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The truth, the whole truth...
1 October 2009
Tackling policy response difficulties with Underwriters will all
too often be a difficult business. However, the recent High Court
appeal in R & R Developments Limited -v- Axa Insurance UK plc
(September 2009) seems to confirm a favourable judicial climate for
policyholders on such issues, at least for now.
The answers given by a client on the Proposal Form tend to
attract particular scrutiny from Underwriters upon the notification
of any new claim. In R & R Developments, brokers had arranged a
Commercial Combined and Contract Works policy, with the aim of
obtaining theft and damage cover for their client. The client had
completed a Statement of Fact comprised within the relevant
Proposal documentation. In this respect, the client had given the
‘usual’ declaration that “full and true answers to all questions”
had been supplied and further, the client was explicitly warned
that cover would only be accepted subject to those questions,
indeed, being true.
In this particular case, the focus was upon the following
question in the Proposal Form, which the client answered in the
negative:
“Have you or any Partners or Directors either personally or in
connection with any business in which they have been involved:
(i) ever been declared bankrupt or are the subject of any
bankruptcy proceedings or any voluntary or mandatory
insolvency?”
When, in due course, the client did make a claim against its
policy, Underwriters decided that the client had misrepresented the
position in the Proposal Form and had failed to disclose an
insolvency history associated to one of the client’s Directors, Mr
Molton. Mr Molton, it seems, had been a director of a number of
other companies that had variously been placed into administrative
receivership and compulsory liquidation. There was some suggestion
that, at the time of completing the relevant Proposal Form in 2006,
Mr Molton was still a Director of the business in administrative
receivership and that the receivership was still outstanding.
The Court was asked to rule on whether the relevant question on
the Proposal Form concerned only the insolvency of the proposer
client’s business or of any of its Partners or Directors as opposed
to any other company in which the Directors might have been
historically or presently involved.
The client argued that, here, the question put to the proposer
was ambiguous and as such, there could be no misrepresentation if
the answer given was true on a reasonable interpretation of the
question. In other words, what the judge had to consider was
not:
“… what is the correct construction of the question, but whether
the answer to the question was correct on the basis of a meaning
which could reasonably be attributed to it.”
Underwriters, on the other hand, argued that a different
approach was required where, as here, the answer to a question
became a term of the contract. In those circumstances, it was
suggested, the court merely had to decide what the correct meaning
of the question was and then assess whether, on that basis, it had
been correctly answered. However, even if Underwriters were wrong
about that, they submitted that the client “…could only rely on the
ambiguity of the question if he had in fact understood it in the
sense for which he now contended.” In this case, Underwriters cast
doubt on whether the person who had completed the Proposal Form had
in practice understood the question to be confined to the
insolvency of the client company or its Directors personally.
After reviewing the relevant authorities at some length, the
judge concluded that there was no need to examine the sense in
which the client had actually understood the question. Rather,
where there was ambiguity, the contra proferentem principle was “to
be applied both to the representation and, where it becomes a term,
to a term of the contract of insurance.” That is to say, on these
facts, any prevailing uncertainty was to be construed against
Underwriters, who were seeking to avoid the policy.
It is fair to say that the judge reached his view on this with
some hesitation. He recognised that it was potentially unreasonable
for a policyholder to “be able to rely on a meaning which (but for
contra proferentem) would not have been the meaning attributed to
the question and which was not how he understood it.” However,
impressed by the weight of the case law in this area, the judge was
still sure that:
“… in this context as in all others except for fraud, objective
construction reigns supreme and subjective understanding is
irrelevant.”
Turning, then, to the actual phraseology used for the question
in issue in this case, the judge found that the literal
interpretation made “good commercial sense”:
“It makes perfect sense to ask the insured about the Directors’
personal position, whether arising from their personal affairs or
from any businesses with which they have been involved, without
going further and asking about the position of the companies as
well.
The fact that insolvency was not a risk against which the client
would have been insured under this policy in any event, seems to
have been a supportive influence on the judge’s reasoning.
Similarly, if the interpretation put forward by the Underwriters
had been upheld, the judge found that “the representations required
of the insured would be both unreasonably vague and unreasonably
wide.” In this regard the judge’s comments betray a degree of
anti-insurer sentiment, which some might say traditionally prevails
in policy disputes of this sort:
“Whilst obviously there is no limit on what questions insurers
may ask, where the scope of the intended questions is as wide as
these insurers contend, they must ask them clearly and explicitly:
no court is going to assist insurers with a benevolent construction
of questions which (if that was indeed what was intended) were
asked in a muddled and confusing manner.”
Interestingly and incidentally, even if the judge had taken the
view that the question on the Proposal Form was ambiguous, he
considered that he would still have found that the meaning
attributed by the client to the question was a reasonable one and
therefore, applying the contra proferentem principle, the Court’s
view was that the client’s answer on the form was true in law in
any event.
Another important issue arose in the R & R Development
judgment, namely one surrounding the interplay between the client’s
representation in the Proposal Form and issues of material
non-disclosure. In short, Underwriters argued that Mr Molton’s
connections with those previous insolvent companies were material
facts that ought to have been disclosed. The client’s lawyers
countered by submitting that Underwriters had waived any enquiry
about other companies in which the Directors were involved by
asking the very specific questions that they did within the
Proposal Form.
Again, the judge upheld the client’s reasoning on this aspect
and found against Underwriters. By not bluntly asking questions
about the position of the Directors’ other businesses, Underwriters
had waived the point in this respect and accordingly, the
appropriate inference for the client to reach was that the
Underwriters were disinterested in the insolvency of any party
other than the client or its Directors.
As something of a final throw of the dice, Underwriters’ argued
that the Statement of Fact completed by the client effectively
operated as an anti-waiver provision: it had been made clear to the
client that – on top of answering the Form’s questions accurately,
the client had to disclose all material information which “may
influence” the Underwriters in their acceptance of the cover or its
terms. The judge rejected that point too by returning to his ruling
on the formulation of the relevant question in the Proposal Form.
Given that the question implied a lack of interest on the
Underwriters’ part in the specific subject matter “then ex
hypothesi, the information is not information which “may influence”
[Underwriters]”, he concluded.
This most recent decision in R&R Developments represents a
very comprehensive “hands down” success for a policyholder against
the Underwriters involved. Indeed, the Underwriters may yet seek to
appeal to the Court of Appeal and if they do, these will be
developments to watch with interest.
So far as time allows, it will always be useful to review
Proposal materials before claims are notified through to insurers
on behalf of clients. This can sensibly be done to ensure that
claims are generally presented in ‘apple pie order’. Scoping out
possible areas of ambiguity in advance, and seeking to marshal the
client’s position in those respects, is bound to leave brokers
well-placed to meet any queries and challenges that Underwriters
might raise.
This article was first published in Brokers
Monthly
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