This recommendation is along lines similar to those suggested by the Law Reform Committee in their Fifth Report, in which the Committee formulated the following rule which, in their view, could be introduced into the law without difficulty: “…that, notwithstanding anything contained or incorporated in a contract of insurance, no defence to a claim thereunder should be maintainable by reason of any misstatement of

fact by the insured, where the insured can prove that the statement was true to the best of his knowledge and belief.” 4.62 In the foregoing paragraph, we dealt with the standard required from an insured when answering specific questions in a proposal form. To complete this aspect, it remains to mention the standard which is to be required from him when he answers a general question at the end, such as whether there are any other facts which might influence the judgment of a prudent insurer in accepting the risk and fixing the premium. We think that the standard required from the insured in answering such questions in proposal forms should be assimilated in all respects with out basic recommendation concerning the reduced standard required from proposers in relation to their general duty of disclosure: viz, they are under no higher duty than to disclose material facts which they know or are to be assumed to know and which would be disclosed by a reasonable person in the position of the proposer, having regard to the nature and extent of the insurance cover which is sought and the circumstances in which it is sought. Thus, for the avoidance of doubt we propose that the legislation which we recommend should also expressly provide that all general questions in proposal forms shall be construed as seeking no further information from the proposer than such information as he would be bound to disclose by virtue of the reduced duty of disclosure referred to above. We recommend accordingly. Copies of proposal forms to be supplied to insured 4.63 Next, we turn to a problem which is of particular significance when an insured is attempting to fulfill his duty of disclosure on renewal of his insurance. It was forcefully represented to us on consultation that the insured will often no longer remember the information which he supplied to the insurers on his initial application and on subsequent

renewals (if any), unless he is at least able to refer to a copy of his proposal form. In our view, insurers should be required to supply the insured with a copy of his completed proposal form…Further, in some cases there may be further communications between the insurer and the insured after the proposal form has been filled in, in the course of which the insured may supply further written information to the insurer, either in amplification of an answer given or in regard to a matter not canvassed specifically in the proposal form. The insured should clearly also be able to refer to these matters on renewal, and we again consider that he should be warned of the importance of keeping copies for future reference of the information which he has supplied.

Warnings to be included in proposal forms 4.64 We have already explained that in our view all proposal forms should contain certain warnings to the insured and that these should be presented in a prominent manner. We can now summarise the warnings which we recommend should be required to be included in all proposal forms in this manner. These should warn the insured: (i) that he must answer all questions to the best of his knowledge and belief, after making such enquiries as are reasonable in the circumstances; (ii) that in relation to any matter which is not the subject of a question in the proposal form, he must disclose any matter which he knows or could ascertain by reasonable enquiry and which might reasonably be considered to influence the judgment of a prudent insurer in deciding whether or on what terms to provide the cover which is sought; (iii) of the consequences to the insured of a failure to fulfill the obligations referred to in (i) and (ii) above, that is, of the insurer’s right to repudiate the policy and to reject any claim which may have arisen; and

(iv) of the importance to the insured of keeping the copy of the completed proposal form which will have been supplied to him under our recommendations and of any additional information which he may give to the insurers.

Sanctions if any of the requirements concerning proposal forms are not complied with 4.65 We have already mentioned that it is clearly necessary to provide sanctions against insurers in cases in which any of the prescribed warnings are omitted or are not presented in a prominent manner. Similarly, sanctions will clearly also be necessary if an insurer fails to comply with the obligations which we have recommended to supply to the insured a copy of the completed proposal form. We therefore turn to this aspect. 4.66 Since we foresee no real difficulties for insurers in complying with the foregoing recommendations, which are in any event already widely adopted so far as concerns warnings about the duty of disclosure and the standard for answering questions in proposal forms, we consider that there should be a clear and substantial sanction for cases in which there is a failure to comply with these requirements. They are all directed to seeking to assist the proposer to discharge his obligation to disclose material facts to the insurer, whether by answering questions in proposal forms or by complying with any residual duty of disclosure which might still subsist. In these circumstances we consider that the appropriate sanction is that if there is a failure to comply with any of these requirements the insurer shall not be entitled to rely on any failure by the insured to disclose any material fact, and we so recommend. 4.67 However, there may be cases in which the stringency of this sanction would be inappropriate because it may be quite clear that some trivial failure on the part of the insurer will not have caused any prejudice to the insured in relation

to any failure of disclosure on his part. For instance, the insurer may have failed to provide the insured with a copy of the proposal form, but the insured may have kept his own copy…In such cases it may be quite clear that the nondisclosure of some material fact has had no connection with some particular failure on the part of the insurer to comply with the requirements. We think that some additional provision should be made for exceptional cases of this kind. We accordingly recommend that, where there has been a failure by the insured to disclose a material fact, in circumstances in which the court is satisfied that a failure on the part of the insurer to comply with the requirements did not cause any prejudice to the insured with regard to his obligation to disclose such fact, then the court may give leave to the insurer to rely on the non-disclosure in question…

Renewals Introduction 4.69 Having dealt with the topic of disclosure in the context of proposal forms we now turn to deal with it in relation to renewals. In this context, the topic is of great importance because the vast majority of insurance contracts made in England are by way of renewal of existing policies, with the result that the duty of disclosure will most often arise on applications for renewed cover. The reason is that most insurance policies in England, other than policies of life insurance, are contracts for a term of one year and are renewable annually. In relation to such contracts the parties usually envisage that the contract will be renewed each year…

Reform of the duty of disclosure on renewal 4.72 Earlier in this report we concluded that, to put it shortly, an insured should on an original application for insurance, be under a duty to disclose only those material facts which, having regard to the particular circumstances, a reasonable man would disclose. On this basis, we consider that it would be clearly unsatisfactory if an insured were under a more onerous duty of disclosure on renewal than when he made his original application, and in our view the same standard of duty should clearly apply. On the other hand, since an insured is under no obligation to disclose matters which are already known to the insurer, on renewal the insured will only be obliged to update the matters disclosed when the contract was concluded or on the occasion of the last renewal, as the case may be. The effect of this, and of our recommendation about the general duty of disclosure, will therefore be that on renewal the insured will have to disclose material facts which he knows or is assumed to know, which have not been disclosed by him and which would be disclosed by a reasonable insured in his position, having regard to the nature and extent of the cover which is renewed and the circumstances in which it is renewed… Should the insurer’s rights in disclosure be further restricted?

respect

of

non-

Introduction 4.88 In the following paragraphs we will consider whether the balancing of the interests of the insurer and the insured requires that the insurer’s rights in respect of non-disclosure by the insured should be still further restricted than on the basis of the recommendations which we have already made. We consider two possible further restrictions. The first would

preclude the insurer from rejecting a claim if the insured could prove that there could have been no connection between his non-disclosure and the loss. The second would leave the remedy for non-disclosure to the discretion of the court and would thus allow the insured who is in breach to make partial or total recovery of his claim in some cases. We deal with proposals in turn.

Connection between the non-disclosure and the loss 4.89 In our working paper, we dealt with the question whether our provisional recommendations should go further to protect the insured on the basis that insurers should only be entitled to reject a claim on the ground of non-disclosure of a material fact if the undisclosed fact is in some way connected with the loss. We refer to this hereafter for convenience as a “nexus test”… 4.90 In our working paper, we provisionally recommended that the law of warranties should be reformed so that rejection of a claim for breach should only be allowed if there is a connection of some kind between the insured’s breach and the loss. We adhere to this recommendation in this report. In the context of non-disclosure the precise formulation of a nexus test would require separate consideration, but for the purpose of the present discussion it is sufficient to put the issue in broad terms. Suppose that an insured has failed to disclose a material fact, that is, one which would have affected a prudent insurer’s decision whether or not to accept the risk at all or, if so, at what premium and on what terms. Suppose also that a loss subsequently occurs which could not have had any connection with the undisclosed fact. Although the insurer would be entitled to repudiate the policy, should the insured nevertheless be entitled to recover his claim? 4.91 At first sight this result may appear to be just, as some of our commentators felt. However, on examination it is clear that the insurer would thereby be held to a contract

which he would either not have accepted at all, or only at a higher premium or subject to different terms, or both. This would appear to be unfair. For this reason and for the reasons set out in the paragraphs below, we have concluded that, whatever superficial attraction the nexus test may have in the context of non-disclosure, it is misconceived and should not be adopted in this context. 4.92 One must begin by putting the issue into the perspective of our other recommendations in this report in order to see the extent of the problem which would remain if these are adopted. Our present law of non-disclosure has caused hardship and led to widespread criticism, as we have already pointed out. In particular, we have identified the following mischiefs with which we have already dealt, viz: (a) that the standard to be applied to the duty of disclosure is that of a prudent insurer and not of a reasonable insured; and (b) that in proposal form cases it may well not occur to the proposer that in addition to answering a large number of questions he is required to volunteer material information without his attention having been drawn to this obligation in any way. However, under our recommendations these mischiefs will disappear. By applying the test of a reasonable insured, many of the ‘moral hazard’ cases, which have been subject to particularly strong criticism, may in any event be decided differently. Further, in proposal form cases, which in the present context in our view present the greatest mischief in practice, the insured will have had his attention drawn expressly to his duty to volunteer material information. If the insurer has failed to give the necessary warning, he will not be entitled to rely on the nondisclosure of such information. 4.93 For present purposes one therefore starts with cases concerning proposers who will, ex hypothesi, not have acted in the way in which a reasonable person in the position of the insured would have acted. On this basis, the considerations of justice concerning the consequences of a

non-disclosure at once assume a different aspect. But then one comes to a further consideration. Suppose that a proposer unreasonably fails to disclose some material fact under the rubric of “moral hazard”: how could the application of a nexus test work in practice? Suppose that an applicant fails to disclose a bad claims record or (unspent) convictions for dishonesty: such facts could, in practice, hardly ever be shown to have had any connection with a particular loss. The result would be that an insured who is unreasonably in breach of his duty of disclosure would, in such cases, virtually always recover. We do not think that this would be acceptable or that it strikes a fair balance between insured and insurer against the background of the reforms of the law of non-disclosure which we are recommending. 4.94 There is a further and perhaps even more fundamental objection to the introduction of a nexus test into the law of disclosure which applies whether or nor the undisclosed material fact concerns “moral hazard”. This objection stems from comments which we received from the insurance industry on consultation which have greatly impressed us. Unlike cases of breach of warranty, in relation to which we are recommending that there must be a connection between the breach and the loss, all considerations relating to non-disclosure must focus on the moment when a proposal for insurance is put forward and either accepted on certain terms or rejected, in either event by reference to what the insurer judges to be the quality of the risk. The technique — one might almost say the art — of good underwriting is to judge all the factors affecting an offered risk at this moment, when the underwriter must then and there assess its quality on the basis of his experience, as though he were considering the overall impression given by a “still photograph” of the risk at this point. In these respects, the implications of nondisclosure are quite different from those of breaches of warranties

during the currency of the cover. As a result of the nondisclosure, the insurer will have accepted a risk which, had he known all the material facts, he would either not have accepted at all or would have accepted at a different premium or on different terms. In these circumstances, we see great force in the contention made on behalf of the industry that it would be wrong in principle to hold the insurer to the contract in such cases. Furthermore, under our recommendations made later in this report we severely curtail the rights of insurers to rely on ‘basis of the contract’ clauses as a means of avoiding liability, with the result that their rights in cases of non-disclosure would assume even greater importance than at present. 4.97…we [therefore] recommend against the introduction of a nexus test in relation to non-disclosure…

[431] The Australian Law Reform Commission Report No 20, Insurance Contracts (1982): Chapter 6 Non-disclosure and Misrepresentation.

Conclusion 183. The existing duty of disclosure is not justified by the principle of uberrimae fides. That principle would appear to suggest that an insurer should only be entitled to redress in the event of deliberate concealment or culpable indifference. A former member of the Commission` was firmly of this view. However, the existing members are concerned that a rule based on concealment might give rise to unwarranted difficulties of proof and might conceivably make dishonesty more difficult to detect. They therefore recommend that the duty of disclosure should be retained in modified form. An insurer which wishes to rely on innocent

non-disclosure should warn the insured of his duty of disclosure before the contract is entered into. The duty should itself extend to facts which the insured knew, or which a reasonable person in the insured’s circumstances would have known, to be relevant to the insured’s assessment of the risk. The substance of the test suggested in the English Law Commission’s working paper is preferable to that which the Law Commission espoused in its final report. Fairness to the insured can only be achieved by taking account of those differences between individual insureds which the Law Commission’s final recommendation would exclude from consideration. Literacy, knowledge, experience and cultural background are ad vitally important factors affecting the behaviour which can reasonably be expected of insureds, both by insurers and by the legal system which regulates the insurance relationship. Insurers sell to a wide market. They often do so with a minimum of formality. Subject only to the principle of utmost good faith, they must take the individual members of the relevant market as they find them. The existing requirement of disclosure imposes obligations on those individuals which many of them, acting in the utmost good faith, are unable to discharge. Marketing methods are adopted which increase the risk of non-disclosure. Where intermediaries are not involved, there is no one to bring the insured’s obligation to his attention. For reasons of cost and competition, proposal forms are often kept to a minimum. Relevant questions concerning the moral risk are not asked in case they should embarrass a prospective insured. The adoption of direct marketing techniques has increased the pressure for brevity and simplicity. Within the foreseeable future, insurance, like many goods and services, may be purchased by means of computer-based communications systems. All these developments increase the risk of occasional innocent nondisclosure by an unsuspecting member of the public. That risk is one which should be borne by all insureds. The

insured’s “particular circumstances” are primarily within his knowledge rather than that of the insurer. He should be required to establish the existence of any circumstances which he relies on to reduce the scope of his duty to disclose. In view of the infrequency with which insurers exercise their rights to avoid a contract for non-disclosure, the risk of non-disclosure is already largely being borne by all insureds. Because there are so many insureds and because the combination of non-disclosure and subsequent loss is so infrequent, the effect of the proposed change on premiums would be negligible.

Misrepresentation General Insurance 184. The duty not to misrepresent facts is acceptable in principle. It becomes unacceptable when the materiality of the facts misrepresented is rendered irrelevant by a basis of contract clause. That type of clause should be rendered ineffective…

Remedies for Breach Insurance and Other Contracts 187. The remedy of avoidance or rescission of a contract is not unique to insurance. But there is a vital difference between the operation of that remedy in insurance and its operation in relation to other contracts. Avoidance of a contract for, say, the sale of land does not usually result in great hardship to either party. The vendor regains his

interest in the land; the purchaser recovers his money. But avoidance of an insurance contract normally takes place after a loss has occurred and a claim has been made. In such a case, It inevitably results in a loss which may well be overwhelming. The principle of restitutio in integrum is satisfied only in the most technical sense. The insured gets back his premium and the insurer is freed from its obligations. But that does not put the parties back into the substantial position they were in at the time of the contract; at that time, the insured had not suffered an uninsured loss. In many cases, the insurer’s remedy is out of all proportion to the harm caused by the insured’s breach of duty. These considerations suggest that a limitation should be placed upon an insurer’s right to avoid a contract for non-disclosure or misrepresentation. The limitation which suggests itself is the substitution of a right to damages for the existing right of avoidance. That would provide an adequate deterrent to misrepresentation and non-disclosure. It would also ensure that insurers were entitled to adequate compensation for loss suffered as a result of breach of the insured’s duties. Disproportionate burdens would no longer be placed on the insured. Even so, an important problem arises: the method by which damages should be assessed.

Assessing Damages 188. Proportionality France and the EEC. There are several methods by which damages for misrepresentation and nondisclosure might be assessed. First, normal contractual principles might be used. On this approach, the misrepresentation or non-disclosure would notionally be treated as a term of the contract of insurance. An insurer would be entitled to recover such damages as would compensate it for the loss it had suffered as a consequence of the breach of that notional term. Normally, those damages would be the difference between the cost to the insurer of bearing the risk it had agreed to bear — that is,

the cost of the risk if the representation were true or the fact which was not disclosed were false — and the cost to the insurer of bearing the actual risk — that is, the cost of bearing the risk given that the representation was false or the fact not disclosed was true. This appears to be the rationale behind the principle of proportionality which has been adopted in some European countries. Under French law, for example, an insurer is obliged to pay the proportion of the claim which the actual premium paid bears to the premium which would have been payable if the material facts had been disclosed [Code des Assurances (1930–76), Article 113–9]. In this way, any additional risk and the loss attributable to that additional risk is, in effect, borne by the insured. A more complex set of provisions was adopted in the Proposed EEC Directive on the Co-ordination of Legislative, Statutory and Administrative Provisions relating to Insurance Contracts, a directive aimed at harmonisation of the laws of the members of the EEC. Article 2 of the Proposed Directive deals with the insurer’s right in respect of innocent non-disclosure. It adopts the principle of proportionality only where non-disclosure is due to fault (short of fraud) on the part of the insured. In a case where the non-disclosure is not due to fault, the insurer would remain liable for any loss. 189. Difficulties. The adoption of either the French or the EEC approach would present two main difficulties. First, there would be cases in which it would be hard to establish what premium would have been payable if the undisclosed fact had been known by the insurer. It is clear that such a calculation could be made more readily in a country with a system of fixed tariffs. It is equally clear, however, that, even in Australia, it could be made with relative ease in life insurance and in certain areas of general insurance where individual insurers generally act on the basis of Axed categories and premiums. The calculation would be much more difficult to make in areas where the risks are unusual

ones or where the premiums are set on an ad hoc basis in response to competitive pressures. Similar difficulty would attend the setting of a notional premium where the undisclosed fact was connected with a moral or physical risk peculiar to the particular proposal, rather than with a matter of statistical importance. Secondly, there would be cases where the insurer would not have offered cover at all or would only have offered it on special terms, had it been aware of the undisclosed fact. In such a case, the premium which would have been charged could only be calculated by reference to the premiums which would have been charged by those insurers, if any, which would have accepted the risk. To make a calculation on that basis might be regarded as unfair to the particular insurer since it would be forced to accept a risk of a type which it had decided to exclude from cover. The only alternative would be to allow the insurer a complete defence when it was able to establish that, had the fact been disclosed, it would not have extended the cover sought. In its most recent form, the Proposed EEC Directive has adopted the latter approach, but only in the case of non-disclosure due to fault (short of fraud) on the part of the insured. 190. Proportionality: the English Law Commission. The difficulties noted in the previous paragraph, together with the danger that insurers might abuse a system based on their own recalculation of the premium, led the Law Commission, in its working paper, to conclude that neither the French system nor that subsequently set out in the Proposed EEC. Directive should be adopted in England. Although accepted by the British Insurance Brokers’ Association, this conclusion met with opposition from the British Insurance Association (BIA). The BIA was apparently willing to accept proportionality in order to facilitate the creation of a truly European insurance market. In its report, the Law Commission reaffirmed the stand taken in the working paper. It pointed to the difficulties experienced with

the operation of the principle of proportionality in both France and Sweden and to the fact that the strict principle has recently been abandoned in Sweden in relation to consumer insurance. It also noted that, even in France, there appears to have been a shift away from strict “arithmetical” application of the principle towards a discretionary reduction of the insured’s recovery. Finally, it re-emphasised the difficulties to which the principle would give rise in relation to setting the notional premium: Tables of tariffs can only correlate specific quantifiable factors, such as age, date of manufacture and so on with the premium to be charged. Thus in the straightforward but unusual case where there has been a misstatement of age in an application for life insurance or a misrepresentation as to the date of manufacture of a motor vehicle in an application for motor insurance, ascertainment of the notional premium should not be too difficult.…However, in the usual case where the undisclosed fact is qualitative rather than quantitative in nature — for example, failure to disclose a gastric complaint in an application for life assurance, or non-disclosure of a previous motoring conviction in an application for motor insurance — tables of tariffs will almost certainly he unable to assist, and disputes would proliferate into litigation with the inevitability of conflicting expert evidence as to what the notional premium should be. For the Law Commission, proportionality was defective in principle in that it concentrated on one term of the contract, the premium, to the exclusion of all others. It ignored the possibility that, had it known of the undisclosed fact, the insurer might have insisted on alteration to one of the other terms of the contract rather than on a simple increase in the premium. Similar criticisms of the principle of proportionality have been made in Australia. A number of general insurers have indicated their belief that the principle of proportionality would simply not work. It is understood that some life offices already informally apply such a

principle in relation to innocent non-disclosure within the three-year period before statutory incontestability. Indeed, section 83, Life Insurance Act 1945, is an Australian example, limited to misstatements of age, of the proportionality principle applied in the field of life insurance. 191. Causal Connection. A second way in which damages might be assessed in accordance with the contractual principle stated earlier is by allowing the insured to recover under the policy except where, and to the extent that, the breach of the notional term of the contract caused or contributed to the loss. Where the breach of the term was a partial cause, the insurer would be liable in respect of the loss, but only to the extent that the loss was not caused by the breach…While the test has considerable attraction in other contexts, it is doubtful whether it would be appropriate in the present one. Misrepresentation and non-disclosure relate to the truth of facts at particular times. For example, a representation that a motor vehicle was in good order and repair is a representation that, at the time the representation was made, the vehicle was in the stated condition. If, in fact, the representation was false and an accident subsequently occurred as a result of a defect in the vehicle, it is difficult to see how the falsity of the representation at the time the representation was made was a cause of the accident. The cause of the accident was the unroadworthiness of the vehicle at the time of the accident. Consequently, the insured would not, in the circumstances described, be disentitled from recovery by the causal connection test. There is a second difficulty with that test. The duty of dislosure and the duty not to misrepresent material facts enable an insurer to obtain information about the risk it is proposing to insure. Much of the information is relevant to the terms on which the insurer is prepared to provide cover against that risk. But the information is also relevant to the question whether the insurer in prepared to insure the risk

at all. For example, an insurer may only be prepared to insure buildings containing certain types of fire-fighting equipment. Under the causal connection test, if an insured made a relevant misrepresentation which induced the contract, the insurer would be liable for any loss, except one due to lack of the preferred equipment. And this, despite the fact that, had it known the true facts, the insurer would not have accepted the risk at all. 192. Common Law Damages. At common law, a different approach is taken to the assessment of damages for misrepresentation. Damages are only available in respect of fraudulent misrepresentation. They are assessed as the amount which would place the other party in the position he would have been in had the misrepresentation not been made. A similar principle has been adopted in those jurisdictions where the right to recover damages has been extended by statute to innocent misrepresentation. However, the relevant legislation also gives a court power, in cases where it considers it just and equitable to do so, to override a rescission for innocent or fraudulent misrepresentation, to declare the contract to be subsisting and to award damages. The legislation does not require a court to apply common law principles in assessing damages in such cases. Rather, the court is required to award such damages as it considers “fair and reasonable”. Either of these approaches might be used to assess damages for innocent misrepresentation and non-disclosure in relation to insurance contracts. Of the two, the common law approach is preferable. It is directed towards the parties themselves and does not require that discretions be conferred on a court. Damages for a breach of duty would simply depend on what the insured would have done had it known the true facts. Where the insurer would not have accepted the risk on any terms at all, the amount of its loss is clearly equivalent to the amount of the claim made against it. Where the insurer would have accepted the risk, but at a

different premium, its Ion is the difference between the actual and notional premiums. Where it would have accepted the risk on different terms (whether at the same premium or not), the loss is the difference between its liabilities under the actual and notional contracts. If it would have excluded the risk which gave rise to the claim, the amount of its loss is equivalent to the amount of the claim made against it. In that case, the insured would recover nothing…

Recommendations: General Insurance 194. The Principle. The nature and extent of the insurer’s redress should depend on the nature and extent of the loss which it has suffered as a result of the insured’s conduct. It should no longer be entitled to avoid a contract, and a heavy claim under that contract, merely because it has suffered a small, even insubstantial, loss as a result of a non-disclosure or misrepresentation. As the English Law Commission noted in its discussion of the proportionality principle, it is not always easy, in retrospect, to determine what the insurer would have done had it known the true facts. In numerous cases, however, the insurer would be able to establish, whether from rating guides, from its instructions to its agents or staff or from its prior conduct, the nature and extent of the loss which it had suffered. It is true that it would sometimes be difficult to establish how it would have reacted to additional moral, as distinct from statistical, risks. But difficulties of proof cannot be avoided if a proper balance is to be reached between the interests of the insurer and those of the insured. It is quite plainly contrary to the true principle of uberrima fides to impose on the insured a burden which far exceeds the harm which he has done. The insurer should not be entitled to any redress which exceeds the loss which it has in fact suffered. That is the basic principle which lies behind the law of damages, both in contract and in tort. It also lies behind the trend

towards restricting rights of rescission for innocent misrepresentation by allowing courts to override a purported rescission and to substitute an appropriate award of damages. An insurer’s right to avoid a contract ab initio for non-disclosure or misrepresentation should be abolished. The insurer should be entitled to cancel the contract prospectively. It should be entitled to damages for the breach of duty. This entitlement should be limited to a right to deduct from a claim an amount that fairly represents the loss it has suffered as a consequence of the insured’s breach of duty. Given the difficulties associated with proportionality and with the causal connection test, the only appropriate method for assessing this amount is in accordance with the principle applicable to the assessment of damages for fraudulent misrepresentation at common law. 195. Means of Evasion. One way in which an insurer might avoid the recommendations contained in the previous paragraph is by converting a misrepresentation or nondisclosure into a warranty of existing fact. For example, the contract might contain a term by which the insured warranted the truth of some, or all, of his answers in the proposal form. Under existing law, that would allow the insurer to terminate the contract and to sue for damages. Limitations on an insurer’s right to terminate contracts of insurance are recommended later in this report. However, warranties of existing fact are more akin to representations than they are to continuing warranties and similar terms in the contract. It would be undesirable in principle for the remedies for a breach to depend on the form in which the relevant obligation was phrased. Consequently, all warranties of existing fact should be treated as representations. 196. A Remedy for Fraud. Several members of the insurance industry have argued that, whatever changes may be made to the principles of non-disclosure and

misrepresentation, an insurer should always be entitled to avoid a contract ab initio in the event of fraud. This argument has been based on two main grounds. First, fraud on the part of the insured is so flagrant a breach of the duty of utmost good faith that avoidance of the contract is the only appropriate remedy. Secondly, if the penalty for fraudulent misrepresentation, like that for innocent misrepresentation, were to be limited to the loss actually caused by the insured’s conduct, there would be little disincentive to an insured against attempting to obtain lower premiums or more advantageous terms by misrepresenting facts clearly relevant to the insurer. On some occasions, the most an insured would lose would be the difference between the premium paid and the premium which ought to have been paid. This loss would normally be suffered, if at all, only upon a substantial claim being made under the contract. It might be worthwhile for an insured to gamble on the unlikelihood of a claim and on the likelihood of discovery by deliberately misrepresenting facts in order to obtain a reduced premium. Fraud certainly constitutes a serious breach of the duly of utmost good faith. But where that breach has not caused substantial harm, an attempt by the insurer to impose a much heavier loss on the insured would not necessarily demonstrate utmost good faith on its own part. Penalties are not normally imposed in other branches of the civil law. It is true that a party may avoid a contract for fraud, but, in areas other than insurance, that does not usually involve a penalty which far exceeds the ham caused by the fraud. Moreover, recent statutory restrictions on rights of avoidance themselves apply to both innocent and fraudulent misrepresentation. None the less, the disincentive argument is an important one. In some cases of course, a clear disincentive to fraud would exist. If the insurer would not have accepted the risk had it known the true facts, the insurer would he entitled to refuse a claim, notwithstanding the heavy loss thereby imposed. In

many other cases, however, a disincentive would be lacking. The insurer’s right to avoid a contract or a claim for fraudulent misrepresentation or non-disclosure should remain. The court should have power to disregard the avoidance and adjust the rights of the parties in cases where the loss of the insured’s claim would be seriously disproportionate to the harm which the insured’s conduct has or might have caused. In adjusting the rights of the parties, the court should be required to have regard to all relevant facts, including the need to deter fraudulent conduct by the insuring public.’

[432] (Australian) Insurance Contracts Act 1984 (as amended) Part IV—Disclosures and misrepresentations Division 1—The duty of disclosure 21 The insured’s duty of disclosure (1) Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that: (a) the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or (b) a reasonable person in the circumstances could be expected to know to be a matter so relevant. (2) The duty of disclosure does not require the disclosure of a matter: (a) that diminishes the risk; (b) that is of common knowledge; (c) that the insurer knows or in the ordinary course of the insurer’s business as an insurer ought to know;

or (d) as to which compliance with the duty of disclosure is waived by the insurer. (3) Where a person: (a) failed to answer; or (b) gave an obviously incomplete or irrelevant answer to; a question included in a proposal form about a matter, the insurer shall be deemed to have waived compliance with the duty of disclosure in relation to the matter. 21A Eligible contracts of insurance — disclosure of specified matters (added by the Insurance Law Amendment Act 1998) (1) This section applies to an eligible contract of insurance unless it is entered into by way of renewal.

Position of the insurer (2) The insurer is taken to have waived compliance with the duty of disclosure in relation to the contract unless the insurer complies with either subsection (3) or (4). (3) Before the contract is entered into, the insurer requests the insured to answer one or more specific questions that are relevant to the decision of the insurer whether to accept the risk and, if so, on what terms. (4) Before the contract is entered into, both: (a) the insurer requests the insured to answer one or more specific questions that are relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; and (b) insurer expressly requests the insured to disclose each exceptional circumstance that: (i) is known to the insured; and (ii) the insured knows, or a reasonable person in the circumstances could be expected to know, is a matter relevant to the decision of the insurer

whether to accept the risk and, if so, on what terms; and (iii) is not a matter that the insurer could reasonably be expected to make the subject of a question under paragraph (a); and (iv) is not a matter covered by subsection 21(2). (5) If: (a) the insurer complies with subsection (3) or (4); and (b) the insurer asks the insured to disclose to the insurer any other matters that would be covered by the duty of disclosure in relation to the contract; the insurer is taken to have waived compliance with the duty of disclosure in relation to those matters.

Position of the insured (6) If: (a) the insurer complies with subsection (3); and (b) in answer to each question referred to in subsection (3), the insured discloses each matter that: (i) is known to the insured; and (ii) a reasonable person in the circumstances could be expected to have disclosed in answer to that question; the insured is taken to have complied with the duty of disclosure in relation to the contract. (7) If: (a) the insurer complies with subsection (4); and (b) in answer to each question referred to in paragraph (4)(a), the insured discloses each matter that: (i) is known to the insured; and (ii) a reasonable person in the circumstances could be expected to have disclosed in answer to that question; and (c) the insured complies with the request referred to in paragraph (4)(b); the insured is taken to have

complied with the duty of disclosure in relation to the contract.

Onus of proof — exceptional circumstance (8) In any proceedings relating to this section, the onus of proving that a matter is an exceptional circumstance covered by subparagraph (4)(b)(iii) lies on the insurer. Definition (9) In this section: eligible contract of insurance means a contract of insurance that is specified in the regulations. 22 Insurer to inform of duty of disclosure (1) The insurer shall, before a contract of insurance is entered into, clearly inform the insured in writing of the general nature and effect of the duty of disclosure and, if section 21A applies to the contract, also clearly inform the insured in writing of the general nature and effect of section 21A. (2) If the regulations prescribe a form of writing to be used for informing an insured of the matters referred to in subsection (1), the writing to be used may be in accordance with the form so prescribed. (2) An insurer who has not complied with subsection (1) may not exercise a right in respect of a failure to comply with the duty of disclosure unless that failure was fraudulent. Division 2 — Misrepresentations

23 Ambiguous questions Where:

(a) a statement is made in answer to a question asked in relation to a proposed contract of insurance or the provision of insurance cover in respect of a person who is seeking to become a member of a superannuation or retirement scheme; and (b) a reasonable person in the circumstances would have understood the question to have the meaning that the person answering the question apparently understood it to have; that meaning shall, in relation to the person who made the statement, be deemed to be the meaning of the question. …

25 Misrepresentation by life insured Where, during the negotiations for a contract of life insurance but before it was entered into, a misrepresentation was made to the insurer by a person who, under the contract, became the life insured or one of the life insureds, this Act has effect as though the misrepresentation had been so made by the insured.

26 Certain statements misrepresentations

not

(1) Where a statement that was made by a person in connection with a proposed contract of insurance was in fact untrue but was made on the basis of a belief that the person held, being a belief that a reasonable person in the circumstances would have held, the statement shall not be taken to be a misrepresentation. (2) A statement that was made by a person in connection with a proposed contract of insurance shall not be taken to be a misrepresentation unless the person who made

the statement knew, or a reasonable person in the circumstances could be expected to have known, that the statement would have been relevant to the decision of the insurer whether to accept the risk and, if so, on what terms… Division 3 — Remedies misrepresentation

for

non-disclosure

and

28 General insurance (1) This section applies where the person who became the insured under a contract of general insurance upon the contract being entered into: (a) failed to comply with the duty of disclosure; or (b) made a misrepresentation to the insurer before the contract was entered into; but does not apply where the insurer would have entered into the contract, for the same premium and on the same terms and conditions, even if the insured had not failed to comply with the duty of disclosure or had not made the misrepresentation before the contract was entered into. (2) If the failure was fraudulent or the misrepresentation was made fraudulently, the insurer may avoid the contract. (3) If the insurer is not entitled to avoid the contract or, being entitled to avoid the contract (whether under subsection (2) or otherwise) has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if the failure had not occurred or the misrepresentation had not been made.

29 Life insurance

(1) This section applies where the person who became the insured under a contract of life insurance upon the contract being entered into: (a) failed to comply with the duty of disclosure; or (b) made a misrepresentation to the insurer before the contract was entered into; but does not apply where: (c) the insurer would have entered into the contract even if the insured had not failed to comply with the duty of disclosure or had not made the misrepresentation before the contract was entered into; or (d) the failure or misrepresentation was in respect of the date of birth of one or more of the life insureds. (2) If the failure was fraudulent or the misrepresentation was made fraudulently, the insurer may avoid the contract. (3) If the insurer would not have been prepared to enter into a contract of life insurance with the insured on any terms if the duty of disclosure had been complied with or the misrepresentation had not been made, the insurer may, within 3 years after the contract was entered into, avoid the contract. (4) If the insurer has not avoided the contract, whether under subsection (2) or (3) or otherwise, the insurer may, by notice in writing given to the insured before the expiration of 3 years after the contract was entered into, vary the contract by substituting for the sum insured (including any bonuses) a sum that is not less than the sum ascertained in accordance with the formula SP/Q where: S is the number of dollars that is equal to the sum insured (including any bonuses). P is the number of dollars that is equal to the premium that has, or to the sum of the premiums that have, become payable under the contract; and

Q is the number of dollars that is equal to the premium, or to the sum of the premiums, that the insurer would have been likely to have charged if the duty of disclosure had been complied with or the misrepresentation had not been made. (5) In the application of subsection (4) in relation to a contract that provides for periodic payments, the sum insured means each such payment (including any bonuses). (6) A variation of a contract under subsection (4) has effect from the time when the contract was entered into. 31 Court may disregard avoidance in certain circumstances (1) In any proceedings by the insured in respect of a contract of insurance that has been avoided on the ground of fraudulent failure to comply with the duty of disclosure or fraudulent misrepresentation, the court may, if it would be harsh and unfair not to do so, but subject to this section, disregard the avoidance and, if it does so, shall allow the insured to recover the whole, or such part as the court thinks just and equitable in the circumstances, of the amount that would have been payable if the contract had not been avoided. (2) The power conferred by subsection (1) may be exercised only where the court is of the opinion that, in respect of the loss that is the subject of the proceedings before the court, the insurer has not been prejudiced by the failure or misrepresentation or, if the insurer has been so prejudiced, the prejudice is minimal or insignificant. (3) In exercising the power conferred by subsection (1), the court: (a) shall have regard to the need to deter fraudulent conduct in relation to insurance; and (b) shall weigh the extent of the culpability of the insured in the fraudulent conduct against the

magnitude of the loss that would be suffered by the insured if the avoidance were not disregarded; but may also have regard to any other relevant matter. (4) The power conferred by subsection (1) applies only in relation to the loss that is the subject of the proceedings before the court, and any disregard by the court of the avoidance does not otherwise operate to reinstate the contract.

Notes: 1. See Tarr and Tarr, “The insured’s non-disclosure in the formation of insurance contracts: a comparative perspective” [2001] ICLQ 577. 2. It has been commented above that the rigour of the duty of disclosure has to some extent been mitigated by the self-regulatory response of the ABI to the various calls for reform. The Statements only apply to consumer-insureds and will not necessarily be followed by insurers who are not members of Lloyd’s or the Association of British Insurers. [433] Statements of General Insurance Practice (London, Association of British Insurers, 1986) (replacing 1977). ‘The following statement of normal insurance practice, issued by the Association of British Insurers, applies to general insurance of policyholders resident in the UK and insured in their private capacity only [emphasis added].

1. Proposal forms

…(c) If not included in the declaration [at the foot of the proposal form], prominently displayed, on the proposal form should be a statement: (i) drawing the attention of the proposer to the consequences of the failure to disclose all material facts, explained as those facts an insurer would regard as likely to influence the acceptance and assessment of the proposal. (ii) warning that if the proposer is in any doubt about facts considered material, he should disclose them. (d) Those matters which insurers have found generally to be material will be the subject of clear questions in proposal forms. (e) So far as is practicable, insurers will avoid asking questions which would require expert knowledge beyond that which the proposer could reasonably be expected to possess or obtain or which would require a value judgement on the part of the proposer. (f) Unless the prospectus or the proposal form contains full details of the standard cover offered, and whether or not it contains an outline of that cover, the proposal form shall include a prominent statement that a specimen copy of the policy form is available on request. (g) Proposal forms shall contain a prominent warning that the proposer should keep a record (including copies of letters) of all information supplied to the insurer for the purpose of entering into the contract. (h) The proposal form shall contain a prominent statement that a copy of the completed form: (i) is automatically provided for retention at the time of completion; or (ii) will be supplied as part of the insurer’s normal practice; or

(iii) will be supplied on request within a period of three months after its completion. (i) An insurer shall not raise an issue under the proposal form, unless the policyholder is provided with a copy of the completed form… (For ‘Claims’ (para 2) see chapter 11, below)

3. Renewals (a) Renewal notices shall contain a warning about the duty of disclosure including the necessary to advise changes affecting the policy which have occurred since the policy inception or last renewal date, whichever was the later. (b) Renewal notices shall contain a warning that the proposer should keep a record (including copies of letters) of all information supplied to the insurer for the purposes of renewal of the contract.

4. Commencement Any changes to insurance documents will be made as and when they need to be reprinted, but the Statement will apply in the meantime.

5. Policy Documents Insurers will continue to develop clearer and more explicit proposal forms and policy documents whilst bearing in mind the legal nature of insurance contracts.

6. Disputes The provision of the Statement shall be taken into account in arbitration and any other referral procedures which may

apply in the event of disputes between policyholders and insurers relating to matters dealt with in the Statement.

7. European Union This Statement will need reconsideration when the Draft EEC Directive on Insurance Contract Law is adopted and implemented in the United Kingdom. [This provision is now redundant].’

[434] Statements of Long Term Insurance Practice (London, Association of British Insurers, 1986). ‘This statement relates to long term insurance effected by individuals resident in the United Kingdom in a private capacity [emphasis added].

1. Proposal forms (a) If the proposal form calls for the disclosure of material facts a statement should be included in the declaration, or prominently displayed elsewhere on the form or in the document of which it forms part: (i) drawing attention to the consequences of failure to disclose all material facts and explaining that these are facts that an insurer would regard as likely to influence the assessment and acceptance of a proposal; (ii) warning that if the signatory is in any doubt about whether certain facts are material, these facts should be disclosed… (c) Those matters which insurers have commonly found to be material should be the subject of clear questions in

proposal forms. (d) Insurers should avoid asking questions which would require knowledge beyond that which the signatory could reasonably be expected to possess. (e) The proposal form or a supporting document should include a statement that a copy of the policy form or of the policy conditions is available on request. (f) The proposal form or a supporting document should include a statement that a copy of the completed proposal form is available on request.

2. Policies documents

and

accompanying

(a) Insurers will continue to develop clearer and more explicit proposal forms and policy documents whilst bearing in mind the legal nature of insurance contracts. (b) Life assurance policies or accompanying documents should indicate: (i) the circumstances in which interest would accrue after the assurance has matured; and (ii) whether or not there are rights to surrender values in the contract and, if so, what those rights are. (Note: The appropriate sales literature should endeavour to impress on proposers that a whole life or endowment assurance is intended to be a long term contract and that surrender values, especially in the early years, are frequently less than the total premiums paid.)… (For ‘Claims’ (para 3) see chapter 11, below).

4. Disputes The provisions of the Statement shall be taken into account in arbitration and any other referral procedures which may

apply in the event of disputes between policyholders and insurers relating to matters dealt with in the Statement.

5. Commencement Any changes to insurance documents will be made as and when they need to be reprinted, but the Statement will apply in the meantime. Note regarding industrial assurance policyholders. Policies effected by industrial assurance policyholders are included amongst the policies to which the above Statement of Long Term Insurance Practice applies. Those policyholders also enjoy the additional protection conferred upon them by the Industrial Assurance Acts 1923 to 1969 and Regulations issued thereunder. These Acts give the Industrial Assurance Commissioner wide powers to cover inter alia the following aspects: (a) Completion of proposal forms. (b) Issue and maintenance of premium receipt books. (c) Notification in premium receipt books of certain statutory rights of a policyholder including rights to: (i) an arrears notice before forfeiture; (ii) free policies and surrender values for certain categories of policies; (iii) relief from forfeiture of benefit under a policy on health grounds unless the proposer has made an untrue statement of knowledge and belief as to the assured’s health; (iv) reference to the Commissioner as arbitrator in disputes between the policyholder and the company or society The offices transacting industrial assurance business have further agreed that any premium (or deposit) paid on completion of the proposal form will be returned to the

proposer if, on issue, the policy document is rejected by him or her.’

[435] A Forte “The revised Statements of Insurance Practice: cosmetic change or major surgery?” [1986] MLR 754 ‘CONCLUSION The revised Statements represent a genuine attempt by the insurance industry to meet some of the criticisms levelled against it and it would be unduly cynical to describe them as mere tokenism. Nonetheless, by adhering closely to the Law Commission’s proposals, on which any legislation would have been modelled, the Statements represent a minimalist attitude to the problem of abuses. They do not, for example, address themselves to the question of risk exclusion by means of “excepted perils” clauses…The Law Commission did not recommend legislative control of clauses descriptive of risk [see chapter 8, below] though they recognised that their use might be one way of avoiding their proposals for reforming warranties. Nor did the Commission tackle the problem of average clauses which enable insurers to penalise a claimant for under-insurance… …Although the Statements can be criticised, this does not mean that it is enough, or even sometimes fair, to confine one’s criticisms to them. The Law Commission, for example, refused to countenance a separate regime for consumers, though the Statements have in fact created one. There has, rather, been a failure to resolve some of the more fundamental issues which flow from the existence of such codes. Why, for example, can there not now be a simple legislative change of the law abolishing the duty of disclosure? The spirit of the Statements is certainly inimical to its continued existence. And why should these particular codes be a substitute for legislation rather than, as in many

other cases, a supplement to it? If insurers are prepared, under threat of legislation, to construct a regime which would substantially replicate, in unenforceable codes of practice, the broad proposals which might have been enacted, then why are they so concerned to avoid statutory regulation? The question is all the more intriguing when one considers the participation by British insurance companies in the United States where there is far greater legislative control over the use warranties and the notion of uberrima fides has all but disappeared. For the immediate future, consumers must rest content with the voluntary adherence of insurers to the Statements. And it must be regarded as being fundamentally unsatisfactory that the consumer of insurance services continues to receive less favourable treatment than the consumer of goods and other services…In the long term, administrative control of insurance contracts will probably occur as it does elsewhere. The Statements are a last attempt to stop this. Their success in so doing should only be a temporary one.’

Note: Notwithstanding the insurance industry’s attempts to stave off the various calls for reform by the simple expedient of self-regulation, the National Consumer Council has nevertheless called for legislative intervention along the lines seen in Australia with the objective of constructing a wide ranging scheme of effective consumer protection is to be achieved. [436] Insurance Law Reform — The consumer case for a review of insurance law (London, NCC 1997)

‘4.3 Non-disclosure and misrepresentation The consumer’s absolute legal duty in connection with nondisclosure and misrepresentation — and particularly the insurer’s remedy of avoidance of the contract — is widely agreed to be unfair and unclear to consumers. The practices adopted by the industry’s Insurance Ombudsman have changed the position somewhat from what it was when the Law Commission made its recommendations for reform in the early 1980s — outlined above in section 2.2. The Ombudsman already goes further than those recommendations. His terms of reference allow him to take account of statements and codes of practice in reaching a decision and he can offer different remedies for nondisclosure and misrepresentation than avoidance of the whole contract. If anything, however, this development reinforces the need for reform of the law. As we have seen, the industry’s code and statements carry no legal force and so do not apply to the minority of insurers that do not belong to the Association of British Insurers or the Insurance Ombudsman scheme. Consumers who choose to take a dispute to their local county court and those who cannot use the Ombudsman scheme because their insurer is not a member do not even have this minimal protection. If the statements of practice had statutory force, perhaps as a requirement of authorisation, more consumers would be more effectively protected. (If an insurer carries on insurance business in the UK it must, under the Insurance Companies Act 1982, be authorised or permitted to do so by the Department of Trade and Industry. The exact meaning of carrying on insurance business in the UK is not defined in the legislation — each case has to be considered individually. Although it is an offence to carry on insurance business in the UK without authorisation or permission, it is legal to sell insurance that is carried on “off shore”.)

Again, Australia provides a useful comparative model. The test in Australia of what an insurer must be told and the consequences of a failure to tell are fairer to the consumer. We draw on the Australian legislation as a basis for our own proposals for the UK. However…Australian experience is that extra care is necessary to protect innocent co-insureds and people from non-English speaking backgrounds. Telephone selling, a growth area for insurance in the UK too, can also cause disputes over the level of understanding of disclosure. If the duty is not to be abolished the burden of proving an appropriate explanation has been given should be borne by the insurer.

Recommendation 4 We recommend reform of the law on insurance to require insurers to give notice to the buyer, in writing, of the general nature and effect of the duty of disclosure. In the event of failure to do this, the burden of proof being on the insurer, the insurer should not be able to rely upon any defence except fraudulent concealment by the policy holder. Recommendation 5 The insured person’s duty on disclosure and misrepresentation should be defined in law as follows: (a) The insured consumer has a duty to disclose facts within his or her knowledge which either he/she knows to be relevant to the insurer’s decision or which a reasonable person in the circumstances could be expected to know to be relevant. (b) An untrue statement made by an insured person is not misrepresentation if he/she honestly believed it to be true, and is a misrepresentation in law only if the insured person knew, or a reasonable person in his position could be expected to have known, that the statement would have been relevant to the insurer’s decision.

(c) If there has been a relevant non-disclosure or misrepresentation, the insurer has no remedy if its decision would not in fact have been any different. (d) If a misrepresentation or non-disclosure is nonfraudulent, the insurer retains liability under the policy but is entitled to deduct the extra premium it would have charged had there been no non-disclosure or misrepresentation. The contract can be avoided only where there is fraudulent non-disclosure or misrepresentation or it would not have insured the risk. 4.4 Utmost good faith The fact that, in UK law, the contract of insurance is a contract requiring the insurer as well as the insured to display the utmost good faith has practically no useful consequences for consumers. As we saw [above], it does not help the policyholder whose insurer is unconscionably slow in paying a claim nor the policy holder who has been misled about the content of the policy. The provisions in sections 13 and 14 of the Australian Insurance Contracts Act reflect the law as it is in the UK — but they go further, emphasising by statute that good faith is an obligation of both parties. The same sort of clarification of the UK law would immeasurably strengthen the hands of consumers with legitimate grievances, in particular about the mis-selling of policies.

Recommendation 6 We recommend legal codification of the principle of utmost good faith in insurance contracts, by defining it as follows: (a) an insurance contract is a contract based on the utmost good faith, where it is implied that each party should act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good

(b) the duty includes the requirement that an insurer who unreasonably in paying a claim is liable for breach of contract; (c) the duty includes the requirement that the insurer bring to the insured consumer’s attention the general nature and effect of his/her obligations under the contract; failure to do so will mean the insurer cannot rely upon a breach by the insured; (d) remedies for breach of the duty (other than those covered by (c) above) would include damages. [437] Sir Andrew Longmore (Lord Justice of Appeal), “An Insurance Contracts Act for a new century?” [2001] Lloyd’s Maritime and Commercial Law Quarterly 356. ‘…There are numerous areas where reform would be useful and some where it is essential. Piecemeal proposals for reform have not worked well in the past; reform elsewhere in the world is made more difficult by the fact that the City of London remains the leading insurance centre of the world. Other countries are somewhat reluctant to adopt reforms if the risk is likely to be reinsured by a significantly different law. The time has come when, in my view, both the law and the market should adopt sensible reform across the board. There has been some reform in the area of what I may call insurance by consumers as a result of the Unfair Terms in Consumer Contracts Regulations 1994/924 but it does not extend to business insurance or to the general law of avoidance for non-disclosure or misrepresentation; proposals for reform of business insurance have fought shy of reforming marine and aviation insurance as well…. Codification or Piecemeal Reform? There is an argument for codification of insurance law in general just as Chalmers codified the law of marine

insurance in 1906. I would have no principled objection to such a proposal but it would be an enormous task and invite yet further delay. In this context. Sir Mackenzie Chalmers’ own thoughts are worth reading. The Marine Insurance Bill was first introduced to Parliament in the early 1890s. It took 12 years to reach the statute book. He published the originally proposed Bill as a Digest of the law relating to marine insurance. In 1901 he said this: “The future which awaits the Bill is uncertain. Mercantile opinion is in favour of codification. but probably the balance of legal opinion is against it. As long as freedom of contract is preserved, it suits the man of business to have the law stated in black and white. The certainty of the rule laid down is of more importance than its nicety. It is cheaper to legislate than to litigate; moreover, while a moot point is being litigated and appealed, pending business is embarrassed. The lawyer, on the other hand, feels cramped by codification…No code can provide for every case that may arise, or always use language which is absolutely accurate. The cases which come before lawyers are the cases in which the code is defective. In so far as it works well it does not come before them. Every man’s view of a question is naturally coloured by his own experience. and a lawyer’s view of commerce is perhaps affected by the fact that he sees mainly the pathology of business. He does not often see its healthy physiological action.” I would prefer the Law Commission to consider what reform is really necessary an attempt to re-engage Government to enact those reforms. I suggest 6 topics in particular: (1) whether a doctrine of the utmost good faith should be retained and, if so what its content should be; (2) the appropriate test for an insurer or reinsurer who wishes to defend a claim on the basis of non-

disclosure and misrepresentation before formation of the contract; (3) the remedies which should be open to an insurer or reinsurer if he wishes to defend a claim on the ground of non-disclosure or misrepresentation; (4) the right approach to breach of warranty by the insured; (5) the right approach to proposal forms and answers given being declared to be the basis of the contract; (6) the question whether damages should be payable for insurers’ refusal to pay a valid claim. I have said enough already on the first topic of the utmost good faith. But I would like to say something more about the appropriate test for evidence of non-disclosure and misrepresentation.

Test for avoidance The current law in relation to the objective part of the test is settled by Pan Atlantic v Pine Top and I hope I summarise it correctly by saying it is whether the non-disclosed or misrepresented fact would have been taken into account by a prudent insurer when assessing the risk. My own view is that, even after the addition of the subjective part of the test (actual inducement), this tilts the matter too heavily in the insurers’ favour. Mr David Higgins of Herbert Smith has observed that it does not reflect the way in which insurance business is actually underwritten to suppose that an insurer just sits silently while a presentation is made to him and then, without speaking a word, signs a slip or other contractual document. As Staughton LJ said recently (Kausar v Eagle Star): “Avoidance for non-disclosure is a drastic remedy. It enables the insurer to disclaim liability after, and not before, he has discovered that the risk turns out to be a bad one; it leaves the insured without the protection which he thought he had

contracted and paid for…I do consider there should be some restraint in the operation of the doctrine. Avoidance for honest non-disclosure should be confined to plain cases.” Any rational discussion of this thorny topic needs to take into account alternative formulations. Six possible alternative formulations spring to mind and, no doubt, others can be considered. 1) Whether a prudent insurer would have considered that, if the relevant matter had been disclosed, the risk was a different risk; this is the formulation preferred by the Court of Appeal in St Paul Fire and Marine v McConnell; they obviously did not consider it any different from the Pan Atlantic test; but I do wonder; a prudent insurer may take something into account without it being a factor that would make the risk different in any sensible use of the word “different”; 2) whether, if the matter had been disclosed, the prudent insurer would have declined the risk or written it in different terms (the decisive influence test which was espoused by the minority but rejected by the majority in Pan Atlantic v Pine Top); 3) whether a reasonable insured would have considered the undisclosed matter to be material to a prudent insurer. (This is the solution adopted by statute in Australia and was recommended here by our own Law Commission); 4) whether the actual insured ought to have considered the undisclosed matter to be material to a prudent insurer; 5) whether the undisclosed matter was a matter which a reasonable insured would realise was within the knowledge only of himself (or those for whom he is responsible) rather than a matter which could have been independently investigated and verified by insurers; 6) whether the duty on an insured should be merely to answer correctly any question asked by the insurer; this

would be to abandon any requirement of disclosure at all. While I would not favour the total abolition of the requirement of disclosure, my own view for what that is worth is that option 5 has much to commend it, viz that the insured should only be expected to disclose what a reasonable insured in his position should have appreciated was material and within his own knowledge rather than a matter which could have been independently verified. This seems to have been the law in the aftermath of Lord Mansfield’s famous decision in Carter v Boehm in which, it is sometimes forgotten, the insured actually succeeded. In 1817. it was expressly held in Friere v Woodhouse: “What is exclusively known to the assured ought to be communicated; but what the underwriter, by fair inquiry and due diligence may learn from ordinary sources of information need not be disclosed.” Of course, ordinary sources of information are far more extensive now that in the early nineteenth century but that seems to me to make stronger rather than weaker the case for a professional underwriter having to equip himself with knowledge of matters that can be independently investigated and verified.

Remedies I have already remarked that one of the difficulties about a doctrine of avoidance for nondisclosure and representation in insurance law is that it is such an extreme remedy. That was a major reason why the House of Lords in The Star Sea declined to extend the doctrine of good faith in its widest form to post-contract dealings. The remedy would be worse than the disease.

The remedy may, however, be equally extreme in relation to pre-contract non-disclosure and misrepresentation. This was, of course, considered by the Law Commission in their 1980 report. They rejected, for good reasons as it seems to me, the notion of proportionality as espoused in some European countries and in the then proposed European Directive. But I feel they may have rejected too readily the idea that the court should be vested with a discretion in a suitable case to adjust the parties’ respective responsibilities. It is a concept that appealed to at least one member of the Court of Appeal when it decided Pan Atlantic. It would not be so necessary, no doubt, if there were to be reform of the law to adopt the reasonable insured test since, if an insured cannot recover on that test, he would only have himself to blame; it may well be for this reason that the Law Commission did not consider the proposal in any substantial detail. But if the tests for disclosure and misrepresentation are to remain as they are, a discretionary apportionment of the loss has much to recommend it. It would, of course, lead to some uncertainty but that, after all, was a reason against the introduction of the concept of contributory negligence which, in the event, is a concept that has worn the test of time very well. In these days when the incidence of costs in litigation may depend on well or illinformed guesses made by the litigant, at the time they are obliged to serve pre-action protocols, uncertainty is endemic, yet the court, and litigants, are quite good at getting used to it. Moreover, the Insurance Ombudsman Bureau apparently uses its discretion on occasion to apportion the loss and appears to have no difficulty with the concept. I do not think I need say anything in particular about the 4th and 5th topics on my list; breach of warranty and basis of the contract clauses. The evils of the present law are, I think, well enough known and universally acknowledged and

it is about time that the law was changed to accord with an ordinary person’s expectations. Mind you, the doctrine of warranty sometimes works against insurers. I expect that most of you know of the recent case about the man from North Carolina who insured a box of two dozen expensive cigars against, among other risks, fire; having smoked the entire stock and without even having paid the premium for the policy, he sued the insurers on the basis that the cigars had been lost “in a series of small fires”; the company refused to pay but the judge held the company liable on the basis that it had warranted that the cigars were insurable and had not stipulated what they considered to be an unacceptable fire. So the company had to pay the claim amounting to $15,000. However the story has a happy ending because once the insured had cashed the cheque, the insurance company had him arrested on 24 charges of arson and the insured was convicted of intentionally burning the insured property, which resulted in 24 months in jail and a fine of $24,000. The question of delay in paying valid claims is a newer topic, which, it seems to me, does merit consideration. The courts have set their face against there being an implied term of an insurance contract that valid claims will be met and thus do not award damages against an insurer even if his delay in negotiating the claim means that the insured goes out of business. In a sense this is part of a wider point viz whether interest is truly compensation for delayed payment of claims for damages. But it has always been an oddity that a claim under an insurance policy is treated by the law as a claim for damages rather than a straight debt. This is a doctrine that could be usefully considered, I suggest, by the Law Commission. Where Do We Go From Here? In terms of legal principle and abstract justice, the case for reform in the areas about which I have been talking is

extremely strong. Opposition to reform may come from the insurers’ side of the insurance industry who like to rely on the content of the present law and, perhaps, from Government on the grounds of inertia rather than principle. Siren voices will say “Show us the law is working unjustly in practice before we take any interest in proposals for reform.” On the assumption that. unlike Odysseus’s crew, we should not consent to have our ears stopped with sealing wax, there are perhaps two separate ways to deal with these siren voices. The first is to do some empirical research in order to discover whether insureds have suffered injustice in the areas I have been considering. In this respect the records of the Ombudsman Bureau will be an early port of call. The experience of other Law Commissions, eg., in Australia and Canada can be investigated. London firms of insurance brokers and of solicitors will be able to help, but it may be even more important to consult out of London brokers and solicitors. Barristers will be much less help because for every insured whom counsel has, regretfully or otherwise, to advise that he is likely to lose, there will be many insureds who have already given up the struggle in correspondence, well before there is any question of obtaining counsel’s opinion. The judiciary are even less well placed to give examples of injustice since no insured will want to fight a case he knows he will probably lose. Despite the difficulties, I would urge the Law Commission to undertake a research project. I doubt if they would find that there is any widespread devotion to the present state of the law. But secondly there is the question of principle. How can it be right that a lawyer insuring his home and household possessions can rely on a more relaxed test of nondisclosure under the Statements of Practice, but the small trader, eg. the garage owner or the fishmonger insuring his premises, cannot. The truth is that the same standard

should apply to both and it should, at least, be the standard of the reasonable insured. The very fact that insurance companies are so anxious to persuade people that the best form of self-regulation is to ensure that the law is not enforced in its full rigour shows that insurers are worried that, if the law if reformed, they would have to pay more claims. If they accept that for the consumer, why should the law not be the same for the small business as indeed a wealthy business? The very acceptance by the insurance industry of the Statements of Practice shows that the law ought to be different from what it is. If even insurers accept that, surely it is time that the rights of not merely consumers but of all insured persons should be enforceable as a matter of right, not as a matter of discretion. Surely we should be able to look forward to a better day…’

[438] Report of the Sub-Committee of the British Insurance Law Association, Insurance Contract Law Reform (London, Centre for Financial Regulation Studies London Guildhall University, 2002) ‘INSURANCE CONTRACT LAW REFORM A Report of the BILA Sub-Committee

Formation 1. This Sub-Committee was formed in January 2001 to examine areas of insurance law causing concern in the insurance market and in insurance disputes, and to make recommendations to the Law Commission as to the desirability of drafting a new Insurance

Contracts Act in respect of Marine and Non-Marine Insurance and/or other reforms to current legislation… 3. Our over-riding objective has been to put forward ideas for consideration by the Law Commission, in the context of the wider perspective the Commission is able to form from its consultations with interested parties. 4. We are satisfied that there is a need for reform. This is supported by the excellent report of the National Consumer Council in 1997. We believe that it is important to start by the speedy implementation of the recommendations of the 1980 Law Commission, which we believe to be non-controversial. We hope that it can be updated by some revisions along the lines we suggest… 9. This [Law Commission] report has been widely praised, but its implementation has not been forthcoming…We respectfully adopt what is said in [Longmore LJ’s]… lecture [see above, [437]]…Longmore LJ summarises the history of inactivity, and concludes “…this is not just good enough.” We agree… 10. This Sub-Committee’s view is that the starting point for reform should be the implementation of this Report, and the enactment of the draft Bill, with only such alterations as are sufficiently non-controversial as not to delay this enactment. 11. We agree wholeheartedly with the Commission that Statements of Practice, particularly limited to those insuring in their private capacity, are not sufficient to protect insureds. Nor do we think that the fact that the Ombudsman is bound to act in accordance with what is fair and reasonable and therefore does not always apply the strict letter of the law, removes the need for law reform. Many disputes are not settled by that route. The appropriate course is to remove

unfairnesses in the law, not simply to alleviate the unfairnesses… Possible Alterations To The Draft Bill 17. Longmore LJ in his [article, above, [437]], suggests 6 topics for the Law Commission to consider. We take each in turn on the basis that the reforms are limited to the types of insurance covered by the draft Bill [extracted in chapter 8 below]: 17.1 “1. Whether a doctrine of utmost good faith should be retained and if so, what its content should be.” We think that the answer should be yes, but with modifications, which we shall discuss in paras 19–23 below. Utmost good faith should apply to the whole period of the contract. The nature of the duty will vary with the phase and circumstances of the relationship: The Star Sea [see above, [425]], per Lord Clyde and per Lord Hobhouse. 17.2 “2. The appropriate test for an insurer or reinsurer who wishes to defend a claim on the basis of nondisclosure and misrepresentation before formation of the contract.” The House of Lords in Pan Atlantic v Pine Top decided (i) that the test of materiality was the objective one of whether the non-disclosed (or misrepresented) matter would have been taken into account by a prudent insurer when assessing the risk and (ii) by a new departure, that subjectively, the actual insurer had to prove that he was induced to enter into the contract on the relevant terms by the non-disclosure (or misrepresentation). Longmore LJ mentions six possible formulations for reform…We prefer his third alternative (“whether a reasonable insured would have considered the undisclosed matter to be material to a prudent insurer”), which is the solution recommended by the Law Commission and included in the draft Bill. It has also been adopted in Australia by the Insurance Contracts Act 1984, and is the proposed solution

in the Australian Law Reform Commission (‘ALRC’) report reviewing the Marine Insurance Act 1909. We observe and agree with the views of Carnwath J (as he was then) sitting in the Court of Appeal in The Mercandian Continent [see chapter 11] that this “…report would be a very useful starting point for any consideration of law reform in this country.” 17.3 “3. The remedies which would be open to an insurer or reinsurer if he wishes to defend a claim on the grounds of non-disclosure or misrepresentation.” 17.3.1 The sole remedy currently available for nondisclosure or misrepresentation is the draconian remedy of avoidance of the contract of insurance, whether the misrepresentation or non-disclosure was fraudulent, negligent or innocent. This position has been the subject of sustained criticism from the courts (eg in Pan Atlantic v Pine Top supra) and from academic lawyers. We consider that reforms are necessary for the protection of the insured. 17.3.2 In the first place we would retain the right to avoid where there has been fraudulent or reckless misrepresentation or non-disclosure. We would equate blind eye recklessness (not caring whether a representation is true or false) with fraud. 17.3.3 More difficult are the remedies which should be available for innocent or negligent misrepresentation or non-disclosure. We believe that principles of proportionality should be introduced if possible, despite the 1980 Law Commission’s reluctance. 17.3.4 We would recommend a solution on the lines of Recommendation 25 of the ALRC: “Recommendation 25. The MIA should be amended to insert new provisions which provide that if the insured has breached its duties relating to non-disclosure and misrepresentation

(1) if the breach is fraudulent, the insurer is entitled to avoid the policy from its outset with no return of premium. (2) if the breach is not fraudulent: (a) where the insurer would not have entered into the contract if it had known of the undisclosed circumstances or the truth of the misrepresented circumstances, the insurer is entitled to avoid the policy from its outset but with a return of premium. (b) where the insurer would have entered into the contract but on other conditions, the insurer is not entitled to avoid the policy but: (i) is not liable to indemnify the insured for a loss proximately caused by the undisclosed or misrepresented circumstance; (ii) is entitled to vary its liability to the insured to reflect the amount of any variation in premium, deductible or excess that would have been imposed if it had known of the undisclosed circumstance or the truth of the undisclosed circumstance; [and (iii) is entitled to cancel the policy in accordance with the other provisions of the MIA on cancellation which are the subject of recommendation 18.1 (Recommendation 18 outlines other rights of cancellation. Clause 11 of the draft Bill adequately covers the position. Accordingly we do not consider that sub-sub recommendation 25(2)(b)(iii) need be included.) 17.4 “4. The right approach to breach of warranty by the insured” The draft Bill covers this in Clauses 8–12 inclusive. 17.5 “5. The right approach to proposal forms and answers given being declared to be the basis of the contract”

We agree with the views of the 1980 Law Commission, which would be implemented in Clause 9(1)(b) of the draft Bill. 17.6 “6. The question whether damages should be payable for insurers’ refusal to pay a valid claim.” 17.6.1 We agree with Longmore LJ that this is a topic to be considered by the Law Commission. Very often the speedy payment of an insurance claim is critical to an insured. Express terms may alleviate the situation, such as terms in householders’ policies to pay for alternative accommodation during rebuilding. But insureds may be driven into bankruptcy by delay, whether they insure in a business or a private capacity. 17.6.2 The situation could be improved by provisions along the following lines: (1) That a claim under an insurance contract is to be treated as a debt, and it is an implied term of the contract that the debt will be paid within a reasonable time, having regard to all the circumstances; (2) That it should be an implied term of an insurance contract that each party shall act towards the other party with utmost good faith. (3) That there shall be no right of avoidance in respect of a post-contractual failure to act with utmost good faith, except where the breach is materially fraudulent. 17.6.3 An alternative to treating the claim as a debt, would be to have a provision that breach of that duty gives rise to damages covering types of loss that an insurer should have had within reasonable contemplation. 18. We recommend that the following co-insurers should be deemed to be induced by misrepresentation or non-disclosure, if all the leading insurers were so

induced: see Recommendation 27 of the ALRC report and draft Section 26D of the proposed amendments. 19. The law on post-contract duty of utmost good faith has been the subject of 3 important decisions: The Star Sea and the Mercandian Continent and Agapitos v Agnew [see chapter 11, below]. The duty of utmost good faith applies after the conclusion of the contract. Lord Clyde in The Star Sea says that the contrary is “past praying for”, Lord Clyde goes on to point out that: “…the idea of good faith in the context of insurance contracts reflects the degree of openness required of the parties in the various stages of their relationship. It is not an absolute. The substance of the obligation which is entailed can vary according to the context in which the matter comes to be judged. It is reasonable to expect a very high degree of openness at the stage of the formation of the contract, but there is no justification for requiring that degree necessarily to continue once the contract has been made.” Post-contract the duty in respect of claims is a duty of honesty — ie not to be fraudulent. The duty of utmost good faith raises a strict duty of disclosure in respect of variations and renewals. It is potentially applicable in respect of a material change in risk, but it is important that the contract of insurance should include a specific condition for notification of material change of risk. 20. These cases underline the problem caused by the much criticised law that says avoidance is the only remedy for a failure to act with utmost good faith. That can never be of assistance to an insured treated by his insurer without utmost good faith. He wants his claim to be satisfied by payment or an award of damages — not the cover avoided.

21. The difficulties and problems caused are usefully set out in the ARLC Report at pp 222–32. We refer particularly to the observations of Lord Hobhouse in The Star Sea, cited in the ALRC Report at pp 224–5. He points to the appropriate remedy when he says: “[Post-contractual duties of good faith]…can derive from express or implied terms of the contract; it would be a contractual obligation arising from the contract and the remedies are the contract remedies provided by the law of contract. This is no doubt why judges have on a number of occasions been led to attribute the post-contract application of the principle of good faith to an implied term.” 22. The remedy lies in what we have already recommended in para. 17.6.2(2) and (3) above, namely that there should be an implied term that each party shall act towards the other party with utmost good faith. The remedy for breach would be damages to compensate the wronged party for his actual proved loss, according to ordinary principles of damages. Avoidance will only be available in respect of a materially fraudulent breach. 23. As to what constitutes the duty of utmost good faith in the post-contract situation, we see no reason why there should be statutory interference with the law as it is developing, most recently in The Star Sea, the Mercandian Continent and Agapitos v Agnew. If the breach is a materially fraudulent breach of the implied term in the sense that the fraud would have an effect on the underwriters’ ultimate liability, and the gravity of the fraud or its consequences were sufficient, this would enable the underwriters if they wished to do so, to terminate for breach of contract. It is desirable that insurance law should develop along the lines of general contract law…’

Notes: 1. Many USA jurisdictions have confined the strict duty of disclosure to marine policies so that for other branches of insurance, such as life and fire, proof of intent to conceal is a prerequisite to the insurer avoiding the policy: Holtzclaw v Bankers Mutual Insurance Co 448 NE 2d 55(Ind App 3d Dist, 1983). Further, some state statutes restrict an insurer’s right to avoid a policy for non-disclosure or misrepresentation by requiring proof of intentional concealment or misrepresentation of a material fact. Other states, such as Alabama, are more insurerfriendly by permitting avoidance where the non-disclosure/misrepresentation was such as to increase the risk of loss (see Bankers Life and Casualty Co v Long, below, [439]). 2. The majority of states follow the English approach towards the determination of materiality. In Nappier v Allstate Insurance Co 961 F.2d 168, 170 (1992) the court stated that: “A material [fact] is one that would influence a prudent insurer in deciding whether to assume the risk of providing coverage.” [439] Bankers Life & Casualty Co v Long Court of Civil Appeals of Alabama 48 Ala App 570, 266 So 2d 780 (1972) [The facts appear from the judgment]. Holmes J:

‘This is an appeal from a verdict and judgment rendered thereon in a suit on a life insurance policy issued by appellant insurance company. The policy sued on was issued to William B Long on 1 April 1968, in the amount of $10,000. Appellee, the widow of William B Long, the beneficiary of the policy, filed a claim for the proceeds of the policy. This claim was denied by appellant insurance company and, thereafter, appellee filed suit. The insurance company plead the general issue in short by consent. The case was tried before a jury and judgment was rendered in favour of the beneficiary, the appellee here, for the amount of the policy. Appellant, in his appeal, brings some four assignments of error. Both appellant and appellee agree that the issue presented is whether the policy sued on was void because of misrepresentations made by the policy holder William B. Long, which increased the risk of loss to appellant or which were made with actual intent to deceive. Tit. 28, § 6, Code of Alabama 1940, provides that: “No written or oral misrepresentation, or warranty therein made, in the negotiation of a contract or policy of insurance, or in the application therefor or proof of loss thereunder, shall defeat or void the policy, or prevent its attaching, unless such misrepresentation is made with actual intent to deceive, or unless the matter misrepresented increase the risk of loss.” The policy was issued to the decedent, William B Long, upon a written application. The application was sent from appellant by a general mailing to all American Express credit card holders, of which decedent was one. The application was executed by decedent, insured, and by the

terms of the policy the application and the policy constituted the contract of insurance. The following are questions and answers in the application for insurance, pertinent to our review: “2. Has this person been hospitalized or had any medical or surgical treatment or checkups in the past 5 years? YES If answer is “yes” give full details below SICKNESS OR DEFECT DATE DURATION OPERATION Hepatitis 1-12-66 6 mos. None Doctor’s name and address Dr. Arthur M. Freeman c/o Medical Arts Bldg, Birmingham, Ala 3. “is this person in good health and free from any physical or mental impairment or disease?” YES (emphasis supplied)”. The medical record of decedent, as revealed by the record, shows the following medical history up to the time the written application for insurance was made with appellant, said application having been made on 7 March 1968: January 12 through February 21, 1966 — admitted to East End Memorial Hospital — admitting diagnosis was sclerosis liver, pencilled over which was “cirrhosis.” Final diagnosis was cirrhosis, alcoholic [Laennec’s] hepatitis, alcoholic. May 12 to June 20, 1966 — East End Memorial Hospital — diagnosis was sclerosis and hepatitis. Final diagnosis was “cirrhosis alcoholic; hepatitis sec to above.” Clinical findings on May 11, 1966, indicated “sclerosis and hepatitis.” July 20 to August 16, 1966 — admitted to Hill Crest Hospital. Admitting diagnosis and final diagnosis was cirrhosis of the liver. September 20 to October 13, 1967 — East End Memorial Hospital; diagnosis “lacerated scalp, poss head injury” and

final diagnosis was “laceration of left forehead, scalp, sec. to fail — cirrhosis.” The appellee testified she was the wife of William B. Long who died on 27 September 1969; that her husband was hospitalised in January 1969 and that Dr Doggett was the attending physician; that her husband was hospitalised in May 1966 and, later, in Hill Crest Sanitarium; that he took medication for his liver. Dr Doggett’s uncontradicted testimony was that cirrhosis of the liver would tend to shorten a person’s normal life expectancy; that he treated the deceased in the hospital in January 1966; that his admitting diagnosis was cirrhosis and the final diagnosis was cirrhosis of the liver — alcoholic cirrhosis; that there are different kinds of hepatitis and various degrees of hepatitis; further, that hepatitis could lead to cirrhosis and that alcoholic hepatitis would be a form of cirrhosis; that in his opinion assured had cirrhosis of the liver from January 1966 until his death. Dr Doggett further testified that the terms “hepatitis” by itself and “cirrhosis of the liver” are used interchangeably and that he could have used the term “hepatitis” with a patient rather than “cirrhosis.” The death certificate introduced into evidence without objection shows that the immediate cause of death was “cirrhosis liver.” James Day, the manager of the Life Underwriting Department of appellant, testified that in his opinion if the information concerning deceased’s hospitalisation in 1966 and 1967 and a diagnosis of cirrhosis of the liver had been listed the appellant would not have issued the policy as applied for. As we noted earlier, appellant’s plea was in short by consent and his motion for a new trial and this appeal is based on the theories that assured had cirrhosis of the liver at the time he executed the application for insurance, and in such application made misrepresentations with actual intent

to deceive, or misrepresented matters which increased the risk of loss. Of course, either alternative would justify avoidance of the policy by the insurance company. Liberty National Life Ins Co v Hale, 285 Ala. 198, 230 So. 2d 526. In other words, as the Supreme Court of Alabama has stated, to defeat the insurance policy for the reason of misrepresentation, it must appear that (1) the misrepresentations were false, (2) made either with actual intent to deceive or the matter misrepresented increased the risk of loss and (3) the insurer relied on them to its prejudice… The supreme court in the Hale case. above, quoted from New York Life Ins Co v Horton, 235 Ala. 626. 632, 180 So. 277, 282, as follows: “A candid and truthful answer would have enabled the insurer to discover the true facts with reference to the insured’s health. Insurance companies are entitled to candid and truthful answers, and when such candor is withheld and involves matters material to the risk, no just complaint can be raised, when, if after investigation, the falsity is discovered and the policies issued in reliance upon the truthfulness of the statements, are avoided…” Mr Long was asked in the application for insurance to give any hospitalisation. medical or surgical treatment in the past five years. He listed one such hospitalisation. He did not list two other pertinent hospitalisations which were material…. Regardless of the innocence with which such misrepresentation may have been made its misleading character is obvious, “nor can it be questioned that information thereof would have affected the conduct of the insurer to a very material extent.” Misrepresentations in an application for life policy need not be the sole inducement to the contract nor the chief

influence leading to action in order to relieve the insurer from liability, but it is enough if, as a contributory influence, they operate on the mind and conduct of the other party to any material extent… The appellant here was entitled to the information concerning the above mentioned hospitalisation as such hospitalisation does relate to a serious ailment material to the question of life expectancy and the withholding of same under the facts of this case is such a misrepresentation as to increase the risk of loss… It is therefore our opinion that the appellant was entitled to avoid the policy under the second alternative presented by Tit 28, § 6, Code of Alabama 1940; that is, that the matter misrepresented, to wit, two material hospitalisations, to wit, 12 May to 20 June 1966, and 20 July to 16 August 1966, which insured failed to disclose at the time of execution of the application for insurance, increased the risk of loss.’

[440] Illinois Insurance Code (1993) § 154. Misrepresentations and false warranties No misrepresentation or false warranty made by the insured or in his behalf in the negotiation for a policy of insurance, or breach of a condition of such policy shall defeat or avoid the policy or prevent its attaching unless such misrepresentation, false warranty or condition shall have been stated in the policy or endorsement or rider attached thereto, or in the written application therefore, of which a copy is attached to or endorsed on the policy, and made a part thereof. No such misrepresentation or false warranty shall defeat or avoid the policy unless it shall have been made with actual intent to deceive or materially affects either the acceptance of the risk or the hazard assumed by

the company. This section shall not apply to policies of marine or transportaton insurance.

5 Formation of the Insurance Contract 5.1 Introduction Leaving aside statutory insurance and similar schemes (see Part 1.8) insurance contracts are a subspecies of the genus contract, although they are a peculiar type of contract in that in many cases the insured will receive nothing tangible for the consideration paid since the event, which gives triggers the insurer’s liability, may never occur. In common with other contracts, for there to be a binding contract of insurance there must be an agreement between the insured and the insurer on the material terms. Typically, in non-marine business the prospective insured (the proposer) completes a proposal form and this amounts to the offer when it is received by the insurer. It is for the insurer to accept the proposal. [501] N Legh-Jones, J Birds and D Owen, eds, Macgillivray on Insurance Law, London,

Sweet & omitted]

Maxwell,

2003

[footnotes

‘2–2 An acceptance will be of no effect unless the parties have agreed upon every material term of the contract they wish to make. The materials terms are: the definition of the risk, the duration of the insurance cover, the amount and mode of payment of the premium and the amount of the insurance payable in the event of a loss. As to all these there must be a consensus ad idem, that is to say, there must be either an express agreement or the circumstances must be such as to admit of a reasonable inference that the parties were tacitly agreed.’

Note: Versions of this passage from MacGillivray have been widely cited with approval: for instance, De Mezey v Milwaukee Mechanics’ Insurance Co (1945) 12 ILR 122 (Alberta Supreme Court), Davidson v Global General Insurance Co 48 DLR (2d) 503, and Seymour v Wagstaff (1984) 52 NBR(2d) 86 (New Brunswick). [502] LP Martinez and JW Whelan, Cases and Materials on General Practice Insurance Law (2001, West Group: St Paul, Minn) at 56 ‘Courts of late have been keen to emphasise that an insurance policy is, fundamentally, a contract…The tacit message is that, as contracts, insurance policies should be treated under the general rubric of contract law.

Despite case-law admonitions to the contrary, insurance policies differ from traditional contracts. With a typical bilateral contract, the parties exchange performances and receive the benefits of performance simultaneously, and a breach is generally easily identifiable. With insurance policies, on the other hand, the insured tenders performance in the form of payments of premiums and the insurer is obligated to perform only if some event identified in the policy triggers performance — recall the concept of a condition precedent. Further, the insured typically does not assume an active role in negotiating or drafting the terms memorialised in the policy document itself.’

5.2 Offer and Acceptance An insurance contract is created in the same way as other types of contract and the analysis that the courts engage in to discover its existence is also the same. [503] Taylor v Allon [1966] 1 QB 304 (QB Divisional Court) Lord Parker CJ: ‘This is an appeal by way of case stated from a decision of justices for the North Riding of Yorkshire sitting at South Bank who convicted the defendant of using a motor car on a road when there was not in force in relation to the user of the vehicle such a policy of insurance and such a security in respect of third party risks as complied with Part VI of the Road Traffic Act, 1960, contrary to section 201 of that Act. The justices in the event, in my judgment quite rightly, fined him a nominal amount, some £2.

The short facts were these. The defendant was found using the motor car on a road on 15 April 1964. In fact he had been insured by an insurance company called the Federated Employers’ Insurance Association Ltd, the policy expiring on 5 April. On 18 April he obtained a temporary cover note for 30 days from a fresh insurance company, and there is a finding by the justices that on the expiration of the old policy he never intended to renew it with the old insurance company. The case is not very illuminating; we have been told that the defendant never gave evidence, but at some stage the solicitor appearing for him produced a temporary cover note from the old insurance company, purporting to cover him for 15 days commencing from and including 6 April, when the insurance policy expired. Accordingly, on 15 April when he used the vehicle, that extended cover was on the face of it in force. Bearing in mind that a valid insurance for the purposes of the section must arise from an enforceable contract, it seems to me that the contract, if any, contained in the temporary covering note must arise by offer and acceptance. It is conceded that the policy that expired had no provisions for extended cover, and accordingly this document sending this temporary covering note must in my judgment be treated as an offer to insure for the future. It may be, although I find it unnecessary to decide in this case, that there can be an acceptance of such an offer by conduct and without communication with the insurance company. It may well be, as it seems to me, that if a man took his motor car out on the road in reliance on this temporary cover, albeit that there had been no communication of that fact to the insurance company, there would be an acceptance, and that the contract so created would contain an implied promise by the insured to pay, either in the renewal premium when that was paid, or if it was not paid, for the period for which the temporary cover note had, as it were, been accepted.

I find it unnecessary in the present case to decide that matter, and for this reason, that it seems to me that the defendant must at any rate go to the length of saying that he knew of the temporary cover and that he took out his motor car in reliance on it. In fact, as I have already said, the defendant never gave any evidence at all. Further, from the justices’ clerk’s notes, which again we have been allowed to refer to, it appears that when he was stopped by the police and asked to produce his insurance certificate, he produced the old certificate of insurance which expired on 5 April, and he also produced the cover note from the new insurance company which commenced on 16 April. When the police pointed out that therefore on 15 April he was not covered, he not only did not refer to this temporary cover note, but he said then that he had been negotiating a change of insurance companies, and did not realise that it, presumably the original certificate, had run out. It was only at the hearing, and I think at the second hearing, that this temporary cover note, this extended cover, was produced by the defendant’s solicitor. In those circumstances it seems to me that the defendant has never gone to the length of showing that he knew of the temporary cover, that he acted in reliance on it, and thereby had accepted the offer contained in it. I think that the justices came to a correct decision in law and I would dismiss this appeal.’

Notes: 1. In Rust v Abbey Life Assurance Co [1979] 2 Lloyd’s Rep 334 (CA). Rust, who had been advised by the insurers and her own advisors, completed a proposal and sent it to the insurers. The insurers duly dispatched the

policy on terms different from those set out in the proposal. The court held that Rust’s application was an offer and the insurer’s action in sending out the proposal was an acceptance so that a contract existed. However, recognising that since the policy differed from the proposal it might be regarded as a counter offer by the insurer, the court held in the alternative that Rust’s delay of seven months in responding amounted to an acceptance. This was ‘an inevitable inference from the conduct of the plaintiff in doing and saying nothing for seven months’. 2. In Anderson v North America Life Assurance Company [1980] ILR 1–1267 (British Columbia Supreme Court), an insurer sent a premium notice for life assurance to the wrong person. That person paid, and the insurer accepted, the premium demanded. The court denied the insurer’s liability of the policy since the existence of a contract could not be inferred from the conduct of the insurer, either in issuing the notice or in receiving the premium. 3. Once acceptance has been communicated neither party can unilaterally withdraw from the agreement thereby formed, although in most jurisdictions legislation stipulates a “cooling off period” for certain types of insurance — typically, the so-called long-term business, such as life assurance or, in some places, where the transaction involves distance selling — during which the insured can withdraw (see

also the general cooling off period for insurance in General Insurance Standards Council General Insurance Code for Private Customers, para 3.9). [504] Canning v Farquhar (1886) 16 QBD 727 (CA) [On 8 December 1883 Mr Canning’s agent, Mr Walters, forwarded to Sun Life Assurance Society a proposal for life assurance which stated that Canning was in good health. On 14 December the insurer accepted the proposal and set an annual premium, but added that, ‘No assurance can take place until the first premium is paid.’ On 5 January, Canning fell over a cliff and was seriously injured; four days later, Walters tendered the premium and told the insurers of the accident. They refused to accept the premium. Canning later died. The Court of Appeal upheld the insurers denial of liability]. Lord Esher MR: ‘This seems to me to be a very important case in insurance law, and at the beginning of it I was much taken with the ordinary proposition that a proposal and an acceptance of that proposal make a contract. Whether that is so or not depends on whether the one was meant to be a proposal, and the other an acceptance by way of contract, and we are bound to look further and see what was the subject-matter. What is the contract of life assurance? It is this, “Taking the life to be good at the commencement of the risk I insure that life, for a year at a certain premium.” From this it is apparent that the material moment for the agreement as to

the state of health is when the risk commences, that is, at the beginning of the year, for it is not denied that the agreement is only for a year. Now it is said that before that year commenced there was a binding agreement to insure. But is it possible to say that when parties are discussing beforehand the conditions of the risk they mean to treat what they then say are the existing facts as binding them when the moment to make the contract arrives? No one can bind himself as to the state of his health a short time hence, and a man who makes a statement as to his state of health cannot mean to be bound as to what it will be a month hence, neither can the person to whom the statement is made be taken to rely on it further than as it may guide him in accepting the insurance or not. These considerations show that all these statements which are made preliminary to the moment of insurance are not considered by either party as contractual statements, but as expressions of intention on the one side to insure, on the other to accept the risk. That seems to me to be the view at which we must arrive looking at this as a business transaction. Now there is no case that supports affirmatively this view, but it is supported negatively by the fact that during all the years that life insurance has been known and practised, there is no case in the books or known to any one in which an action such as this has been maintained. These considerations are conclusive to my mind that what was said was preliminary to the contract of insurance, and was never intended by either party to be a contract in itself. From this it follows that after the insurance company have said that they accept the proposal, and that if the premium is paid they will issue a policy, although there is no change in the circumstances, and all that has happened is that they alter their mind, yet they are not bound to accept the premium. I do not shrink from saying that in my view of insurance law there is no contract in such a case binding them to accept the premium. If so this action fails, because

tender is only equivalent to payment if the person to whom the money is offered is bound to accept it. If the premium is offered and accepted there is at once an insurance, and the year for which the insurance runs commences then, and if the policy is drawn up properly that will appear in it. But then there is another view short of that. Supposing it to be true that after all the terms are agreed on, and the premium is offered, the company are bound to accept it, when does the contract of insurance commence? It commences at the time when the premium is offered, because in this case tender would be as good as payment. There is no insurance before that, but only a contract to the effect, “If you will offer the premium we will insure”. The only consideration any one can suggest for this contract is the trouble the man takes to bring his money. What then happens with regard to any previous examination or declaration of health, neither of which is material unless the company insist upon it. This is material, that the person to be insured should not conceal any material fact, and that his statements, if he makes any, should be correct. In this case the declaration was a representation which was true at the time it was made. In insurance law that is not the material time, but the material time is the moment when the insurance is made, and the representations ought to be true then. If there has been a material change there ought to be an alteration of the representation, and the ground for entering into the contract is altered. In this case the ground of the contract to give an insurance being changed, it was not binding on the society at the time of the tender of the premium, and they had a right to say “the circumstances are altered, therefore we will not insure,” even though, if the circumstances had not been altered, they would have been bound by their contract. It seems to me, therefore, that the appeal fails. In my opinion, however, the real ground for our decision is that the negotiations before the time when the policy is effected are mere statements of intention, and that

till the insurance company accept the premium they have a right to decline to accept the risk.’

Lindley LJ: ‘This action is for damages for breach of a contract to grant a policy on the life of Canning, and the question is whether the Sun Office was bound to issue a policy. This turns, it appears to me, on the question whether the office was bound to accept the premium which was tendered during the lifetime of Canning. It is said the office was so bound by contract, and we have to investigate this and see how it is made out. On 8 December Canning sent a proposal to the office. In that there was nothing about the premium that would be payable; with that document was a declaration of the truth of certain statements made by Canning, which was to be the basis of the contract…On 14 December the office made a communication to Canning, through Walters, that his proposal had been accepted subject to payment of a certain premium. I pause here for a moment to consider the effect of these negotiations. It was urged on the part of the plaintiff that there was then a complete contract binding the office on payment or tender of the premium to issue a policy of insurance. It is true that there had been an acceptance of Canning’s offer, but he had not at this time assented to the company’s terms; and until he assented to them there was no contract binding the company. The company’s acceptance of Canning’s offer was not a contract but a counter offer. Subsequently the premium was tendered, and I think there would be considerable difficulty, if there had been no change in the risk, in saying that the company, under such circumstances, might decline to accept the premium and issue the policy. In the case supposed the counter offer would be a continuing offer; the tender would be an acceptance of it, and the company would be bound to issue the policy. But the case supposed is not the case we

have to deal with here, because another element is introduced by reason of the material change in the risk in the interval between what I have called the counter offer and the tender of the premium. If Canning had tendered the money and had not informed the office of the alteration in the character of the risk, he would have been attempting to take advantage of an offer intended to cover one risk in order to make it cover another risk not known to the office. In other words, if he had paid the money without disclosing to the office the fact that his statements, which were true when he made them, were so no longer, he would have done that which would have been plainly dishonest. But that was not done — the alteration was disclosed, and the company refused to take the risk. I think they were perfectly justified in so refusing. It comes to this: there was no contract before the tender; and the risk being changed the company’s offer could not fairly be regarded as a continuing offer which Canning was entitled to accept. His tender was in truth a new offer for a new risk which the company were at liberty to decline. It appears to me, therefore, that this action fails, and the appeal ought to be dismissed.’

Notes: 1. On the duty of the insured to disclose material facts to the insurer, see chapter 4. In Looker v Law Union and Rock Insurance Co [1928] 1 KB 554 the insurers accepted a proposal for life assurance on the basis of the applicant’s warranty that he was free from disease. However, the insurers stated that the cover would not commence until the first premium had been paid. After the applicant received this letter but before the payment, he was

diagnosed with an illness from which he died four days later. The day before his death, the premium was paid, and the insurers, who had not been informed of the illness, sent him the policy. The insurers were not held liable. 2. The general rule is that cover starts once the contract has been made, irrespective of whether the premium has been paid, although, as in Canning and Looker, insurers do often stipulate to the contrary. Where the premium has been paid but the insurers were never on risk, then it must be refunded (Tyrie v Fletcher (1777) 2 Cowp 666 at 668, per Lord Mansfield CJ; Marine Insurance Act 1906, s 84(1)). 3. In some jurisdictions certain presumptions have been developed with regard to contract formation and the payment of the premium. In Alberta, for instance: ‘When the policy has been delivered the contract is as binding on the insurer as if the premium had been paid, although it has not in fact been paid’ (Insurance Act, R.S.A. 1980, c. 1–5 (Alberta), s 208(1))

See McDonnell v Wawanesa Mutual Insurance Co 102 DLR (3d) 561 (Alberta Supreme Court, 1980). In Australia and New Zealand cover is not dependent on proof of premium (Goodwin v State Government Insurance Office (1991) 6 ANZ Insurance Cases 77, 163 (Queensland Supreme Court), unless the contract specifies otherwise, although it usually does (Newis v General Accident, Fire and Life Assurance Corp (1910)

11 CLR 620 (High Court of Australia); Aetna Life of Australia & New Zealand v ANZ Banking Group Ltd [1984] 2 NZLR 718 (Court of Appeal, New Zealand). The courts in the US have shown themselves willing to impose liability on the insurer where the insured has completed a proposal and paid the premium and then there has been unreasonable delay in responding by the insurer. Different states have used different bases for this liability: negligent delay, under which the insurers are liable in tort where there is unreasonable delay; estoppel, which prevents the insurers from asserting that the delay did not amount to acceptance; contract, where the retention of the premium and failure to notify rejection within a reasonable period of time amounts to a contract; and implied agreement to act promptly. In addition to the cases extracted at [505], [506] and [507], see Moore v Palmetto State Life Ins Co 73 SE2d 688 (Supreme Court of South Carolina, 1952; Barrera v State Farm Mutual Auto Ins Co 456 P 2d 674 (Supreme Court of California, 1969); Independent Life and Accident Insurance Co v McKenzie 503 So 2d 376 (District Court of Florida, 1987); EM Holmes, Holmes’s Appleman on Insurance, 2d (1998, Lexis Law Publishing: Charlottesville, Va.), vol 3, chap 12. [505] Continental Life & Acc Co v Songer 603 P2d 921 (Court of Appeals of Arizona, 1979) Contreras J:

‘Our express recognition of the negligent delay theory is in accord with and justified by the precepts of individual consumer protection and the public interest. Because insurance companies are licensed and regulated by the state, they are part of an industry which is affected by the public interest…As a result, they can and should be held to a broader legal responsibility than are parties to purely private contracts. This is especially true in cases where the insurance carriers have solicited and obtained an application for insurance, and have received payment of a premium… In addition, and since insurance companies unilaterally prepare the applications and set forth the conditions for acceptance, the parties are not in an equal bargaining position. There must, in all fairness, be some degree of correlative consumer protection. We are of the opinion that an insurance company which retains an application for medical insurance that does not contain a provision as to the time within which the application must be acted upon, and also retains payment of a premium, may be held liable in damages if it fails to either accept or reject the application within a reasonable period of time. It is generally the rule that the determination of what constitutes a reasonable time is a question for the jury…’

[506] Ryan v Security Industrial Insurance Co 386 So2d 939 (Court of Appeal of Louisiana, 1980) Stoker J: ‘Although an insurer is granted a reasonable time to accept or reject an application, a period of 90 days is not a reasonable time. Since the insurer did not issue or reject the policy within a reasonable period of time, the insurer is estopped from denying coverage on the ground that the

policy was not issued until after the insured’s death. It would be inequitable to allow the insurer to receive, retain, and enjoy the benefits of premiums for a burial insurance policy, without issuing the policy, and then allow the insurer to deny coverage once the insured dies.’

[507] Smith v Westland Life Ins Co 539 P2d 433 (California Supreme Court, 1975) Sullivan J: ‘In Ransom [Ransom v Penn Mutual Life Ins Co 274 P2d 633 (1954)] we recognised that an ordinary person who pays the premium at the time he applies for insurance is justified in assuming that payment will bring immediate protection, regardless of whether or not the insurer ultimately decides to accept the risk. Subsequent cases have held the layman’s expectation of complete and immediate coverage upon payment of the premium to be so strong that if the insurer wishes to avoid its obligation of providing such protection it must not only use clear and unequivocal language evidencing its intent to limit temporary coverage pending its approval of the policy, but must also call such limiting condition to the attention of the applicant. In the absence of proof by the insurer that it satisfied both of these requirements, courts have held that the coverage provided under a temporary contract of insurance “is that which the ordinary layman, acting in the ordinary course of business, reasonably may expect by virtue of that transaction…” — namely, complete and immediate coverage upon payment of the premium. (Wernecke v Pacific Fidelity Life Ins Co 238 Cal App2d at p 887) …When, therefore, as in the case at bench, a contract of temporary insurance arises upon the insurer’s receipt of an application for insurance together with the first premium payment, the expectation of the applicant thereby given

recognition actually emerges from two conjoined acts — his signing of the application and his payment of the premium. In the words of Ransom “such a person would assume that he was getting immediate insurance for his money…” (at 635) This reasonable expectation on the part of the applicant would, in our view, extend to a continuance of such coverage until the insurer had nullified the two factors responsible for its existence — the application for the policy by rejection and notice of rejection, and the payment of premium by a refund of it. Unless the insurer “manifest(s) this intention (to refuse permanent coverage) by the return of the premium within a reasonable time,…the applicant could assume that his insurance was effective.” (Reck v Prudential Ins Co of America, 184 A. 777, 778…) A rule requiring that such temporary insurance can be terminated only by notice of rejection and refund of the premium appears to us to be not only logical but fair. It at once eliminates uncertainty as to coverage and controversy as to effective notice of rejection. When the insurer notifies the applicant of the rejection of his application but does not refund his premium, its action is uncertain and confusing. On the one hand, the notice of rejection indicates that the permanent policy the applicant requested will not be issued; on the other, the retention of the premium indicates that “(the) immediate insurance (he was getting) for his money” (Ransom, above at p 635) is still continuing. This uncertainty in which the applicant finds himself can be dissolved by conditioning termination on both notice of rejection and refund of premium. Such a rule will at the same time go far in eliminating risk of unfairness to the applicant where the circumstances surrounding the rejection of his application and notification thereof to him are disputed. Our decision to adopt this rule is fortified by the consideration recognized in Ransom that it is unconscionable for an insurance company to hold premiums without providing coverage.’ [Footnotes omitted]

Note: For a discussion of this idea in Canada, see Elite Builders Ltd v Maritime Life Assurance Company [1984] ILR 1–1798 (British Columbia Supreme Court). In Australia, it is an offence for an insurer, when asked by the prospective insured, to fail to give a reason where cover or renewal has been refused, or where renewal is given on less advantageous terms, although the insurer is provided with a defence and prosecution requires the Attorney-General’s consent (Insurance Contracts Act 1984, s 75).

5.3 Formalities In general, there are no special rules relating to the formation of an insurance contract. Although such contracts are commonly embodied in a document, there is no general requirement that they should be and, indeed, the fastest growing markets are in the provision of insurance over the telephone and through the internet: see Stockton v Mason and the Vehicle and General Insurance Co Ltd and Arthur Edward (Insurance) Ltd [1978] 2 Lloyd’s Rep 430. In some areas of insurance, however, legislation does require a written document. [508] Section 22 of the Marine Insurance Act 1906 (6 Edw 7 c41)

‘Subject to the provisions of any statute, a contract of marine insurance is inadmissible in evidence unless it is embodies in a marine policy in accordance with this Act. The policy may be executed and issued either at the time when the contract is concluded, or afterwards.’

Notes: 1. For the formal requirements of a marine policy, see sections 23–26. The provision in section 22 does not preclude the existence of a marine insurance contract based on an oral agreement, but it does prevent that contract from being enforced unless evidenced in writing. The practice in the London marine insurance market is to write a policy should litigation arise, but in any event it seems that ‘a slip may contain sufficient information to satisfy the Marine Insurance Act’ (HN Bennett, “The Role of the Slip in Marine Insurance Law” [1994] LMCLQ 94, 118). On the slip, see Part 5.6, below). 2. The Life Assurance Act 1774 does not expressly require that a life policy be written, but this is implicit in that it is unlawful ‘to make any policy or policies on the life or lives of any person or persons, or other event or events, without inserting in such policy or policies the person or persons name or names interested therein, or for whose use, benefit, or on whose account such policy is so made or underwrote.’ (s 2) A third-party motor policy can be made orally,

but the Road Traffic Act 1988 makes it an offence to use a car unless the insured has ‘a certificate of insurance’ from the insurer (sections 143, 145, 147, 165). In other statutes, documentation acts as notification to third parties of the existence of compulsory insurance and is, therefore, coupled with requirements concerning the display of a certificate of insurance: eg Employers’ Liability (Compulsory Insurance) Act 1969, s 4. [509] Insurance Act, RSA 1980, c 1–5, s 203(1) (Alberta) ‘All the terms and conditions of a contract of insurance shall be set out in full in the policy or by writing securely attached to it when issued, and unless so set out no term of the contract or condition, stipulation, warranty or proviso modifying or impairing its effect is valid or admissible in evidence to the prejudice of the insured or any beneficiary.’

Note: Under section 203(3) every policy must contain: the names of the insurer, the insured and the beneficiary under the policy; the amount of the premium; the subject matter of the insurance; the level of indemnity; the event which will give rise to liability; the dates on which the insurance takes effect and on which it terminates. However, none of these requirements prevents the parties from forming the contract orally (s 1(e.2)).

5.4 Mistakes The possibility of a mistake affecting the enforceability or formation of a contract is often removed by the fact that one of the parties has assumed the risk of there being such a mistake. [510] Section 6 Marine Insurance Act 1906 ‘where the subject-matter is insured “lost or not lost”, the assured may recover although he may not have acquired his interest until after the loss, unless at the time of effecting the contract of insurance the assured was aware of the loss, and the insurer was not.’

It is likely that the only other class of insurance where the parties can enter such a lost or not lost agreement is reinsurance. Where it is claimed that a written policy does not accurately represent the agreement, it may be possible to seek the equitable remedy of rectification: [511] Agip SpA v Navigazione Alta Italia SpA [1984] 1 Lloyd’s Rep 353 (CA) Slade LJ: ‘First, there must be common intention in regard to the particular provisions of the agreement in question, together with some outward expression of accord. Secondly, this common intention must continue up to the time of execution of the instrument. Thirdly, there must be clear evidence that the instrument as executed does not accurately represent the true agreement of the parties at

the time of its execution. Fourthly, it must be shown that the instrument, if rectified as claimed, would accurately represent the true agreement of the parties at that time’

Notes: 1. For examples of situations in which rectification was ordered, see Wilson, Holgate & Co Ltd v Lancashire & Cheshire Insurance Corpn Ltd (1922) 13 Ll L Rep 487; Eagle Star & British Dominions Insurance Co Ltd v A V Reiner [1927] 27 Ll L Rep 173. With regard to policies made at Lloyd’s, ‘Where there is a duly stamped policy, reference may be made, as heretofore, to the slip or covering note, in any legal proceeding.’ (Marine Insurance Act 1906, s 89; also Symington and Co v Union Insurance Society of Canton Ltd (No 2) (1928) 34 Com Cas 233 at 235, per Scrutton LJ (although see HN Bennett, “The Role of the Slip in Marine Insurance Law” [1994] LMCLQ 94). On the slip, see Part 5.6 below). 2. In other areas, mistake has always been something of a minefield, not least because of the confusion surrounding the ratio decidendi of the leading case, Bell v Lever Brothers Ltd ([1932] AC 161 (HL)), and the distinction made by some judges between mistake at common law and mistake in equity. In Bell v Lever Brothers Ltd, the House of Lords held that for a mistake to vitiate a contract it had to be common to both parties and be ‘something

which both must necessarily have accepted in their minds as an essential and integral element of the subject matter’ (at 235 per Lord Thankerton), or, to adopt Steyn J’s later explanation of the decision, the mistake ‘must render the subject matter of the contract essentially and radically different from the subject matter which the parties believed to exist’ (Associated Japanese Bank (International) Ltd v Credit Du Nord SA [1989] 1 WLR 255, 268). In Solle v Butcher [1950] 1 KB 671 and Magee v Penine Insurance Co Ltd (see [513]) it was held that Bell only referred to mistake at common law and that there was an additional category of mistake in equity. However, in Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd (see [514]) the Court of Appeal rejected this idea on the ground that it does not accord with the decision in Bell v Lever Brothers Ltd. In the following extracts, the judgment of Lord Denning in Magee is included to illustrate the position that has now apparently been rejected; that of Winn LJ, who dissented in Magee, now seems to represent the correct approach. [512] Scott v Coulson [1903] 2 Ch 249 (CA) [The parties entered a contract for the sale of a life policy in the belief that the assured life, Mr AT Death, was still alive. It later emerged that after the contract but before the actual assignment of the policy the

vendor received information, which he did not pass on to the buyer, indicating that Death might have died before the contract. That this was indeed the case was only confirmed after the assignment]. Vaughan Williams LJ: ‘On the facts of this case, if one takes those which were found by the learned judge in his judgment, I do not see what room there is for argument on any question of law. If we are to take it that it was common ground that, at the date of the contract for the sale of this policy, both the parties to the contract supposed the assured to be alive, it is true that both parties entered into this contract upon the basis of a common affirmative belief that the assured was alive; but as it turned out that this was a common mistake, the contract was one which cannot be enforced. This is so at law; and the plaintiffs do not require to have recourse to equity to rescind the contract, if the basis which both parties recognised as the basis is not true. Having regard to the evidence, it seems to be clear that the learned judge came to a right conclusion. If it had turned out that the vendors or their agent had requested Coulson to find out whether the assured was dead or alive, and Coulson had come back and said he could not find out, I should have said that, apart from argument, it would have been almost impossible to arrive at the conclusion that both parties had entered into the contract upon the basis that the assured was alive. But it turns out that no such inquiry was requested to be made. The only inquiry requested to be made was that contained in Coulson’s letter of 15 March 1902, in which he requested inquiry to be made about the assured. Therefore the inference cannot arise which, if it had arisen, would have been fatal to the plaintiffs’ contention that this contract was entered into upon the basis that the assured was still alive. If one gets rid of that,

what is there left? We have before us the conditions of the proposed sale which were before both parties, in which it certainly seems to be assumed that the assured was still alive. All I say with regard to the matter is that the material date all through is the date of the contract. If at that date a good contract was entered into, I cannot conceive that it could be rescinded. But it turns out that it was a contract entered into under a common mistake existing at the date of it, and therefore it follows that an assignment executed in pursuance of such a contract cannot be supported.’

Note: Strickland v Turner (1852) 7 Exch 208 concerned the sale of an annuity on the life of a person, who unknown to both buyer and seller had already died. It was held that the buyer was entitled to the return of the purchase price on the ground that there had been a total failure of the consideration. [513] Magee v Pennine Insurance Co Ltd [1969] 2 QB 507 (CA) [Thomas Magee bought a car in 1961. The salesman completed a proposal form for insurance which indicated Thomas Magee as the main driver, but which also noted that his two sons, including John Magee, would drive. The policy was renewed each year. Then in 1965 John Magee ran into a shop window, wrecking the car. The insurers wrote on 12 May agreeing to pay £385 and this offer was accepted. However, a few days later the insurers

discovered that Thomas Magee had never driven the car, indeed he had never driven any car. He admitted that the car was his son’s property and his son had been the only driver. The insurers refused to pay the £385. At the trial, the judge held that there had been no fraud by Thomas Magee.] Lord Denning MR: ‘Accepting that the agreement to pay £385 was an agreement of compromise. Is it vitiated by mistake? The insurance company were clearly under a mistake. They thought that the policy was good and binding. They did not know, at the time of that letter, that there had been misrepresentations in the proposal form. If Mr Magee knew of their mistake — if he knew that the policy was bad — he certainly could not take advantage of the agreement to pay £385. He would be “snapping at an offer which he knew was made under a mistake” and no man is allowed to get away with that. But I prefer to assume that Mr Magee was innocent. I think we should take it that both parties were under a common mistake. Both parties thought that the policy was good and binding. The letter of 12 May 1968, was written on the assumption that the policy was good whereas it was in truth voidable. What is the effect in law of this common mistake? Mr Taylor said that the agreement to pay £385 was good, despite this common mistake. He relied much on Bell v Lever Brothers, Ltd [1932] AC 161, and its similarity to the present case. He submitted that, inasmuch as the mistake there did not vitiate that contract, the mistake here should not vitiate this one. I do not propose today to go through the speeches in that case. They have given enough trouble to commentators already. I would say simply this: A common mistake, even on a most fundamental matter, does not make a contract void at law: but it makes it voidable in

equity. I analysed the cases in Solle v Butcher [1950] 1 KB 671, and I would repeat what I said there, at p 693: “A contract is also liable in equity to be set aside if the parties were under a common misapprehension either as to facts or as to their relative and respective rights, provided that the misapprehension was fundamental and that the party seeking to set it aside was not himself at fault.” Applying that principle here, it is clear that, when the insurance company and Mr Magee made this agreement to pay £385, they were both under a common mistake which was fundamental to the whole agreement. Both thought that Mr Magee was entitled to claim under the policy of insurance, whereas he was not so entitled. That common mistake does not make the agreement to pay £385 a nullity, but it makes it liable to be set aside in equity. This brings me to a question which has caused me much difficulty. Is this a case in which we ought to set the agreement aside in equity? I have hesitated on this point, but I cannot shut my eyes to the fact that Mr Magee had no valid claim on the insurance policy: and, if he had no claim on the policy, it is not equitable that he should have a good claim on the agreement to pay £385, seeing that it was made under a fundamental mistake. It is not fair to hold the insurance company to an agreement which they would not have dreamt of making if they had not been under a mistake. I would, therefore, uphold the appeal and give judgment for the insurance company.’

Winn LJ (dissenting): ‘This appeal has given me pleasure because it has been so well argued by both the counsel who have appeared in it; and, of course, the problem which it presents is not one the solution of which is going to impose frightful actual loss or consequences on the particular individuals or companies

who are involved. It is a neat and teasing problem, the difficulty of which is slightly indicated, though by no means established, by the regrettable circumstance that I find myself respectfully having to dissent from the views of my Lord and of my brother Fenton Atkinson LJ. I agree with my Lord that the letter of 12 May 1965, is of very great importance, though I take Mr Carman’s point, that it is not the insurers’ letter: it is only what purports to be a report, probably of a telephone conversation, written by the brokers, who were the agents of the plaintiff, Mr Magee, of what they were told by some representative of the defendant insurance company. I attach importance to it not because of its terms, which may not be an accurate representation of what the insurers had said, but because it contemplates a complete clearance of the whole matter and a termination of the dispute arising out of the claim, in so far as there was any, by return of various documents, which clearly was regarded as the final terminal phase of the matter. Whether or not this could be regarded, on a strict construction, as no more than an offer to fix a figure, which, subject to being liable to pay at all, the insurers were prepared to pay, seems to me to be excluded as a reality by the considerations which I have mentioned. This must have evinced an offer by the insurance company to dispose of the matter by paying £385 in settlement. As I see the matter, it is not a question of whether thereby a contract was formed, since it seems to me it is clear that there was a contract formed by that offer from the insurers and the acceptance of it again through the brokers by Mr Magee. The question is whether, as my Lord has indicated clearly, that contract is, for one reason or another, invalid and unenforceable by Mr Magee against the insurers. I do not desire to take long in expressing my opinion that on the principles of Bell v Lever Brothers, Ltd [1932] AC 161 applied to the circumstances of this case the contrary conclusion to that which my Lord has expressed is the

correct conclusion. It appears to me that the parties were under a misapprehension. If there was any misapprehension shared commonly by both Magee and the insurers as to what was the value of any rights that he had against them arising from the insurance policy, that seems to me to have been precisely the subject-matter of the common misapprehension in Bell v Lever Brothers, Ltd. One could pick out and read, and it would be instructive to re-read them many times, several passages from the speech of Lord Atkin, at p 210, and indeed also from that of Lord Thankerton, at p 229; but I content myself with the point made by Lord Atkin, when he said, at p 225: “Various words are to be found to define the state of things which make a condition.”; ie, a condition non-compliance with which will avoid a contract. And he instances, quoting them, the phrases: “In the contemplation of both parties fundamental to the continued ‘validity of the contract’, ‘a foundation essential to its existence’, ‘a fundamental reason for making it’ ” — all of which, as he said, were to be found in the judgment of Scrutton LJ in the same case; and Lord Atkin said, at p 226: “The first two phrases appear to me to be unexceptionable.” “But” — by contrast, he said — “a fundamental reason for making a contract may, with respect, be misleading.” And he goes on to give instances of such misleading assertions or misleading definitions of what is meant by a foundation essential to the contract. For my part, I think that here there was a misapprehension as to rights, but no misapprehension whatsoever as to the subject-matter of the contract, namely, the settlement of the rights of the assured with regard to the accident that happened. The insurance company was settling his rights, if he had any. He understood them to be settling his rights; but each of them, on the assumption that the county court judge’s view of the facts was right, thought his rights against the insurers were very much more valuable than in fact they were, since in reality they were worthless: the

insurers could have repudiated — or avoided, that being the more accurate phrase on the basis of the mis-statements which my Lord has narrated. Lord Thankerton also said, at p 235: “The phrase ‘underlying assumption by the parties,’ as applied to the subject-matter of a contract, may be too widely interpreted so as so [sic] include something which one of the parties had not necessarily in his mind at the time of the contract; in my opinion it can only properly relate to something which both must necessarily have accepted in their minds as an essential and integral element of the subject-matter.” I venture respectfully to contrast that sentence with any such sentence as this: — “which the parties both must necessarily have accepted in their minds as an essential reason, motive, justification or explanation for the making of the contract.” In my view the mistake must be a mistake as to the nature or at the very least the quality of the subjectmatter and not as to the reason why either party desires to deal with the subject-matter as the contract provides that it should be dealt with. And Lord Thankerton also said, at p 236: “I think that it is true to say that in all” the cases — and he is referring to a number of them — “it either appeared on the face of the contract that the matter as to which the mistake existed was an essential and integral element of the subject-matter of the contract, or it was an inevitable inference from the nature of the contract that all the parties so regarded it.” …For the reasons which I have endeavoured to state quite briefly — though I think there are many other considerations which are relevant to this interesting problem — I find

myself, respectfully and diffidently, unable to agree with the judgment of my Lord.’

Note: In Associated Japanese Bank (International) Ltd v Crédit du Nord SA [1989] 1 WLR 255, Steyn J said, ‘No one could fairly suggest that in this difficult area of the law there is only one correct approach or solution. But a narrow doctrine of common law mistake (as enunciated in Bell v Lever Bros Ltd [1932] AC 161), supplemented by the more flexible doctrine of mistake in equity (as developed in Solle v Butcher [1950] 1 KB 671 and later cases), seems to me to be an entirely sensible and satisfactory state of the law: see Sheikh Bros Ltd v Ochsner [1957] AC 136. And there ought to be no reason to struggle to avoid its application by artificial interpretations of Bell v Lever Bros Ltd.’

In spite of this the Court of Appeal has recently declined to follow Solle and Magee must, therefore, be incorrect. [514] Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2003] QB 679 (CA) Lord Phillips MR: ‘We do not find it conceivable that the House of Lords overlooked an equitable right in Lever Bros to rescind the agreement, notwithstanding that the agreement was not void for mistake at common law. The jurisprudence established no such right. Lord Atkin’s test for common

mistake that avoided a contract, while narrow, broadly reflected the circumstances where equity had intervened to excuse performance of a contract assumed to be binding in law… A number of cases, albeit a small number, in the course of the last 50 years have purported to follow Solle v Butcher [1950] 1 KB 671, yet none of them defines the test of mistake that gives rise to the equitable jurisdiction to rescind in a manner that distinguishes this from the test of a mistake that renders a contract void in law, as identified in Bell v Lever Bros Ltd [1932] AC. This is, perhaps, not surprising, for Denning LJ, the author of the test in Solle v Butcher, set Bell v Lever Bros Ltd at nought. It is possible to reconcile Solle v Butcher and Magee v Pennine Insurance Co Ltd [1969] 2 QB 507 with Bell v Lever Bros Ltd only by postulating that there are two categories of mistake, one that renders a contract void at law and one that renders it voidable in equity. Although later cases have proceeded on this basis, it is not possible to identify that proposition in the judgment of any of the three Lords Justices, Denning, Bucknill and Fenton Atkinson, who participated in the majority decisions in the former two cases. Nor, over 50 years, has it proved possible to define satisfactorily two different qualities of mistake, one operating in law and one in equity. In Solle v Butcher Denning LJ identified the requirement of a common misapprehension that was “fundamental”, and that adjective has been used to describe the mistake in those cases which have followed Solle v Butcher. We do not find it possible to distinguish, by a process of definition, a mistake which is “fundamental” from Lord Atkin’s mistake as to quality which “makes the thing [contracted for] essentially different from the thing [that] it was believed to be”: [1932] AC 161, 218. A common factor in Solle v Butcher and the cases which have followed it can be identified. The effect of the mistake

has been to make the contract a particularly bad bargain for one of the parties. Is there a principle of equity which justifies the court in rescinding a contract where a common mistake has produced this result? …[T]he premise of equity’s intrusion into the effects of the common law is that the common law rule in question is seen in the particular case to work injustice, and for some reason the common law cannot cure itself. But it is difficult to see how that can apply here. Cases of fraud and misrepresentation, and undue influence, are all catered for under other existing and uncontentious equitable rules. We are only concerned with the question whether relief might be given for common mistake in circumstances wider than those stipulated in Bell v Lever Bros Ltd [1932] AC 161. But that, surely, is a question as to where the common law should draw the line; not whether, given the common law rule, it needs to be mitigated by application of some other doctrine. The common law has drawn the line in Bell v Lever Bros Ltd. The effect of Solle v Butcher [1950] 1 KB 671 is not to supplement or mitigate the common law: it is to say that Bell v Lever Bros Ltd was wrongly decided. Our conclusion is that it is impossible to reconcile Solle v Butcher with Bell v Lever Bros Ltd. The jurisdiction asserted in the former case has not developed. It has been a fertile source of academic debate, but in practice it has given rise to a handful of cases that have merely emphasised the confusion of this area of our jurisprudence…If coherence is to be restored to this area of our law, it can only be by declaring that there is no jurisdiction to grant rescission of a contract on the ground of common mistake where that contract is valid and enforceable on ordinary principles of contract law. …In this case we have heard full argument, which has provided what we believe has been the first opportunity in this court for a full and mature consideration of the relation between Bell v Lever Bros Ltd [1932] AC 161 and Solle v

Butcher. In the light of that consideration we can see no way that Solle v Butcher can stand with Bell v Lever Bros Ltd. In these circumstances we can see no option but so to hold. We can understand why the decision in Bell v Lever Bros Ltd did not find favour with Lord Denning MR. An equitable jurisdiction to grant rescission on terms where a common fundamental mistake has induced a contract gives greater flexibility than a doctrine of common law which holds the contract void in such circumstances. Just as the Law Reform (Frustrated Contracts) Act 1943 was needed to temper the effect of the common law doctrine of frustration, so there is scope for legislation to give greater flexibility to our law of mistake than the common law allows.’

Notes: 1. For comments on this case, see (2003) 62 CLJ 29; [2002] LMCLQ 449; (2003) 119 LQR 177, 180. 2. The decision in Scott v Coulson (see [512]) survives this revision of the case law. Lord Phillips remarked, ‘The policy…was very far from a nullity. The only way that the case can be explained is by postulating that a life policy before decease is fundamentally different from a life policy after decease, so that the contractual consideration no longer existed, but had been replaced by something quite different — ergo the contract could not be performed. Such was the explanation given by Lord Thankerton in Bell v Lever Bros Ltd…[at 236].’

5.5 Cover Notes and Renewals Insurers often issue a cover note providing temporary insurance pending the formal policy or in order to give them time to consider whether to take on the risk for the full term. These cover notes are contractual documents and are subject to the normal principles of insurance contract law, including the duty of disclosure. The terms of cover may, however, differ from those included in the policy. [515] Re Coleman’s Depositories Ltd and Life & Health Assurance Association [1907] 2 KB 798 (CA) Buckley LJ: ‘For the purposes of the decision of this case the material facts taken from the award [by the arbitrator] are as follows. On 28 December 1904, the employers [Coleman’s] signed the proposal, and by the hands of Moran, Galloway & Co as their agents received the covering note from the insurance company. The premium was duly paid, not, it is true, at that time, but at a later date. The award, however, finds as a fact that as between the insurance company and the assured the premium is to be treated as having been paid. On 2 January 1905, a risk covered by the proposal and covering note resulted in a claim. At that date the assured had no knowledge of the condition now relied upon. The absence of such knowledge is not stated in the award, but knowledge (if it existed) was a fact for the insurance company to prove, and they have not proved it. On 9 or 10 January the policy was received by Moran, Galloway & Co, and delivered by them to the employer. The policy contained a condition that

“the employer shall give immediate notice to the association of any accident.” The whole matter for decision before us is whether the failure of the employer to comply with that condition affords a good defence to this particular claim. In my opinion it does not. On 2 January the employer had no knowledge of the condition which was subsequently disclosed by the policy. It was impossible, therefore, that he should comply with a condition which required that he should give immediate notice to the association of the accident which occurred on 2 January for he had at that time no knowledge that it was required of him. The policy when delivered was dated 3 January and was to be in force from 1 January 1905. But upon these facts the true inference in my opinion is that the insurance office, as regards this risk which had resulted in a claim before knowledge of the condition was created, never imposed that condition. The point is not that there was waiver of a condition which was applicable to this risk. It is that the condition never became applicable to this risk. Upon this ground I think that the appeal fails.’

Note: 1. See Car Owners’ Mutual Insurance Co Ltd v Buckley (1986) 81 FLR 424 (Australian Capital Territory, Supreme Court). 2. This problem can also be seen in the provision of cover over the telephone (the internet provides the opportunity for an insurer to supply full policy terms). Where, for example, a motorist is seeking cover over the telephone, in practice insurers ask some fairly basic questions concerning age, motoring convictions and so forth, which go to the duty of disclosure and

tend to give very little, if any, information about the terms. This creates a difficulty for the insurer in that cover is commonly provided from the time of the call (or shortly after) and before any paperwork is received by the motorist. The question is, what are the terms of such a contract? In the case of a new policy, it seems likely that the motorist would expect, and a court would imply, terms that might reasonably be expected in such a policy. However, the Unfair Terms in Consumer Contracts Regulations 1999 state that a term will be unfair where it has the effect of ‘irrevocably binding the consumer to terms with which he had no real opportunity of becoming acquainted before the conclusion of the contract’. (sch 2, para 1(i)). If the motorist were merely renewing cover, the presumption would be that the terms of the old contract would apply to the new one. [516] CE Heath Underwriting & Insurance (Australia) Pty Ltd v Edwards Dunlop & Co Ltd 176 CLR 535 (High Court of Australia, 1993) Dawson, Toohey and McHugh JJ: ‘The distinction between the renewal of a policy and the extension of a policy was expressed in the following terms by Mayo J. in Re Kerr:

“Strictly, a ‘renewal’ is descriptive of a repetition of the whole arrangement by substituting the like agreement in place of that previously subsisting, to be operative over a new period, whereas an ‘extension’ betokens a prolongation of the subsisting contract by the exercise of a power reserved thereby to vary one of its provisions, that is, by enlarging the period. Upon a renewal similar rights revest… A contract reserving continuous rights of renewal will, if these be exercised, lead to succeeding contracts in a series, the identity of each contract [being] separate and distinct. On the other hand, the exercise of the right of extension augments the length of time over which the contract operates, without changing its identity.” Whether there is a renewal or an extension of an insurance policy is a question of construction, the term “renewal” often being used to refer to both “renewal” and “extension” in the sense that those words are used above. It is, however, well established that, where a policy is renewable only by mutual consent (ie not as of right), the renewal results in a fresh contract rather than an extension of an existing contract. Of course, a policy may expressly stipulate that it is not to continue in force beyond the period of insurance, unless renewed by mutual consent. And where a policy, such as the ordinary form of life policy, expressly provides for continuation beyond the specified period of insurance unless a particular event, such as the nonpayment of the premium, takes place, the renewal is an extension of the original contract. But where a policy is silent on the question of renewal, renewal of it will generally constitute a new contract.’

Notes:

1. Where there is a renewal in the sense in which Mayo J used the word and it is, therefore, treated as a fresh contract, the duty of disclosure arises again and new terms may be introduced; if new terms have not been incorporated into the policy, the original terms will apply (GNER v Avon Insurance plc [2001] 2 All ER (Comm) 526 (CA)). 2. A renewal notice will often be sent before the expiration of the old policy and will give the insured a period within which to pay the renewal premium. The offer will lapse after the expiry of the specified period: Maguire v AMP Fire & General Insurance Co Ltd (1982) 2 ANZ Ins Cas 60–470 (High Court of New Zealand). However, in Australia under the Insurance Contracts Act 1984 (Cth), section 58, the insurers must give at least 14 days notice of the expiry of cover and at that time inform the insured whether they are prepared to contemplate renewal. Even more thrilling for the insured is that if this is not done the renewed policy will be free of charge unless a claim is made, in which event a formula for calculating the premium comes into operation (section 58(4)). Australian case-law also favours the view that, on renewal, the insurers should point out to the insured any change in terms: Forbes v Australian Motor Insurers Ltd (1990) 6 ANZ Ins Cas 61–015 (Supreme Court of Tasmania). Indeed, Professor Sutton has suggested that under Australian law this is part

of the insurers’ duty of disclosure (see K. Sutton, Insurance Law in Australia, (Sydney, Information Services,1999) at 60). English law does not require insurers to inform an insured of the imminent expiration of a policy. However, aside from considerations of good business practice, the General Insurance Standards Council requires its members, which includes insurers as well as intermediaries, to give both private and business customers such notice (see the Code for Private Customers, para 5.3 and Commercial Code, para 32. See further, chapter 3). 3. In neither English and Australian law is there substance to the idea that where cover has expired and renewal is offered an insured is covered for a reasonable time after the expiry of the old policy, unless this can be gathered from the circumstances: Mobili Pty Ltd v FAI Insurance Ltd (1986) 4 ANZ Ins Cas 60-718 (New South Wales, Supreme Court).

5.6 Insurance at Lloyd’s Lloyd’s has particular rules about the formation of insurance contracts (for the history and regulation of Lloyd’s, see chapter 2, Part 2.5). A prospective insured cannot go directly to the Lloyd’s market, but must go through a Lloyd’s broker or an outside agent guaranteed by a Lloyd’s broker. The broker, acting as the agent of the prospective insured, writes a slip

outlining the risk and then approaches an underwriter (see [520]; HN Bennett, “The Role of the Slip in Marine Insurance Law” [1994] LMCLQ 94). The underwriter, who wishes to take on the risk, initials the slip. Where the subject matter to be insured has a high value, it is likely that the underwriter will be unwilling to take on the whole of the risk. In such cases, the broker obtains the initials of an underwriter specialising in this type of risk (the “leading” underwriter) and then seeks the subscription of other underwriters (“following” underwriters) until the slip is fully subscribed. Once the slip is fully subscribed, a policy can be issued by the Lloyds Policy Signing Office, although in practice policies are often not issued, unless required, as, for instance, would be the case where a claim is made and liability disputed. Several legal issues arise out of these practices. One is the problem of how many |contracts there are. Is there a single contract to which all the underwriters are parties, or is there a separate contract with each underwriter? Another problem is that any misrepresentation made to the leading underwriter would not be actionable by the following underwriters unless it is repeated to them. Where the following underwriter has subscribed because of the subscription of the leading underwriter, or has subscribed as a way of encouraging the broker to place other business, then the representation has not induced the following underwriter to enter the contract. Other problems arise where circumstances have changed while the broker is obtaining

subscriptions, or a following underwriter subscribes on different terms, or the broker fails to obtain subscriptions for the entire risk, or the broker obtains subscriptions that exceed the risk. In addition to the following cases, see Rozanes v Bowen (1928) 32 Ll L Rep 98; Youell and Others v Bland Welch & Co Ltd and Others [1992] 2 Lloyd’s Rep 127 (CA), see [908]; BP Plc v GE Frankona Reinsurance Ltd [2003] 1 Lloyd’s Rep 537, see [909]). [517] General Accident Fire and Life Assurance Corporation v Tanter (The ‘Zephyr’) [1984] 1 Lloyd’s Rep 58 Hobhouse J: ‘Another point which emerged clearly from the evidence was that the slip is the record of the contract between the assured and the underwriter. It is the contract; it is not merely evidence of an oral contract; it is not open to either party to contend that part of the contract between the assured and the underwriter is to be found elsewhere. In this the evidence correctly reflected the legal position as stated by the Courts; see for example Mr Justice Matthew in Thompson v Adams, (1889) 23 QBD 361 at p 365 and Lord Justice Roskill in American Airlines Inc v Hope [1973] 1 Lloyd’s Rep 223 at p 243. Thus if something is agreed between the underwriter and the broker as part of the contract between the underwriter and the assured it must be written in the slip. It is of course conceptually possible to make a contract which is partly oral and partly written but that is not the practice of the market. The contract is the slip. What the broker says may ‘of course’ be a representation or disclosure and affect the validity of the contract. But any agreement with the broker not

incorporated in the slip will not be part of the contract with the assured. There are good practical reasons for this. A single slip leads to a single policy or to split but identically worded policies. The policy is the formal contractual document issued to the assured and unequivocally contains the terms of the contract. The practice could not accommodate slips or policies which did not correctly record the terms of the contract with the assured. Another practical reason is that later underwriters subscribe slips in part on the faith of the subscription of the leaders and the earlier underwriters. The later underwriters are entitled to believe that those subscriptions are to an insurance contract in the terms written on the slip. If this belief was not to accord to the true position, the market could not operate in the way it does.’ [Decision reversed on appeal, but on grounds that did not relate to this issue: see [518].]

[518] General Accident Fire and Life Assurance Corporation v Tanter (The ‘Zephyr’) [1985] 2 Lloyd’s Rep 529 (CA) Mustill LJ: ‘First, as to the practice in the London market. As in the case of direct insurance, the business is offered to the reinsurer in the form of a slip, tendered by the broker to the underwriter. If the underwriter decides to accept the whole or part of the risk, he signifies this by placing his initials on the slip, against a statement of the amount which he is prepared to accept. This statement may be expressed in various ways. In the case of this particular reinsurance, which was concerned with total loss only, the underwriters wrote their lines as percentages of the value of the ship. Naturally, the broker sets out to obtain from the underwriters a series of lines totalling the whole amount of the risk. He will not, however, necessarily be content with

this. He is entitled, according to the practice in the London market, to continue with the collection of subscriptions, to the extent that, on the face of it, the slip will reflect a series of contracts which provide the assured or reassured with a greater amount of cover than he has instructed the broker to obtain. This anomaly is dealt with by an automatic implied adjustment of the individual contracts of reinsurance — the precise juridical basis of which need not be explored — whereby each line is proportionally reduced so as to ensure that the subscriptions add up to 100 per cent and no more. A slip which undergoes this process is said to be “signed down”. When each line is automatically adjusted in this way to a particular percentage of the amount originally initialled it is said to have signed down to that percentage. Since English law recognises that risks may be written retrospectively, the broker may legitimately continue to obtain further subscriptions, and hence to increase the degree of signing down, after the risk has attached. On the other hand, if the vessel suffers a casualty while the slip is being taken round the market, the extent of signing down is to be determined at the moment when the loss is known to the assured or the broker, since thereafter the risk can no longer properly be offered to further underwriters. A large part of the art of underwriting consists of choosing the size of the line which is written. An underwriter will incline towards writing a line on any slip tendered to him, in order not to discourage the broker from offering him more interesting business in the future. If the risk is unattractive, he will try to make the line as small as possible. If the broker offers a series of risks at the same time, in the shape of a package, some attractive and others not, the underwriter will often write a line on an unattractive risk, as small as he is allowed, in exchange for the chance to write a larger line on the others. Since the magnitude of the risk ultimately borne by the underwriter will be determined, not only by the

percentage which he writes against his initials, but also by the degree to which the slip is signed down — a matter not within the underwriter’s control — any underwriter who is interested in the effect of writing the risk on his total exposure or on his premium income will necessarily be interested in the extent to which the slip will be signed down. He can, if he wishes, protect himself by inscribing one of the various formulae against the stated percentage, to indicate that this percentage is to represent his firm exposure. This solution is not much used in the particular type of insurance with which this appeal is concerned. In its absence, the underwriter may obtain a degree of safeguard by obtaining from the broker a signing down indication — namely a statement by the broker as to the percentage of the written line which he believes the underwriter will actually have to bear when the process of signing down is completed. On some occasions the broker will volunteer this information; on others, he will give it in response to a direct question; on others still, it is not given at all. There is no invariable form of words for such an indication. The broker may say “It will sign down to 40 per cent”, or “I think it will sign down to about 40 per cent;” or “It will sign down to 40 per cent at most;” or he may use some other formula. Although in many respects the writing of reinsurance business takes the same shape as in the case of direct insurance, it has one special feature which has led to many of the problems debated at the trial and on this appeal. When a primary insurer is deciding whether or not to take a line on a particular risk, and if so in what amount, he may decide to participate only if he can obtain reinsurance. In such a case the broker will have a better prospect of persuading the underwriter to participate in the primary insurance if he is able to offer him reinsurance at the same time. Accordingly, a practice has developed whereby a broker instructed to obtain a primary cover will on his own initiative approach potential reinsurers to obtain from them

in advance a binding promise to provide reinsurance for whatever person may subsequently write a line on the primary cover and desire to reinsure the whole or part of that line. The reinsurer conveys this promise by initialling a percentage line on a slip, which identifies the subjectmatter, the nature of the risk and the value. The slip does not, however, identify the reassured and could not do so: for at the stage when the potential reinsurer is approached, it is not known whether the primary insurance will ever be written at all, and if so by whom; or whether any of the primary insurers will desire to effect reinsurance; or whether any insurer who does desire to reinsure will be willing to do so with the reinsurer whom the broker has approached, and on the terms which he has offered. With this promise “at large” in his pocket, the broker can offer to an underwriter a package consisting of the opportunity to take a line on the primary cover, and at the same time to place an order for reinsurance. It can readily be seen that the practice of oversubscription and signing- down applies in a special way to the broking of reinsurance in advance. Where a primary insurer initials a percentage line, both he and the broker know that the percentage which he will actually bear in practice will depend solely upon the extent to which the broker goes on recruiting subscribers after 100 per cent of the risk has been written. This will also be one of the controlling factors in the case of reinsurance, but there are other factors as well: namely, the extent to which the primary insurers place orders for reinsurance, and the extent to which the lines written by those of them who have placed orders are signed down by oversubscription of the primary slip.’

[519] General Reinsurance Forsakringsaktiebolaget

Corporation v Fennia Patria

[1983] QB 856 (CA) Kerr LJ: ‘In every insurance or reinsurance transaction the object of the insured is to secure a contract which provides him with the full desired cover on acceptable terms. But where the risk is not covered by one insurer, as it is in the tariff market, and the slip method of participation is used, it is clear that the total cover results, both in fact and in law, from the conclusion of the individual contracts made with the various syndicates or companies on whose behalf the participating lines are written. An ordinary lay insured may not appreciate this, but a professional insurer who seeks reinsurance will know that this is so. In either case, if and when a claim arises, the legal position is that the insured or reinsured can only claim against the individual insurers to the extent of the proportion which they have underwritten… [T]he slip method of placing insurance results in the conclusion of separate contracts with the subscribers of the slip. However, in placing the desired cover in this way, the completion of the slip may well take days and sometimes weeks. In the great majority of cases, the first line, written by the leading underwriter on the slip as presented to him, will be followed by the remainder writing different proportions — whether by way of percentage or amount — on identical terms and at the same rate of premium until the 100 per cent subscription has been achieved. But in some cases this may not happen, because the subsequent underwriters may insist on different terms to which the broker may agree, albeit reluctantly, or because there may be some other intervening event, such as a change of circumstances or a change of mind by the insured, or because of the inability of the broker to procure completion of the slip up to 100 per cent on any terms which are acceptable to him. In such cases, apart from the problem

concerning the status of the lines already written which arises in the present case, the position will be unsatisfactory to the insured, because his initial object of obtaining 100 per cent cover on identical terms will not have been achieved. It will also be administratively unsatisfactory in the market, because one insured or reinsured risk will have been written on different terms. In the present case Staughton J described this situation as follows at [1982] QB 1022, 1039B–C, referring to the evidence of one of the witnesses and to the decision of Donaldson J in Jaglom’s case [[1972] 2 QB 250]: “These difficulties are not of course insuperable. The position was summed up by Mr Shaw in his evidence: market practice abhors a slip on different terms; it is possible, but daft. This too was one of the consequences which Donaldson J described as absurd.” In order to deal with the difficulties which may arise before a slip has been fully subscribed, the judge listed a number of situations in which these problems may fall to be resolved… [I]t is convenient to set them out again in slightly different terms: (a) The broker may obtain subscriptions for part of the risk and be unable to obtain any more. (b) The broker may obtain subscriptions for part of the risk and then his client may decide that insurance is not required. (c) The broker may obtain subscriptions for 100 per cent of the risk, and then his client may decide that insurance is not required. (d) The broker may obtain subscriptions for more than 100 per cent of the risk. (e) Underwriters subsequent to the leading underwriter may alter the terms of the slip. (f) Situations similar to (a), (b), (c) and (e) may arise with a slip amending an existing insurance contract, ie, an “indorsement” slip as opposed to an original slip. (g) Any of the above situations may arise (i) before the risk has commenced (or “incepted”), or (ii) after it has commenced.

It will be noted that in this list the judge makes no reference to cases where a loss giving rise to a claim arises after the partial, and before the complete, subscription of the slip, and I shall have to return to this point later on. Three matters should be mentioned in the context of this list of possible situations. First, as the judge points out at the end of this passage, where a broker wishes to test the market, it is always open to him to circulate a “quotation slip,” viz, one which makes it plain that he is merely seeking a quotation rather than a contract, so that he can then decide whether or not to proceed by means of an unqualified slip on the same or different terms. Secondly, the situation referred to in (d) requires some explanation. It may often happen, when all the subscriptions on the slip are added up, that these will be found to total more than 100 per cent; indeed, the broker may not discourage excessive subscriptions, because the degree of interest and participation may give him some indication about the attitude of various underwriters for the future if the cover is to be renewed after its expiry or to be increased in the interim. Provided that this over-subscription does not occur to an unreasonable extent, it is accepted by the subscribers of a slip, albeit perhaps reluctantly, that upon the ultimate “closing” — which they may not receive for weeks or even months after they have written their line — this may fall to be written down proportionately to some extent, so that the total subscription does not exceed 100 per cent. The judge dealt with this…as a recognised and binding practice of the market, and this was fully accepted on the present appeal. Thirdly, it was common ground before the judge, as well as on this appeal, that the problems raised by the various situations listed above fall to be resolved in the same way, irrespective of whether the transaction is one of insurance or reinsurance, or whether the slip is an original slip or an indorsement (or amendment) slip which is circulated during the period of the cover, or whether it is a marine or non-

marine risk. It was also accepted that no distinction is to be drawn between insurances at Lloyd’s and those placed by means of slips in the company market. However, given the fact that every line may require to be written down proportionately to some extent, in order to produce a total cover of no more than 100 per cent, there remains the crucial question as to the contractual status of each line once it has been written and before the slip has been completed. In this connection the first consideration is the decision of Donaldson J in Jaglom’s case [1972] 2 QB 250 to which I have already referred. The judge discussed this case in detail…His conclusions were accepted by both parties, and I can therefore deal with the case somewhat more shortly. It concerned a slip which took several weeks to complete and which was amended in different respects by subsequent underwriters during this process. After it had been completed there was a loss, and the resulting claim was resisted by the leading underwriter on behalf of all the subscribers of the slip. The issue turned on the true construction of the slip in the context of the events which had taken place. As appears from the arguments [1972] 2 QB 250, 252–54, both parties proceeded on the basis of the terms of the slip in its finally amended form, irrespective of the chronology of the amendments in relation to the lines as these were written. No issue appears to have been raised as to the status of each line in relation to the slip as it then stood, and there was no argument or evidence as to what the contractual position in this respect was considered to be, either by custom or implication. However, in an obiter passage in his judgment…Donaldson J concluded that each line represented an offer by the underwriter in question on the basis of the slip as it then stood, and that a binding contract only came into existence when the slip had been fully subscribed. It would therefore follow from this analysis that no contractually binding commitment is accepted by

any underwriter when he writes a line. In the present case, in which considerable evidence as to the custom or practice of the market was adduced, this conclusion was rejected by all the witnesses. Accordingly the correctness of the analysis in Jaglom’s case was not supported by either party on this appeal, and there was no cross-appeal by the plaintiffs against the conclusion of Staughton J that to this extent Jaglom’s case should not be followed. Nevertheless, since the decision has been reported and discussed in several of the textbooks to which the judge refers, we felt it necessary to consider it afresh, bearing in mind that if it is correct in law it cannot be ousted by agreement between the parties. Having done so, and with respect to Donaldson J who did not have the benefit of any argument or evidence on this point, I am in no doubt that Staughton J was right in the present case in concluding… that the orthodox understanding of the position is correct, viz, the presentation of the slip by the broker constitutes the offer, and the writing of each line constitutes an acceptance of this offer by the underwriter pro tanto. The evidence in the present case clearly shows that in the insurance market this is the intention of both parties to the transaction, and the legal analysis must accord with their intention Where an underwriter varies the terms of the slip with the consent of the broker before writing his line, this would accordingly constitute a counter-offer which is accepted by the broker on behalf of his client. In connection with the decision in Jaglom’s case [1972] 2 QB 250 I would only add that, since the hearing of this appeal, I discovered, more or less by chance, that the foregoing conclusion is in fact borne out by one authority cited in Chalmers’ Marine Insurance Act 1906, 8th edn (1976), p 36 in the notes to section 21, which deals with the “Slip or covering note or other customary memorandum of the contract,” and which concerned an uncompleted slip. This is Morrison v Universal Marine Insurance Co (1872) LR 8

Ex 40 and on appeal to the Exchequer Chamber (1873) LR 8 Ex 197. It is not mentioned in any of the textbooks in their discussion of Jaglom’s case, but it shows that the understanding in the insurance market has differed from Jaglom’s case for more than a century. In that case a broker was instructed to obtain cover for £5,000, respectively, on a vessel and her chartered freight. He then received information suggesting that the vessel had stranded, but was doubtful as to its accuracy and procured a line of £500 on chartered freight from the underwriter of the defendants. The news of the stranding then became known and thereafter, as appears from the unanimous judgment on appeal, at p 206, “the broker could not succeed in covering the ship or freight for any amount beyond that already effected.” The action was accordingly brought to recover the sum of £500 in relation to the only line which had been written. The issue concerned the direction to the jury as to whether the subsequent issue of a policy in terms of the partially completed slip constituted an election by the insurers not to rely on the non-disclosure. For present purposes the importance of the case is that, on behalf of the underwriters, “it was admitted that in effecting marine insurances the matter is considered merely as negotiation till the slip is initialled, but when that is done the contract is considered to be concluded,” notwithstanding that the slip had only been partially subscribed: see LR 8 Ex 40, 45 and LR 8 Ex 197, 199. I therefore proceed, as did Staughton J and both parties on this appeal, on the basis that each line written on a slip gives rise to a binding contract pro tanto between the underwriter and the insured or reinsured for whom the broker is acting when he presents the slip. The underwriter is therefore bound by his line, subject only to the contingency that it may fall to be written down on “closing” to some extent if the slip turns out to have been oversubscribed. The crucial issue, however, is whether the

insured or reinsured is also bound to the same extent, or whether — as the defendants contend and Staughton J accepted — the latter have an option to rescind the contract thereafter, at any rate until the time when the slip is fully subscribed to the extent of 100 per cent or more. The defendants contend that until that time, and for whatever reason and in whatever circumstances, there remains a continuing option to rescind all the contracts resulting from the lines written on a partially completed slip. This result was said to flow either from the implication of a term, as and when each line is written, which is necessary to give business efficacy to the resulting contract or, alternatively, from a binding usage or practice in the insurance market. In relation to the first of these pleas, the defendants were asked for particulars of the facts and matters relied upon in support of this allegation, and it is convenient to set out their answer: “If such terms were not implied- (1) a single contract of insurance would bind the several underwriters to different terms in the event that after some underwriters had initialled the slip (a) the assured failed to render terms to the other underwriters, or (b) the assured tendered a slip in different terms to the other underwriters, or (c) the other underwriters refused to initial the slip without an amendment or at all. (2) An assured would be compelled to accept and pay for incomplete cover in the event that it proved possible to start but not to complete the slip.” If one then turns back to the different situations listed under (a) to (g) above and to the report of the judgment of Staughton J [1982] QB 1022, 1037–1041, it will be seen that he accepted this conclusion — either on the basis of custom or of an implied term, or both — in all cases other than (c), ie where the slip has been fully subscribed and the insured or reinsured changes his mind thereafter. His conclusion in

relation to (c) was not challenged on this appeal, and it does not arise on the facts. However, there cannot in my view be any doubt about its correctness: see section 21 of the Marine Insurance Act 1906 and the two authorities referred to by Donaldson J in Jaglom’s case [1972] 2 QB 250 which Staughton J cites at pp 1031–1032. His conclusion as to (d) — the custom of writing down if the slip is subscribed to the extent of more than 100 per cent was also accepted as a matter of binding custom, and again there can be no doubt as to its correctness. However, in relation to all the other situations his conclusion as to the existence of an option of rescission was strongly challenged on this appeal, both by reference to implication and to usage. In particular, this conclusion was challenged in relation to (b), which corresponds most closely to the facts of the present case. Further and a fortiori it was challenged in situations which are not mentioned by the judge at all, but which relate directly to the present case, where a loss occurs before a slip is completed. In such cases, depending on the terms of the slip and the facts, the existence of an option would have the consequence that the underwriter of any line would or would not be held liable for his proportion of the loss depending on how the option is exercised. This is so in particular in the case of indorsement slips, as explained hereafter. I now turn to the facts against this background. They are fully set out in the report of the judgment at [1982] QB 1022, 1025–1031, but since the issues on this appeal are considerably narrower I can summarise them fairly shortly. I will refer to the first plaintiffs as “General Re” and to the defendants as “Fennia.” Fennia are insurers carrying on business in Finland and insured linerboard, sack kraft and pulp, ie paper products, in transit from Canada to Europe on a warehouse to warehouse basis. One of their customers was Eurocan Pulp Paper Co Ltd. Eurocan used four principal places of storage in Europe, one of these being a warehouse

in Antwerp. Fennia decided to reinsure their liabilities under this open cover, and did so in the first instance by a “whole account” reinsurance on all risk terms. In May 1976 this stood at FMks 12 million in excess of 3 million any one occurrence. (The figures are in Finnmark throughout; it appears from the judgment that the rate of exchange was from six to eight Finnmark to the pound sterling, so that the amounts involved are substantial.) The effect of this reinsurance was accordingly that Fennia would bear the first 3 million of any loss, the next 12 million would fall on the whole account reinsurers, and Fennia would again be liable for any excess. Fennia considered this to be inadequate, in particular for the risk of a catastrophic loss by fire or flood at one of the warehouses. They accordingly instructed their brokers, J K Buckenham Ltd, to place further facultative reinsurances on the London market against the risks of fire and flood at Eurocan’s four storage locations in Europe, including the warehouse in Antwerp, for 15 million in excess of 15 million any one occurrence, so that Fennia would be liable for the first 3 million and then only for any excess over 30 million. This reinsurance was written by means of a slip on which General Re were the leading underwriters, for 5 of the 15 million; the next was the Insurance Corporation of Ireland Ltd (“ICI”); and there followed 25 other reinsurers to complete the slip. Next, Fennia decided to increase the whole account cover as from 1 January 1977. Instead of 12 million in excess of 3 million it was altered to 20 million in excess of 5 million. There was therefore a partial overlap between the two reinsurances for losses due to fire or flood in the four locations, where the layer between 15 and 25 millions was doubly reinsured. At first this passed unnoticed, but when news of a fire at the Antwerp warehouse reached Fennia, on about 12 February 1977, though without appreciating its seriousness or relevance, they decided to rearrange the facultative cover retrospectively by placing it wholly on top

of the whole account cover as from 1 January 1977. A Mr Holmes, employed by the brokers, accordingly prepared an indorsement slip in the following terms: “It is understood and agreed that effective January 1, 1977, the sum reinsured hereon is amended to FMks 15,000,000 each and every loss, etc excess of FMks 25,000,000 each and every loss, etc. All other terms and conditions remain unaltered.” On 14 February 1977, Mr Holmes presented this slip to Mr Hollis, the manager of General Re’s London branch, who initialled it. Mr Holmes then took the slip to the ICI underwriter who also initialled it. However, the latter had by then already heard that the fire was serious, and this had by then also become clear to Mr Holmes and Fennia. Accordingly, after consultation between them, Mr Holmes was instructed not to proceed with the slip and to request General Re and ICI to cancel the amendment lines which they had written. At first both refused, but later ICI agreed, as the judge said at p 1029F, “on the very proper ground that they had known of the loss at Antwerp when their representative initialled the amendment slip.” Mr Hollis, however, maintained his refusal. He was understandably somewhat mystified, if not suspicious, about the indorsement slip generally, particularly since Mr Holmes was not asking for any return of premium although the amendment removed the reinsurers’ liability to a higher layer. However, all these matters were carefully investigated by the judge, and any suggestion of a material nondisclosure or other impropriety on the part of Fennia has disappeared from the case The only issue is whether Fennia were in law entitled to demand that Mr Hollis should cancel his line on the indorsement slip I now return to the fire at the Antwerp warehouse which took place on the night of 11–12 February 1977. This

destroyed paper stocks to a value of about 27 million. On the basis of the original slip without the amendment, the 27 London reinsurers were accordingly liable for 12 million in excess of 15 million. However, on the basis of the indorsement slip their liability would only have been 2 million. Although a writ was originally issued in the name of all 27 reinsurers, with General Re and ICI as the effective plaintiffs, ICI dropped out following their agreement to cancel their signature on the indorsement slip, and they and all the other reinsurers have settled with Fennia on the basis of the original slip. The issue now only concerns General Re, who claim a declaration that the line which they wrote on the amendment slip remains binding, so that their liability is only for their proportion of 2 million and not of 12 million. As against this, Fennia counterclaim General Re’s proportion of 12 million on the ground that they were entitled to cancel the uncompleted indorsement slip. In the result Staughton J refused the declaration and gave judgment for Fennia on the counterclaim on the ground that Fennia were entitled to exercise the alleged option of rescission. Before turning to the evidence and the judge’s reasoning, it is important to focus on the consequences flowing from the writing of a line on an indorsement slip in circumstances such as the present. It was written by General Re on 14 February 1977, with retrospective effect as from 1 January 1977. On this appeal, and for the reasons already explained, it was accepted by both sides that, when written, it resulted in a binding contract, subject only to the issue whether or not Fennia retained an option to rescind the contract thereafter. Under the terms of this line General Re were only liable on and after 1 January 1977, for their proportion of 15 million in excess of 25 million, ie of 2 million in relation to the loss by fire on 11–12 February. On the other hand, by purporting to exercise an option to rescind this contract, Fennia were accordingly increasing General Re’s liability very substantially, and this, of course, was the reason why

Mr Holmes was instructed to request cancellation of the amending line. However, consider for one moment what would have been the position if, instead of this rearrangement of the cover, the indorsement slip had provided for an increase in the cover to, say, 25 million in excess of 5 million on payment of an additional premium. I realise that this does not fit in with the “whole account” cover on the facts of the present case, but it is nevertheless necessary to consider such examples, because the legal position resulting from the alleged option would still apply in the same way. In that event the effect of General Re writing the line on the amendment slip would be, retrospectively to 1 January 1977, that their liability for a loss of 27 million would have been their proportion of 22 million, with the result that, obviously, Fennia would not have sought to exercise the alleged option of rescission. This example of what may, in particular, be the position in relation to indorsement slips, if there is an intervening loss before the slip has been fully subscribed, is of considerable importance when one comes to consider the evidence and the judge’s conclusions concerning the alleged custom and implied term. In the case of an original slip, if the loss is covered — though of course only partially — by a line which has already been written, the insured or reinsured will have no interest in exercising the alleged option of rescission. He will hold the subscriber to the contract resulting from the line, even though the intervention of the loss will in practice preclude him from procuring the completion of the slip on the same terms. This is precisely what happened in Morrison v Universal Marine Insurance Co, LR 8 Ex 40 and 197 to which I have already referred. In such cases no question of exercising any alleged option to rescind is ever likely to arise. However, in the case of uncompleted indorsement slips the position will be different according to whether the amending line increases or decreases the extent of the cover. In such cases, if the alleged option exists, the position

of the insured or reinsured can be summarised as “heads I win, tails you lose.” If the cover is increased, he will hold the underwriter to his line. But if it is decreased, as in the present case, he will seek to exercise the alleged option. When one then considers the evidence of the alleged custom which the judge found to exist in the present case, one finds in my view that none of the witnesses were directing their minds to these implications, because none of them had in mind the possibility of an intervening loss before the slip had been fully subscribed. In effect, their evidence was only directed to the following question in the context of original slips and not of indorsement slips: “If an insured or reinsured changes his mind before a slip has been fully subscribed, or if it becomes apparent that the broker cannot procure completion of the slip on its original terms from the other underwriters, because they decline to follow the leader and require some alteration in the terms of the cover, is there a right or option of rescission, by the custom or practice of the market, in relation to the lines already written, in particular if the risk has already incepted?” The judge answered this question in the affirmative in relation to original slips, and went on to hold that the same consequences also apply to indorsement slips despite the absence of any evidence of custom in this regard: see [1982] QB 1022, 1039–1041. However, with great respect, in my view no option or right of rescission of any kind, whether by custom or implication of law, has been established in the present case, let alone after the occurrence of a loss affecting lines previously written on an indorsement slip. In relation to original slips, I do not think that the evidence was sufficient to establish any binding custom, even within the limits of the question set down above. In relation to indorsement slips there was simply no evidence at all, and no reason to believe that the market would accept the full implications which would follow from the judge’s conclusion in this regard. [His lordship then

reviewed the evidence of the witnesses at the original trial on whether any binding custom existed.] …With the greatest respect to Staughton J, I cannot begin to accept that any of this evidence goes anywhere near to establish a binding custom entitling an insured or reinsured, as of right and at his unfettered option, to cancel the contract resulting from the writing of a line which — as everyone agreed — is immediately binding on the underwriter. No doubt such situations would in practice be readily resolved by agreement, possibly subject to any “time on risk” premium which may be due, if and when requests for cancellation are made. But this is a long way from proof of a legal right by custom. A fortiori it is clear that there was no evidence whatever to suggest the existence of any such custom in relation to indorsement slips, let alone after the occurrence of a loss which, depending on the terms of the slip, would place the insured or reinsured in the “heads I win, tails you lose” position to which I have referred. Accordingly, I cannot accept the judge’s conclusions concerning the allegation of a binding custom. One then comes finally to the alternative basis on which an optional right to cancel was said to rest, viz, implication of law. However, given the conclusion that no custom to this effect has been established, it would clearly be impossible to conclude that an unfettered option of cancellation arises by implication of law as a matter of necessary business efficacy. Any such implication would be unnecessary, since it was agreed on all sides that it is always open to a broker wishing to test the market without commitment to do so by circulating a “quotation slip.” Moreover, in the case of indorsement slips which, depending on their terms, would entitle the insured or reinsured to cancel or to hold the underwriter to his line in the face of a claim which has meanwhile arisen, the implication of any such option would

also be clearly unreasonable, since one party would be at the mercy of the other. For these reasons I am left in no doubt that this appeal must be allowed and that Fennia’s counterclaim for payment on the basis of the original unamended slip must be dismissed. They had no right to require cancellation of the line written by Mr Hollis on the indorsement slip. The declaration to the same effect claimed by General Re appears to follow, but we should hear counsel as to whether it is appropriate to make any order in this regard.’

Slade LJ: ‘I have had the advantage of reading in draft the judgment of Kerr LJ. I respectfully agree with all of it… No doubt underwriters who operate in the London insurance market will value the goodwill of brokers who operate in the same market. It is not surprising, therefore, that in the situation referred to by Staughton J [before the slip has been fully subscribed] underwriters who have subscribed a slip may not ordinarily in practice stand on their strict rights, but will, as a matter of grace, permit cancellation. There is, however, the world of difference between a course of conduct that is frequently, or even habitually, followed in a particular commercial community as a matter of grace and a course which is habitually followed, because it is considered that the parties concerned have a legally binding right to demand it. As Ungoed-Thomas J pointed out in Cunliffe-Owen v Teather & Greenwood [1967] 1 WLR 1421, 1438: “What is necessary is that for a practice to be a recognised usage it should be established as a practice having binding effect.” …With great respect to [Staughton J], I therefore think that the evidence did not suffice to support his finding that there is a custom and practice of the London insurance market which gives an assured a legally enforceable right of the nature referred to at the beginning of this judgment. A

fortiori, as Kerr LJ has said, it is clear that there was no evidence to suggest the existence of any such custom in relation to indorsement slips, let alone after the occurrence of a loss. On the question of an implied term, I have nothing to add to what Kerr LJ has said, with which I fully agree. For these reasons and the further reasons given by him, I agree that this appeal must be allowed.’

The view that each underwriter enters into a separate contract on subscribing to the slip means that each could negotiate new terms, however, the practice of the market seems usually to work in a way that removes the problems this might cause. [520] American Airlines Inc v Hope [1974] 2 Lloyd’s Rep 301 (HL) Lord Diplock: ‘Contracts of insurance are placed at Lloyd’s by a broker acting exclusively as agent for the assured. It is he who prepares the slip in which he indicates in the customary “shorthand” the cover that the assured requires. He takes the slip in the first instance to an underwriter whom he has selected to deal with as leading underwriter, ie, one who has a reputation in the market as an expert in the kind of cover required and whose lead is likely to be followed by other insurers in the market. If it is the first contract of insurance covering that risk in which a particular underwriter has acted as leading underwriter it is treated as an original insurance. The broker and the leading underwriter go through the slip together. They agree on any amendments to the broker’s draft and fix the premium. When agreement has been reached the leading underwriter

initials the slip for his proportion of the cover and the broker then takes the initialled slip round the market to other insurers who initial it for such proportion of the cover as each is willing to accept. For practical purposes all the negotiations about the terms of the insurance and the rate of premium are carried on between the broker and the leading underwriter alone. Where, as is often the case, the slip gives to the assured options to cover additional aircraft or additional risks during the period of the cover it does so on terms to be agreed with the leading underwriter. This is indicated by the abbreviation “tba L/U”. The slip contemplates its eventual replacement by a policy of insurance in the standard form in use at Lloyd’s for aviation risks, but subject to such deletions and additions as are indicated in the slip. Such additions are generally clauses which themselves follow a standard form and are sufficiently identified in the slip by a reference to a description or a number but some may be specially tailored to the particular requirements of the assured. In the latter case if the slip is for an original insurance the actual clause is set out in the slip itself, although it may be only in abbreviated form. After the slip has been initialled by all the insurers it is retained by the broker. In due course, often after several months, he prepares the policy from the slip. In the case of an original insurance he generally agrees the wording of the policy with the leading underwriter before taking it to Lloyd’s Policy Signing Office for signature. Almost invariably the slip provides that the wording of the policy is to be agreed by leading underwriter. Where this is the case the leading underwriter may occasionally consent to some clause going into the policy which was not provided for by the slip, if in his judgment it would not affect the premium. So there is the possibility of minor variations being made in the contract of insurance when the terms of the policy are agreed.’

6 The Doctrine of Insurable Interest in Property Insurance 6.1 Introduction Insurable interest is a prerequisite to recovery under a contract of insurance. It arises from the principle of indemnity and from a range of statutory provisions. The requirement is said to operate to distinguish insurance contracts from wagers. Prior to legislative intervention the general position at common law was that wagering contracts were enforceable — with the possible exception of fire insurance (see Sadler’s Co v Badcock (1743) 2 Atk 554) — and during the early eighteenth century it was the practice of marine insurers, for example, to underwrite risks without requiring the insured to demonstrate either ownership or some other legal interest in the ship or cargo to be insured. In essence these contracts were naked wagers on whether the vessel would successfully reach its destination. Although insurance was presumed to be a contract of indemnity, so that

only an insured with some interest which has been lost could recover, that presumption was rebutted by the use of phrases such as ‘interest or no interest’ in the contract. The prevalence of wagering which led to the statutory reforms extracted below is apparent from the commentaries of the time: [601] Thomas Mortimer, Every Man His Own Broker (London, WJ & J Richardson, 1801) ‘Insuring of property in any city or town that is besieged, is a common branch of gambling insurance in time of war; but ingenious gamesters, ever studious to invent new, and variegate old games, have, out of this lawful game, (for insurance in general is no more than a game of chances), contrived a new amusement for gentlemen…which is for one person to give another forty pounds, and if café Gibralter (for instance) is taken by a particular time, the person to whom the forty pounds are paid, is to repay £100; but if, on the contrary, the siege is raised before the time mentioned, he keeps the £40. In proportion as the danger the place is in of being taken increases, the premium of insurance advances; and when the place has been so situated, that repeated intelligence could be received of the progress of the siege, I have known the insurance to rise to £90 for one hundred… Of sham insurances…made on places besieged in time of war, foreign ministers residing with us have made considerable advantages. It was a well known fact, that a certain ambassador insured £30,000 on Minorca, in the war of 1755, with advices at the same time in his pocket that it was taken. Our government did not get the intelligence till two days after this transaction. It was the third before it was

made public; and thus the ambassador duped our people, who continued to accept premiums till the third day.’

A modern example illustrating an attempt to use insurance as a subterfuge for wagering is the Newbury International case: [602] Newbury International Ltd v Reliance National Insurance Co (UK) Ltd [1994] 1 Lloyd’s Rep 83 [The claimants, Newbury International Ltd, effected two policies to ‘indemnify’ them in respect of their contractual liability to pay £425,000 in the event of Russell Ingall, a well known racing driver, achieving a top three series position after the twelth race in the 1992–93 New Zealand International Formula Ford Series. In all matters relevant to the policy the claimants were represented by a Mr Graham Lorimer who, though not formally appointed a director of the claimant company, nevertheless managed its affairs]. Hobhouse J: ‘The substance of the matter which in my judgment emerges clearly from the evidence I have heard and read is that Newbury International never in truth had any insurable interest under either of these policies. They were merely a device by which Mr Graham Lorimer, through various of the companies that he represented or controlled, was seeking to raise money to finance a Formula 3 season in the United Kingdom in 1993. What he was doing was in substance placing bets upon Russell Ingall coming in the first three in the New Zealand Championship with the intention, when he won the bet, of using the proceeds in the way indicated…If

policies of prize indemnity insurance are to be valid contracts of insurance they must be a true liability to another which is the subject matter of the insurance.’

Note: As is apparent from the eighteenth and nineteenth century statutes extracted below (see particularly the Preamble to the 1745 Act and section 1 of the 1774 Act), wagering was viewed as an inherently evil practice and between 1745 and 1845 Parliament sought to address the societal waste it was perceived as causing. The legislation was directed towards prohibiting the enforcement of wagering agreements by requiring, for the purposes of insurance, an insurable interest. A further problem to which this requirement was directed was that posed by moral hazard namely, that an insured lacking insurable interest might succumb to the temptation of engineering the loss in order to gain from the proceeds of the policy. Put simply, the rationale is that if an insured is indemnified only to the extent of his or her interest in the insured property there is little or no incentive to bring about the loss in order to receive an insurance windfall. We consider the merits of this policy concern below. But for present purposes, the link between insurable interest and the principle of indemnity (see chapter 13) should be noted.

6.1.1 The Principal Legislation

(i) The Marine Insurance Act 1745 made insurable interest a prerequisite to the validity of a marine policy: [603] Marine Insurance Act 1745 (19 Geo II, c 37). ‘Preamble the making assurances, interest or no interest, or without further proof of interest than the policy, hath been productive of many pernicious practices, whereby great numbers of ships, with their cargoes, have either been fraudulently lost and destroyed, or taken by the enemy in time of war; and such assurances have encouraged the exportation of wool, and the carrying on many other prohibited and clandestine trades, which by means of such assurances have been concealed, and the parties concerned secured from loss, as well to the diminution of the publick revenue, as to the great detriment of fair traders: and by introducing a mischievous kind of gaming of wagering, under the pretence of assuring the risque on shipping, and fair trade, the institution and laudable design of making assurances, hath been perverted; and that which was intended for the encouragement of trade and navigation, has in many instances, become hurtful of, and destructive to the same.’

By section 1 all insurance contracts made on British ships and their cargoes are “null and void” where they are made ‘interest or no interest, free of average, and without benefit of salvage to the assurer.’ Such a policy was declared void even if the ‘insured’ did, in fact, possess an insurable interest.

The 1745 Act was repealed by the Marine Insurance Act 1906. [604] Marine Insurance Act 1906 (6 Edw 7 c 41) ‘4. Avoidance of wagering or gaming contracts (1) Every contract of marine insurance by way of gaming or wagering is void. (2) A contract of marine insurance is deemed to be a gaming or wagering contract— (a) Where the assured has not an insurable interest as defined by this Act, and the contract is entered into with no expectation of acquiring such an interest; (b) Where the policy is made “interest or no interest”, or “without further proof of interest than the policy itself,” or “without benefit of salvage to the insurer,” or subject to any other like term: Provided that, where there is no possibility of salvage, a policy may be effected without benefit of salvage to the insurer.’

The Marine Insurance (Gambling Policies) Act 1909 (9 Edw 7, c12), section 1(1) goes on to provide that a person effecting a marine insurance without interest shall be guilty of an offence, and shall be liable, on summary conviction, to imprisonment. (ii) The second legislative intervention was directed towards making insurable interest a prerequisite to the validity of a life policy (see chapter 7) although, given the language of the Act, there is some doubt as to whether it applies to real property insurance (see below). You should note

that the stated objective of the statute is to address ‘mischievous’ gaming. [605] The Life Assurance Act 1774 (14 Geo III, c 48) ‘Preamble An Act for regulating Insurance upon Lives, and for prohibiting all such Insurances except in cases where the Persons insuring shall have an interest in the Life or Death of the Persons insured. 1. No insurance to be made on lives, etc, by persons having no interest, etc. Whereas it hath been found by experience that the making insurances on lives or other events wherein the assured shall have no interest hath introduced a mischievous kind of gaming: For remedy whereof, be it enacted by the King’s most excellent Majesty, by and with the advice and consent of the lords spiritual and temporal, the commons, in this present Parliament assembled, and by the authority of the same, that from and after the passing of this Act no insurance shall be made by any person or persons, bodies politick or corporate, on the life or lives of any person, or persons, or on any other event or events whatsoever, wherein the person or persons for whose use, benefit, or on whose account such policy or policies shall have not interest, or by way of gaming or wagering: and that every assurance made contrary to the true intent and meaning hereof shall be null and void to all intents and purposes whatsoever. 2. No policies on lives without inserting the names of persons interested, etc. And…it shall not be lawful to make any policy or policies on the life or lives of any

person or persons, or other event or events, without inserting in such policy or policies the person or persons name or names interested therein, or for whose use, benefit, or on whose account such policy is so made or underwrote.

(Section 2 was amended by section 50 of the Insurance Companies Amendment Act 1973: ‘50 (1) Section 2 of the Life Assurance Act 1774 (policy on life or lives or other event or events not valid unless name or names of assured etc. inserted when policy is made) shall not invalidate a policy for the benefit of unnamed persons from time to time falling within a specified class or description if the class or description is stated in the policy with sufficient particularity to make it possible to establish the identity of all persons who at any given time are entitled to benefit under the policy. (2) This section applies to policies effected before the passing of this Act as well as to policies effected thereafter.’) 3. How much may be recovered where the insured hath interest in lives. And…in all cases where the insured hath interest in such life or lives, event or events, no greater sum shall be recovered or received from the insurer or insurers than the amount of value of the interest of the insured in such life or lives, or other event or events. 4. Not to extend to insurances on ships, goods, etc. Provided always, that nothing herein contained shall extend or be construed to extend to insurances bona fide made by any person or persons on ships, goods, or mechandises, but every such insurance shall be as valid and effectual in the law as if this Act had not been made.’

Note: The construction of the Life Assurance Act 1774 was recently subjected to thorough analysis by the Court of Appeal in Feasey v Sun Life Assurance Co of Canada [2003] EWCA Civ 885, considered in chapter 7 (see [707] and [708]). (iii) The next major legislative response to wagering contracts was the Gaming Act 1845. Previous Gaming Acts sought only to regulate aspects of wagering, principally securities given for money lost: see, for example, the Gaming Act 1664 (16 Cha c 7) and the Gaming Act 1710 (9 Anne C19). The 1845 Act is directed towards a general prohibition of gaming contracts and applies to ‘goods and merchandises’ which, until the passing of this Act, continued to be enforceable without interest: [606] Gaming Act 1845 (8 & 9 Vict C109) ‘18 Contracts by way of gaming to be void, and wagers or sums deposited with stakeholders not to be recoverable at law; saving for subscriptions for prizes. …All contracts or agreements, whether by parole or in writing, by way of gaming or wagering, shall be null and void; and no suit shall be brought or maintained in any court of law or equity for recovering any sum of money or valuable thing alleged to be won upon any wager, or which shall have been deposited in the hands of any person to

abide the event on which any wager shall have been made….’

(The Marine Insurance Act 1788 requires that every policy on goods contain the name of a person interested in them. The 1788 Act was repealed by the Marine Insurance Act 1906 insofar as it applied to marine policies. It still technically applies to land policies on goods).

Notes: 1. While section 4 of the Life Assurance Act 1774 expressly excludes insurances of goods, such contracts are nevertheless caught by the 1845 Act. 2. Insurance effected in expectation of acquiring an interest will not be void provided such interest can be shown at the time of loss. Similarly, a policy will not be void where the insured has an insurable interest at the time of the contract but not at the time of loss. It is also noteworthy that a limited interest is sufficient to denude the agreement of any element of wagering. However, in such cases the indemnity principle operates to require the insured to hold insurance monies on trust for the owner, for example a bailor, to the extent that they exceed the value of the insured’s interest in the property (Waters v Monarch Life and Fire Assurance Co (1856) 5 El & Bl 870, (see below, [622]).

3. Although for fire insurance the common law required interest at the time of effecting the policy and at the time of the loss (Sadler’s Co v Badcock (1743) 2 Atk 554, Lord Chancellor Hardwicke), the current position is that for indemnity insurance the insured must possess insurable interest at the time of the loss if he or she is to recover under the policy. Indeed, it is fairly common to effect insurance before the subject matter has come into existence (eg crops). 4. In summary, the insurable interest doctrine represents a prophylactic response to insurance contracts being used as a subterfuge for wagering and the intentional destruction of property or life. Where insurable interest is lacking the contract is declared null and void by all the statutes extracted above ([604]–[606]) and, for the purposes of the Life Assurance Act 1774, illegal (see further chapter 7). It was commented above that it is unclear from the drafting of the Life Assurance Act 1774 whether it applies to real property insurance. As a consequence, the issue has been left to the courts to resolve and the caselaw is not entirely consistent: [607] Re King, Robinson v Gray [1963] Ch 459 (CA) [The facts are immaterial].

Lord Denning: ‘You must remember that when you take out a policy of fire insurance of a building (as distinct from goods), you must insert in the policy the names of all the persons interested therein, or for whose use or benefit it is made. No person can recover thereon unless he is named therein, and then only to the extent of his interest. That is clear from the Life Assurance Act 1774 (14 Geo 3, c 48), ss 2, 3, and 4, which by its very terms applies to “any other ‘event’ as well as life.”’

[608] Mark Rowlands Ltd v Berni Inns Ltd [1986] 1 QB 211 (CA) [The basement area of a building was leased by the plaintiff to the defendant. Due to the negligence of the defendant the whole building was destroyed by fire. The lease had provided that the claimant would insure the property and the defendant would contribute a sum amounting to approximately one quarter of the premium, this being a fair proportion of the entire insurance premium for covering the whole building against loss or damage. The defendant was relieved from the covenant to repair in respect of ‘damage by or in consequence of any insured risks.’ However, the defendant was not a party to the insurance. The insurer therefore argued that the defendant could not benefit from the fire insurance because it was not named in the policy as required by section 2 of the 1774 Act]. Kerr LJ: [cited section 2 of the 1774 Act]

‘Although obviously directed primarily to life insurance, the words ‘or other event or events’ admittedly widen its scope. A literal application of the language of section 2 would create havoc in much of our modern insurance law… In my view [counsel for the defendant] was right in his submission that this ancient statute was not intended to apply, and does not apply, to indemnity insurance, but only to insurances which provide for the payment of a specified sum upon the happening of an insured event. I think that this is supported by the long title of the Act, and in Halsbury’s Statutes of England, 3rd edn, vol 17 (1970), p 827, it is pointed out that this Act is also known as the Gambling Act 1774. In Dalby v India and London Life Assurance Co (1854) 15 CB 365, 387 [see chapter 7, [705]] the judgment of the court, delivered by Parke B., appears to distinguish insurances covered by this Act from indemnity insurance….’

[609] Siu Yin Kwan v Eastern Insurance Ltd [1994] 2 AC 199 (PC) [For the facts and another part of the judgment see below, [635]]. Lord Lloyd of Berwick: ‘They now turn to consider the second main defence, based on section 2 of the Life Assurance Act 1774. It can be dealt with quite shortly. Mr Thomas [counsel for the insurers] submits, and the majority of the Court of Appeal have held, that the policy is payable on the happening of an event, within the meaning of section 2 of the Act, that event being the insured’s liability to pay compensation in respect of injury to his employees. Since the name of the person interested, that is to say Axelson, was not inserted in the policy, the insurance is unlawful and void. The meaning of

section 2 of the Act was considered recently by the Court of Appeal in Mark Rowlands Ltd v Berni Inns Ltd [19861 QB 211, a case of fire insurance…The question was whether the policy taken out by the plaintiff enured for the benefit of the defendant, although his name did not, appear in the policy. It was held that the policy did not infringe section 2 of the Act, since the Act was not intended to apply to indemnity insurance…[Lord Lloyd cited Lord Denning’s judgment in In re King, decd (above, [607])]. Faced with this conflict of authority their Lordships prefer the decision of the Court of Appeal in the former case. In In re King, decd the point was not argued. The observation of Lord Denning MR was obiter and is not reflected in the judgments of the other two members of the court. Some doubt as to the correctness of Mark Rowlands Ltd v Berni Inns Ltd is expressed in MacGillivray and Parkington, p 155, para 154. But their Lordships do not share these doubts. There are two reasons why their Lordships prefer the decision in Mark Rowlands Ltd v Berni Inns Ltd. In the first place the words “event or events” in section 2, while apt to describe the loss of the vessel, are hardly apt to describe Axelson’s liability arising under the Employees’ Compensation Ordinance, or at common law, as a consequence of the loss of the vessel. Secondly, section 2 must take colour from the short title and preamble to section 1. By no stretch of the imagination could indemnity insurance be described as “a mischievous kind of gaming.” Their Lordships are entitled to give section 2 a meaning which corresponds with the obvious legislative intent.’

Notes: 1. Some jurisdictions have resolved the issue by amending the 1774 Act. In New South Wales, for example, the relevant statute (the Imperial

Acts Application Act 1969 (NSW)) excludes from the requirement of insurable interest: ‘insurance made by any person on ships or goods [and] contracts of indemnity against loss by fire or loss by other events whatsoever.’ 2. The Australian Law Reform Commission Report No 20, para 109 notes that ‘the effect of this exclusion would appear to be that, in New South Wales, the direct statutory requirement of insurable interest applies only to life, personal accident and other forms of nonindemnity insurance.’ It is to be hoped that similar measures will be taken in England so as to clear up the confusion surrounding the applicability of the 1774 Act.

6.2 Determining Insurable Interest Notwithstanding the critical importance of insurable interest to the validity of a policy, there is no consistent principle in common law jurisdictions governing its determination. The conventional definition is that an insured must possess some legal, equitable or contractual interest in the subject-matter of the policy (compendiously termed the legal interest test). Broadly speaking this means that an insured must have a proprietary interest in the insured property. However, most common law jurisdictions, notably Australia, Canada, New Zealand and the majority of US jurisdictions, have adopted the wider factual expectancy test whereby the

determinative question is whether or not the insured suffered some actual loss or detriment from the damage or destruction of the insured property, or stood to gain some advantage or benefit from its continued existence. Although the line of cases extracted below involved marine insurance, the views expressed by the various judges therein have been applied more generally to the definition of insurable interest. [610] Le Cras v Hughes (1782) 3 Dougl 79 [Sailors, commanded by a Captain Luttrell, and land forces captured an enemy Spanish ship ‘St Domingo’ together with its cargo. The Prize Act provided that captors of ships were entitled to be vested through proclamation by the Crown with rights to the seized property. The captain and crew insured the ship for the voyage back to England, during which it was destroyed due to the perils of the sea. The insurers refused the claim on the basis that the insureds lacked insurable interest. The insureds sued]. Lord Mansfield: ‘The defendants have set up a most unfavourable defence. At the time of the insurance being effected they were as well acquainted as Captain Luttrell with all the circumstances of the case; they knew that Captain Luttrell had no intention whatever of effecting a gaming policy, and yet they have not even offered to return the premium…The question, whether the sea-officers had an insurable interest, depends, 1. On the Prize Act and proclamation; or, 2. Putting the Act and proclamation out of the case, on the possession,

and on the expectation, warranted by almost universal practice. The first is the strongest ground, because it gives an interest, which will support an action. The whole that is taken is given to the Navy…If this be correct, there is an end of the question. But, 2. Is the expectation a sufficient interest? Wherever a capture has been made, since the Revolution, by sea or land, the Crown has made a grant: there is no instance to the contrary. Then, is the contingency of the ship’s coming home a risk the captors may provide against? It has been said that since the Statute of Geo 2 insurance is a contract of indemnity. An interest is necessary, but no particular kind of interest is required….’

[611] Boehm v Bell (1799) 8 TR 154 [The insureds had seized a ship as a prize. When the capture was adjudged unlawful by the Admiralty Court they sought to reclaim the premium on the basis that they lacked insurable interest in the vessel. They argued that the consideration upon which the premium was paid to the underwriters had failed because they lacked title to the vessel. Citing Le Cras v Hughes, the insurers contended that interest is not dependent upon possessing an absolute indefeasible title. A contingent interest is sufficient]. Grose, J: ‘This is a claim by the plaintiffs for a return of premium, on the ground that the assured had no insurable interest in the property. But it would be opening a source of infinite litigation, if we were to decide that this action could be maintained, and that a portion of the premium ought to be returned, in the event of its appearing that the assured had not an interest up to the extent of the insurance…With

regard to the [insurers contention], it seems to me that the whole difficulty has arisen from confounding an absolute indefeasible interest with an insurable interest. It is not pretended that the assured had the absolute property in the subject of insurance; neither need they have such property to make the policy legal; it is sufficient if they bad an insurable interest: and according to what was said by Lord Mansfield in the case of Le Cras v Hughes, they certainly had an insurable interest. If they had succeeded in the Court of Admiralty, it will be admitted that they had an insurable interest: and in case of their not succeeding there, there were events in which they might be made answerable, and against which it was competent to them to insure. I am therefore satisfied that they had an insurable interest in the subject insured; and this is a full answer to the present action.’

Lawrence J: ‘The case turns on this short question, whether or not the assured had an interest which they might insure? Did they mean to game? Or was not there a loss against which they might indemnify themselves, by a policy of insurance? I do not mean a certain, but a possible loss. Now, it has been shewn that this was a case in which the Court of Admiralty might have decreed them to pay damages and costs; and that is sufficient. It might be asked, in the language of Lord Mansfield, in Le Cras v Hughes, “Had not the insured such an interest in the ship coming home, as to entitle them to an indemnity?” I think that they had; and therefore that the plaintiffs are not entitled to a return of premium.’Postea to the defendant.

[612] Barclay v Cousins (1802) 2 East 545 [The facts appear from the judgment]

Lawrence J: ‘The case states that the insured shipped on board the ship “Jonah” a cargo of goods to be carried on a trading voyage; so that it appears that he had an interest in the profits to arise from a cargo which was liable to be affected by the perils insured against. And the question is, if on an insurance made on the profits to arise from such cargo can the plaintiff recover? As insurance is a contract of indemnity it cannot be said to be extended beyond what the design of such species of contract will embrace, if it be applied to protect men from those losses and disadvantages, which but for the perils insured against the assured would not suffer: and in every maritime adventure the adventurer is liable to be deprived not only of the thing immediately subjected to the perils insured against, but also of the advantages to arise from the arrival of those things at their destined port. If they do not arrive, his loss in such case is not merely that of his goods or other things exposed to the perils of navigation, but of the benefits which, were his money employed in an undertaking not subject to the perils, he might obtain without more risk than the capital itself would be liable to: and if when the capital is subject to the risks of maritime commerce it be allowable for the merchant to protect that by insuring it, why may he not protect those advantages he is in danger of losing by their being subjected to the same risks? It is surely not an improper encouragement of trade to provide that merchants in case of adverse fortune should not only not lose the principal adventure, but that that principal should not in consequence of such bad fortune be totally unproductive; and that men of small fortunes; should be encouraged to engage in commerce by their having the means of preserving their capitals entire, which would continually be lessened by the ordinary expenses of living, if there were no means of replacing that expenditure in case the returns of their adventures should fail. Where a capital is employed subject

to such risks, in case of loss the party is a sufferer by not having used his money in a way, which might with a moral certainty have made a return not only of his principal but of profit: and it is but playing with words to say that in such case there is no loss because there is no possession, and that it is but a disappointment. Foreign writers upon insurance, whose doctrines form the greatest part of our law on this subject, certainly do not treat of insurance on profits as a matter inconsistent with the true nature and design of such a contract; and where it is spoken of by them as a species of insurance which cannot be made, this latter doctrine will be found to be referable to the positive institutions of different nations, who have thought it wise to prohibit it…In this country there is no law forbidding such insurance, unless it could be shewn that the insurer had no interest in the profits, or that from its nature it must be a mere wager, so as to bring the case within the Stat 19 Geo 2. And that they are not considered as contracts inconsistent with the general nature of insurance is proved by the instance put of all insurance oil freight; which, as was very truly argued at the Bar, differs only from the case now before us in the same degree as a return of capital vested in shipping differs from a return of capital vested in merchandise; and by the cases Grant and Parkinson, in Marshall, 111, and Park 267, which was an insurance on the profits of a cargo of molasses; and the case of Henrickson and Walker, and Henrickson and Margetson, Mich 1776. The authority of Grant and Parkinson as applied to this case has been attempted to be gotten rid of by observing that the thing insured there was the profits of a specific cargo; but in that respect the two cases do not differ: for this is an insurance on a specific cargo; and we have no ground to say that the profits of a cargo to be exchanged in the African trade, from which exchange the profits will arise, are not, to use the expression of Lord Mansfield in Grant and Parkinson, pretty certain; admitting for the sake of the argument,

which it is not necessary for us now to determine, that in some mercantile adventures there may be so much uncertainty as to the profits, as to make it not possible to insure them without the policy being a wagering contract. This however we cannot presume of the returns to be made from an adventure undertaken according to a long established course of trade like that in question, in which numbers have been engaged to great advantage for a continued succession of years.’

Note: The leading case on the definition of insurable interest, and one which has shaped judicial thinking throughout Anglo-Commonwealth jurisdictions and the USA, is Lucena v Craufurd. [613] Lucena v Craufurd (1806) 2 Bos & Pul (NR) 269 [Commissioners had been given statutory authority to take charge of Dutch ships and cargoes in England. Acting under the orders of the Admiralty, a Royal Navy ship took several Dutch ships at sea. The commissioners then arranged to insure the ships while they were on their way to England. The ships were lost before they arrived. While the provisions of the legislation meant that the commissioners would clearly have had an insurable interest in the ships if they reached England, the issue was whether such an interest existed before the ships arrived. The case was first argued before Lord Kenyon CJ, the trial judge, and a special jury at the Guildhall in 1799; it

was then appealed to the Court of King’s Bench, the Exchequer Chamber, and finally reached the House of Lords in 1802. The majority of the judges in the Exchequer Chamber (Graham B, Rooke J, Thompson B, Hotham B, Macdonald CB, Lord Avanley CJ and Heath J) said: ‘an inchoate interest though imperfect till a given contingency shall have taken place is nevertheless insurable…It may be admitted that a mere hope or expectation cannot be insured, and it may therefore also be admitted that the next of kin to a person in a dying state and incapable of making a will, who has property on the sea, cannot insure that property…. Where nothing intervenes between the subject insured and the possession of it, but the perils insured against, the person so situated may insure the arrival of such subject of insurance, for he has an interest to avert the perils insured against…These commissioners had not a mere ideal expectation of probable interest, but an interest vested in them as trustees’ ((1802) 3 B & P 75).

In the House of Lords the majority of the judges called to give their advice (Le Blanc J, Grose J and Sir James Mansfield CJ took the same view as the majority in the Exchequer Chamber (in fact they were joined by judges that had already been of the majority in the lower court: Graham B, Rooke J, Heath J and Thompson B): ‘a vested interest is not necessary to give the right of insuring. The commissioners had a contingent interest; and supposing the intentions of the crown to remain unaltered, nothing stood between them and the vesting of that

contingent interest but the perils insured against…The question always is, whether the policy be a gaming contract? If it be no artifice how can it elude the force of the statute? The case of Le Cras v Hughes was infinitely more likely to introduce an abuse of the statute than the present case. That has been decided above 20 years; yet what ill consequences have followed? The same may be said of valued policies. In the case of wagering policies, any number of persons may make insurances on the same ship. But that is not the case here. If the commissioners could not insure this property, the Dutch owners could not; and it would be a strange paradox to assert, that these are ships and cargoes subject to all the perils of the sea in their voyage, and yet none are competent to insure them.’

In the House of Lords, two judges (Chambre J and Lawrence J) dissented from the advice offered by the majority and declared that there was no insurable interest. Chambre J (who had also dissented in the Exchequer Chamber), stated that the statute appointing the commissioners did not give them powers with regard to property until it arrived in the country, so that the only claim of interest was ‘a mere naked expectation of acquiring a trust or charge respecting the property without a scintilla of present right either absolute or contingent, in possession, reversion, or expectancy, in the proper legal sense of the word’].

Note: Lawrence J’s advice to the House of Lords and Lord Eldon LC’s speech, while reaching the same conclusion that the Commissioners lacked insurable

interest, contained what have become two competing tests for its determination. Lawrence J thought that a factual expectancy of interest was sufficient to demonstrate insurable interest while Lord Eldon preferred a narrower legal interest test. Lawrence J: ‘It is first to be considered what that interest is, the protection of which is the proper object of a policy of assurance. And this is to be collected from considering what is the nature of such contract…Mr Justice Blackstone in his Commentaries (v 2, 458), states it to be a contract between A and B upon A’s paying a premium equivalent to the hazard, B will indemnify or secure him against a particular event. These definitions by writers of different countries are in effect the same, and amount to this, that insurance is a contract by which the one party in consideration of a price paid to him adequate to the risk, becomes security to the other that he shall not suffer loss, damage, or prejudice by the happening of the perils specified to certain things which may be exposed to them. If this be the general nature of the contract of insurance, it follows that it is applicable to protect men against uncertain events which may in any wise be of disadvantage to them; not only those persons to whom positive loss may arise by such events, occasioning the deprivation of that which they may possess, but those also who in consequence of such events may have intercepted from them the advantage or profit, which but for such events they would acquire according to the ordinary and probable course of things. In the case of the loss of property it is obvious that the owner is prejudiced, and that therefore it is of importance to him, and he is concerned to avert the damage that it may be exposed to; in other cases there may be some difficulty in showing if the event had not happened, that those advantages would have arisen,

against the interception of by sea risks the assured means to be indemnified, but that difficulty when the nature of the contract is considered abstractedly does not prove that it must be confined to matters of property, where from the variety of probable contingencies (which independent of the specified risks may prevent the assured from deriving any benefit from the subject matter insured), it is impossible to weigh the probability of its being intercepted by such risks; an interest so uncertain may not be the subject of insurance…That a man must somehow or other be interested in the preservation of the subject-matter exposed to perils, follows from the nature of this contract, when not used as a mode of wager, but as applicable to the purposes for which it was originally introduced; but to confine it to the protection of the interest which arises out of property, is adding a restriction to the contract which does not arise out of its nature…A man is interested in a thing to whom advantage way arise or prejudice happen from the circumstances which may attend it…And whom it importeth, that its condition as to safety or other quality should continue: interest does not necessarily imply a right to the whole, or a part of a thing, nor necessarily and exclusively that which may be the subject of privation, but the having some relation to, or concern in the subject of the insurance, which relation or concern by the happening of the perils insured against may be so affected as to produce a damage, detriment, or prejudice to the person insuring and where a man is so circumstanced with respect to matters exposed to certain risks or dangers, as to have a moral certainty of advantage or benefit, but for those risks or dangers he may be said to be interested in the safety of the thing. To be interested in the preservation of a thing, is to be so cirumstanced with respect to it as to have benefit from its existence, prejudice from its destruction. The property of a thing and the interest deviseable from it may be very different: of the first the price is generally the measure, but

by interest in a thing every benefit and advantage arising out of or depending on such thing, may be considered as being comprehended…’

Notes: 1. Thus, in essence, for Lawrence J insurable interest is satisfied where the insured will be prejudiced by the loss of the subject-matter of the insurance while benefiting from its existence. 2. Lord Eldon LC delivered the principal speech in the House of Lords. His speech warrants careful reading because, as we shall see, the legal interest test formulated by him continues to generate controversy among judges and commentators alike. Lord Eldon: ‘The question is, Whether the power, or faculty, or right of concern and management which these commissioners might or might not have had, which they would have had if these ships had come into port, and which they might have ceased to have the moment after, be the subject of a legal insurance? Since the 19 Geo 2 it is clear that the insured must have an interest, whatever we understand by that term. In order to distinguish that intermediate thing between a strict right, or a right derived under a contract, and a mere expectation or hope, which has been termed an insurable interest, it has been said in many cases to be that which amounts to a moral certainty. I have in vain endeavoured however to find a fit definition of that which is between a certainty and an expectation; nor am I able to point out what is an interest unless it be a right in the

property, or a right derivable out of some contract about the property, which in either case may be lost upon some contingency affecting the possession or enjoyment of the party. In the 19 Geo 2, as well as in every other statute and charter relating to insurance, the objects of insurance are plainly described to be ships, cargoes, wares, merchandises, or effects. One or two later statutes mention property — but as to expectation of profits and some other species of interest which have been insured in later times, there is nothing to show that they were considered as insurable. I do not wish that certain decisions which have taken place since the 19 Geo 2 should be now disturbed, but considering the caution with which the Legislature has provided against gambling by insurances upon fanciful property, one should not wish to see the doctrines of those cases carried further, unless they can be shown to be bottomed in principles less exceptionable than they would be found to be upon closer investigation. Lord Kenyon, in Craufurd v Hunter, considered the 19 Geo 2 as a legislative declaration that an insurance might have been effected before that statute without interest. It is with great deference that I entertained doubts on that subject…. But whatever may have been the common law, the 19 Geo 2 has prescribed what should be the law thereafter, and all courts of justice are bound to follow up the spirit of that Act. If this power and faculty of future concern be an insurable interest, we ought at least to take care not to extend to such interest a protection that would be denied to policies of a more solid nature, lest that sort of wagering in policies should grow up, which has of late been extending itself considerably. It has been said, that the commissioners either are or are not like trustees, consignees, or agents, and that they had as good an insurable interest as the captors in the “Omoa” case, or a creditor on the life of his debtor. If the “Omoa” case was decided upon the expectation of a grant from the crown, I never can give my assent to such a doctrine. That

expectation, though founded upon the highest probability, was not interest, and it was equally not interest, whatever might have been the chances in favour of the expectation. That which was wholly in the crown, and which it was in the power of his majesty to give or withhold, could not belong to the captors, so as to create any right in them, I am far from saying, however, that that case might not have been put upon other ground. The captors not only had the possession, but a possession coupled with the liability to pay costs and charges if they had taken possession improperly. There was also a liability to render back property which should turn out to be neutral, and a liability as agents to act for the king as their principal; and I should be disposed to say, that the king had an insurable interest as the person who had jus possessionis. His right indeed was liable to be affected by a sentence of the Court of Admiralty. But as the insured is often entitled to consider the property as gone the moment the capture takes place, so I think that the king may be considered as against all the world as having an interest in the property before condemnation for the purpose of insuring. With respect to the case of a trustee, I can see nothing in this case which resembles it. A trustee has a legal interest in the thing, and may therefore insure. So a consignee has the power of selling, and the same may be said of an agent. I cannot agree to the doctrine said to be established in the courts below, that an agent may insure in respect of his lien upon a subsequent performance of his contract, nor can I advise your lordships to proceed without much more discussion upon authority of that kind. There are different sorts of consignees: some have a power to sell, manage, and dispose of the property, subject only to the rights of the consignor. Others have a mere naked right to take possession. I will not say that the latter may not insure, if they state the interest to be in their principal. But in the present case the commissioners do not insure in respect of any benefit to themselves, nor of any

benefit to the crown, or to any other person or persons stated on this record; they insure merely as commissioners, and if they have a right so to insure, it seems to me that any person who is directed to take goods into his warehouse may insure; and that there is nothing to prevent the West India Dock Company from insuring all the ships and goods which come to their docks. If moral certainty be a ground of insurable interest, there are hundreds, perhaps thousands, who would be entitled to insure. First the dock company, then the dock-master, then the warehouse-keeper, then the porter, then every other person who to a moral certainty would have ally thing to do with the property, and of course get something by it. Suppose A to be possessed of a ship limited to B, in case A dies without issue; that A has 20 children, the eldest of whom is 20 years of age; and B 90 years of age; it is a moral certainty that B will never come into possession, yet this is a clear interest. On the other hand, suppose the case of the heir at law of a man who has all estate worth 20,000l a year, who is 90 years of age; upon his death-bed intestate, and incapable from incurable lunacy of making a will, there is no man who will deny that such an heir at law has a moral certainty of succeeding to the estate; yet the law will not allow that he has any interest, or any thing more than a mere expectation…Courts of justice sit here to decide upon rights and interests in property; rights in property, or interest derived out of contracts about property. They do not sit here to decide upon things in speculation. Speculative profits are nothing. I send my ship to India; I expect profit from the voyage; if the ship is lost, my, expectation is defeated ; but of those expected profits the law can have no consideration…I cannot accede to that which has been stated as part of the doctrine upon this subject — that unascertained profits, which may or may not be made, may be insured. The present case, however, assumes not only that a man may insure unascertained profits from his own

losses, but that he may insure profits to arise out of ships and goods, which he has not, and which he never may have in his possession, and from the management of which he never can obtain any profit. If I were bound now to state my opinion judicially upon this first count, I should be obliged very strongly to say, that the claims of the plaintiffs could not be supported…’

Notes: 1. Lord Eldon’s legal interest test has received legislative endorsement. The Marine Insurance 1906, drafted by Chalmers as a codifying statute, replicates his formulation: Marine Insurance Act 1906 ‘5. Insurable interest defined (1) Subject to the provisions of this Act, every person has an insurable interest who is interested in a marine adventure. (2) In particular a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss, or damage thereto, or by the detention thereof, or may incur liability in respect thereof.’

2.

Insurable interest spans the spectrum of ownership rights. While the obvious example is an absolute owner of property, others such as a remainderman whose interest is vested, a lessee and lessor, an adverse possessor, a mortgagor of land and a mortgagor of goods, possess sufficient rights in property to satisfy

the requirement. An equitable interest in goods or land such as that of a beneficiary under a trust, tenants in common, and joint tenants, will also suffice. A person with a limited interest in property may therefore possess insurable interest. This arises from the principle of indemnity (see chapter 13, below). Thus, bailees or carriers are able to effect valid insurance contracts on the property in their possession. Although they may insure the goods in question for their full value, the indemnity principle will limit the amount they can recover to a sum equal to their actual loss. Any excess will be held on trust for the third party owner (see Ebsworth v Alliance Marine Ins Co (1873) LR 8 CP 596, 629, per Bovill J). 3. A clear illustration of the legal interest test is afforded by Macaura v Northern Assurance Co Ltd — you should bear in mind that it is a fundamental principle of company law that a company is an entity distinct and separate from its members (see, Salomon v Salomon [1897] AC 22). [614] Macaura v Northern Assurance Co Ltd [1925] AC 619 (HL) [The insured, Macaura, was an unsecured creditor and the only shareholder in a limited company which owned a substantial quantity of timber, much of which was stored on his land. Two weeks after effecting insurance policies with several companies in

his own name, the timber was destroyed by fire. A claim brought by Macaura on the policies was disallowed on the ground that he lacked insurable interest in the timber]. Lord Buckmaster: ‘It must, in my opinion, be admitted that at first sight the facts suggest that there really was no person other than the plaintiff who was interested in the preservation of the timber. It is true that the timber was owned by the company, but practically the whole interest in the company was owned by the appellant. He would receive the benefit of any profit and on him would fall the burden of any loss. But the principles on which the decision of this case rests must be independent of the extent of the interest held. The appellant could only insure either as a creditor or as a shareholder in the company. And if he was not entitled in virtue of either of these rights he can acquire no better position by reason of the fact that he held both characters. As a, creditor his position appears to me quite incapable of supporting the claim…In the case of Moran, Galloway & Co v Uzielli [1905] 2 KB 555, where a creditor for ships’ necessaries was held entitled to insure the ship, the decision rested upon the fact that the creditor had a right in rem against the vessel, and the learned judge said that “in so far as the plaintiffs’ claim depends upon the fact that they were ordinary unsecured creditors of the shipowners for an ordinary unsecured debt, I am satisfied that it must fail. The probability that if the debtor’s ship should be lost he would be less able to pay his debts does not, in my judgment, give to the creditor any interest, legal or equitable, which is, dependent upon the safe arrival of the ship. This is, in my opinion, an accurate statement of the law, and the appellant therefore cannot establish his claim as creditor.”

Turning now to his position as shareholder, this must be independent of the extent of his share interest. If he were entitled to insure holding all the shares in the company, each shareholder would be equally entitled, if the shares were all in separate hands. Now, no shareholder has any right to any item of property owned by the company, for he has no legal or equitable interest therein. He is entitled to a share in the profits while the company continues to carry on business and a share in the distribution of the surplus assets when the company is wound up. If he were at liberty to effect an insurance against loss by fire of any item of the company’s property, the extent of his insurable interest could only be measured by determining the extent to which his share in the ultimate distribution would be diminished by the loss of the asset — a calculation almost impossible to make. There is no means by which such an interest can be definitely measured and no standard which can be fixed of the loss against which the contract of insurance could be regarded as an indemnity. This difficulty was realised by counsel for the appellant, who really based his case upon the contention that such a claim was recognised by authority and depended upon the proper application of the definition of insurable interest given by Lawrence J in Lucena v Craufurd. I agree with the comment of Andrews LJ upon this case. I find equally with him a difficulty in understanding how a moral certainty can be so defined as to render it an essential part of a definite legal proposition. In the present case, though it might be regarded as a moral certainty that the appellant would suffer loss if the timber which constituted the sole asset of the company were destroyed by fire, this moral certainty becomes dissipated and lost if the asset be regarded as only one in an innumerable number of items in a company’s assets and the shareholding interest be spread over a large number of individual shareholders. The authorities which have the closest relation to the present are those of Paterson v Harris

1 B & S 336 and Wilson v Jones L R 1 Ex 193; L R 2 Ex 139. In the first of these cases a shareholder in a company that was established for the purpose of laying down a submarine cable between the United Kingdom and America, effected an insurance upon his interest in the cable. The shareholder’s insurable interest in the cable does not appear to have been disputed and the real question, therefore, was never argued. In the case of Wilson v Jones where another policy was effected by a shareholder in the same company, it was distinctly held that the policy was not upon the cable but upon the shareholder’s interest in the adventure of the cable being successfully laid. It was attempted by the underwriters to limit the insurance to an interest in the cable itself, which would have lessened the risk, but it was held that this was not the true construction of the policy. It was not argued that, if it were, the shareholder had no interest to insure, but both Martin B in the Court of Exchequer and Willes J in the Exchequer Chamber, stated that the plaintiff had no direct interest in the cable as a shareholder in the company, and, so far as I can see, this consideration it was that assisted the Court in determining that the insurance was upon the adventure in which the shareholder had an interest, and not upon the cable in which he had none. There are no other cases that even approximately approach the present case, and, properly regarded, I think the case of Wilson v Jones is against and not in favour of the appellant’s contention. Upon the merits of this dispute, therefore, the appellant must fail. Neither a simple creditor nor a shareholder in a company has any insurable interest in a particular asset which the company holds. Nor can his claim to insure be supported on the ground that he was a bailee of the timber, for in fact he owed no duty whatever to the company in respect of the safe custody of the goods; he had merely permitted their remaining upon his land.’

Lord Sumner: ‘My Lords, this appeal relates to an insurance on goods against loss by fire. It is clear that the appellant had no insurable interest in the timber described. It was not his. It belonged to the Irish Canadian Sawmills, Ltd, of Skibbereen, Co Cork. He had no lien or security over it and, though it lay on his land by his permission, he had no responsibility to its owner for its safety, nor was it there under any contract that enabled him to hold it for his debt. He owned almost all the shares in the company, and the company owed him a good deal of money, but, neither as creditor nor as shareholder, could he insure the company’s assets. The debt was not exposed to fire nor were the shares, and the fact that he was virtually the company’s only creditor, while the timber was its only asset, seems to me to make no difference. He stood in no “legal or equitable relation to “the timber at all. He had no “concern in” the subject insured. His relation was to the company, not to its goods, and after the fire he was directly prejudiced by the paucity of the company’s assets, not by the fire.’

Note: As commented above, the legal interest test has attracted substantial criticism by both judges and commentators in major common law jurisdictions. The article by Harnett and Thornton (below, [615]) was particularly influential in leading the Supreme Court of Canada (see below, [616]) to reject Lord Eldon’s approach in favour of Lawrence J’s factual expectation test. [615] Bertram Harnett and John V Thornton, ‘Insurable Interest in Property: A Socio-

Economic Reevaluation of Concept’ (1948) 48 Col LR 1162

a

Legal

[Footnotes in the original have been omitted]. (I) INTRODUCTION ‘With the ever-growing economic interdependence of individuals and nations, there exists a concomitant tendency for law and economics continually to gravitate closer and closer together. Particularly manifest is this trend in the insurance field. The creation and enforcement of insurance contracts impinge at every turn upon the public interest and vitally affect the social and economic welfare of individuals… The requirement of insurable interest in property insurance, like most legal abstractions, has developed over the centuries primarily through judicial resolution of relatively isolated problems. Seldom have the courts examined the entire picture in terms of meaningful underlying policies, and the myopic views of older cases, canonised by precedent, often reflect themselves too brightly in later years to the detriment of sound modem analysis. Since the insurable interest question is a phase of the insurance problem which intimately concerns the buyer, the trade, the home office counsel, the specialist, and the general legal practitioner, it is the very warp and woof of the enforceability of insurance contracts. Without the prerequisite of insurable interest, the contract is unequivocally unenforceable. No conduct on the part of the insurer, verbal or non-verbal, can be relied upon to constitute a waiver or an estoppel to assert the defect. To further illustrate the strong public policy enunciated in this requirement, it is only necessary to realise that the incontestability clause typically found in life insurance

contracts does not operate as a bar to a defence rooted in the lack of insurable interest. The defence is similarly available, notwithstanding the fact that the policy sued on is in a valued form. Because the business of insurance is at the very nucleus of the modern commercial economy, and because the general public is a gigantic daily consumer of the insurance product, a legal requirement which permits the insurer’s escape from contractual liability in such sweeping terms must be constantly reevaluated for utility and correspondence to social and economic practices and expectations. In defining insurance interest, it is most helpful to define the words individually, and then taken together. Insurance properly viewed is a contract: “whereby one party…is obligated to confer benefits of pecuniary value upon another party…dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event [NY Ins Law § 41].” Interest is traditionally defined in terms of rights in the insured property, but it may also be characterised as such a relationship to property as makes a happening adversely affecting the insured property economically disadvantageous to the interest-holder. Insurable interest, then, is that kind of relationship to an occurrence, or, traditionally viewed, that kind of interest in the property insured, which a claimant must show in order to have a legally enforceable claim to recovery. As to when insurable interest must exist, there is a sharp conflict of authority. Some jurisdictions require the insurable interest to exist both at the inception of the policy and at the time of the loss. Many others hold the presence of the insurable interest

at the time of loss sufficient, merely demanding entire good faith in the insured at the inception. The objective of this study is to restate generally the types of insurable interests which have merited judicial recognition, followed by a critical analysis of the three policies supposedly underlying this sui generis requirement. These three policies are the policy against wagering, the policy against rewarding and thereby tempting the destruction of property, and the policy of confining insurance contracts to indemity. Upon the report of observed judicial conduct, and the analysis of the purposes of the requirement, a reevaluation of the entire concept will be set forth.

(II) THEORY VERSUS PRACTICE: THE INSURABLE INTEREST CONCEPT AS A WORKING TOOL A) Generic regrouping of conventional insurable interest categorisations… The range of interests embraced within the category “insurable” is not co-extensive with the law of property interests generally, but rather includes property interests and runs indeterminately beyond…As seen through the eyes of modern courts, the insurable interest concept possesses four main heads. The first and broadest heading embraces property rights, whether legal or equitable. The second and closely allied category includes those types of interests which are reflected in contract rights. The possibility of legal liability as a result of the insured event is the third division while the fourth is the controversial residuum category of “factual expectation of damage.” (1) Property right. In the law of insurable interest, an interest, operationally considered, is such a relation to property that an adverse occurrence may result in economic disadvantage upon the happening. In the usual course of events, the absolute owner of a unit of property is the

individual most likely to suffer economically from its destruction…It is not too much to say that the judicial quest for an incident of ownership is the largest factor to be considered in any discussion of insurable interest, whether the purpose be restatement, reevaluation, or reform. Thus it is that to courts, thinking in terms of property interests, insurable interest contains a distinct in rem connotation in the sense that the insured is required to have an enforceable interest in the res the destruction of which constitutes the insured event. A very common formulation of the property right grouping is in the terms, “an interest that would be recognised and protected by the courts.” This in essence is the conception of a property interest in the thing insured; the test seemingly is whether a court would enforce the interest in the property if the question should arise in an ownership controversy. Absolute ownership is the solid predictable foundation of this unsteady insurable interest structure that has often been constructed with the mortar of property concepts. However, every property interest is manifestly not absolute ownership of a physical property unit, and as this interest fades into less than absolute ownership, the courts follow the recession and allow insurability. Ultimately the property right required to constitute an insurable interest narrows to the thinnest of threads. The ownership concept, for classification purposes, serves well to categorise those insurable interests which are estates in land and personality. While holders of these estates are the persons most likely to seek property insurance, it must always be borne in mind that property interests such as theirs are not the only ones acceptable to the courts. Qualified property interests such as those of life tenants, remaindermen, reversioners, lessors, and lessees are sufficient to be insurable interests… Equitable interests in property which will be protected or enforced by the courts are widely held to be insurable

interests. These include the interest of a vendee under an executory contract to sell land, a mortgagor holding an equity of redemption, and a beneficiary of a trust. It is also held that one of multiple owners of property possesses an insurable interest in his own right, as in such relationships as partners, shareholders or corporations, joint tenants, tenants in common, and spouses in community property jurisdictions. omestead rights likewise give rise to insurable interest. Pressing further on into the field of more shadowy property interests, it is discovered that generally a holder of the property itself or of legal title in representative, trust, or bailment relationship is held to have an insurable interest. Of course, the insurance proceeds paid on the destruction of the res inure to others where the policyholder himself has no beneficial interest in the property. This classification encompasses executors and administrators, trustees, and bailees. In the same way, receivers and trustees in bankruptcy probably have insurable interests for the benefit of creditors. Broadly summarised, then, ownership of all or part of a property unit, whether it be traditionally denominated legal or equitable, is regarded as sufficient to constitute an insurable interest. However, ownership of a physical allocation of property is not strictly necessary to come within the property right conception. As indicated above, the main factor in the property right category is the essentially in rem theme of enforceable rights in a specific res. In the nature of the modern commercial economy the security device occupies a prominent niche, and these security devices typically do provide the creditor with enforceable rights in a specific res. Therefore, the courts have recognised the insurability of the interest of lienors and secured creditors, as well as that of their debtors. Thus, it is that mortgagor and mortgagee, pledgor and pledgee, conditional vendor and conditional vendee, all have

insurable interests. Similarly, lienors holding mechanics’ liens or artisans’ liens, and judgment creditors with statutory liens have insurable interests. A vendor who has contracted to sell realty also has an insurable interest so long as he retains legal title or a lien on the property… (2) Contract rights…the contract right may conceivably be an insurable interest, even though there are no rights specifically in the insured property…The problem then is to develop a working guide for determining just what interrelation between contract performance and existence of the property insured suffices to constitute compliance with the requirement of insurable interest. There are few cases allowing an insurable interest based on contract right without property right. Generalisation is difficult, but a rule may be stated in these terms: a contracting party whose contractual rights are directly contingent on the continued existence of a property unit has sufficient insurable interest to recover on a policy of insurance, the insured event of which is damage to, or destruction of, that property unit. This rule covers a contract situation in which the contractual rights are conditioned on the continued existence of the property, either expressly or by implication. In the case of the unsecured simple contract creditor, generally the contract does not depend on the existence of any particular piece of the debtor’s property, and evidently this distinction, while questionable on closer analysis, is relied upon by the courts in denying insurable interest in that situation. In