Duty of fair presentation: No second chance for policyholders

The Court of Appeal’s decision in Delos Shipholding SA & Ors v Allianz Global Corporate and Speciality SE & Ors provides important clarification on the operation of the duty of fair presentation under the Insurance Act 2015, particularly in relation to the remedies available to insurers where there has been a breach of that duty. 

Of particular significance is the Court’s rejection of the argument that policyholders can avoid the consequences of non-disclosure by demonstrating that they would have complied with any alternative terms or conditions that the insurer would have imposed had the risk been fairly presented.

Key points from the judgment

1. The duty of fair presentation and remedies for breach

The Insurance Act 2015 (the Act) requires policyholders to make a fair presentation of the risk, disclosing every material circumstance known or which ought to be known. Where there is a breach, the Act provides a range of remedies for insurers, depending on whether the breach was deliberate or reckless, and crucially, what the insurer would have done had the risk been fairly presented.

Schedule 1 to the Act sets out that if the insurer would have entered into the contract but on different terms, the contract is to be treated as if it had been entered into on those different terms. However, the Act is silent on whether the insured can avoid the consequences of non-disclosure by showing that, had the alternative terms been imposed, they would have complied with them in practice.

2. The argument and its rejection

In Delos Shipholding, the claimant policyholders argued that, even if the insurer would have imposed a condition (in this case, requiring the resignation of a nominee director), they should still be entitled to indemnity because they would have complied with that condition had it been imposed. The absence of any express wording in the Act addressing this scenario gave some initial oxygen to this argument, as it does not explicitly state whether such a counterfactual is relevant.

The Court of Appeal, however, decisively rejected this approach. The Court held that the Act requires a notional change to the terms of the contract but does not contemplate a further hypothetical inquiry into what the insured would have done in response to those terms. The contract is simply to be treated as if it had been entered into on the terms the insurer would have required, and if those terms have not in fact been complied with, the insurer is entitled to reject the claim. 

The Court reasoned that allowing the insured to prove hypothetical compliance would introduce unnecessary complexity and circularity and is not supported by the language or structure of the Act.

3. Practical implications

• Certainty for insurers: Insurers can be confident that, where a fair presentation would have led to the imposition of additional terms or conditions, the policy will be treated as if those terms were in place. If the insured has not in fact complied with those terms, the insurer is not liable, regardless of what the insured says it would have done.

• No “second chance” for policyholders: Policyholders cannot avoid the consequences of non-disclosure by arguing, after the event, that they would have complied with any additional requirements. The focus is on the actual terms of the contract as it should have been, not on hypothetical compliance.

• Clarity in dispute resolution: The decision brings welcome clarity and avoids the need for speculative and potentially contentious factual inquiries into what the insured might have done in a counterfactual scenario.

Conclusion

This judgment closes the door on arguments that policyholders can retrospectively “cure” a breach of the duty of fair presentation by showing hypothetical compliance with alternative terms. The Court of Appeal’s decision provides certainty and reinforces the importance of full and frank disclosure at the time of placement or renewal. 

Policyholders and brokers should ensure that all material circumstances are disclosed, as the remedies for breach will be strictly applied in accordance with the Act and as now clarified by the Court of Appeal.