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Drake Insurance Plc v Provident Insurance Plc, Court of Appeal, 17 December 2003

24 December 2003
The issues

Insurance – Road Traffic – Association of British Insurers Dual Indemnity Agreements – Avoidance for Non-Disclosure – Material Facts.

The facts

Drake Insurance sought to recover a contribution in equity from Provident Insurance on the basis that both companies were Insurers of the same loss. A Third Party, Mrs Beach, had been injured by a car driven by Mrs Kaur. She had a Policy with Drake in respect of any car driven by her with its owners consent. Her husband, Dr Singh, was insured under his Policy with Provident in respect of the car, which Mrs Kaur was driving at the time of the accident. Mrs Kaur was a named driver on this Policy. The Provident purported to avoid its Policy on the grounds of non-disclosure by Dr Singh. Drake disputed the validity of that avoidance. When Mrs Kaur was sued by Mr Beach, Drake indemnified her and settled his claim. Provident disputed its liability to share with Drake for two reasons:-

Firstly on the ground of avoidance of Dr Singh’s Policy and secondly on the grounds of a special clause in Drake’s Policy limiting Drake’s liability in a case of double insurance to only half the loss. The Provident argued that by paying the loss in full, Drake was a volunteer and could not recover. The Trial Judge found in favour of the Provident on both points. Drake appealed to the Court of Appeal.

The decision

1. Was Provident entitled to avoid the Policy?

In February 1996 Dr Singh renewed his insurance with Provident. In the previous year, two relevant events had occurred. An accident which his wife had suffered as a named driver and which had been declared to Insurers on first entering into the contract of insurance, had settled satisfactorily and secondly, Dr Singh had been convicted for speeding. One event was negative and the other positive. In the circumstances, he would have been entitled to renewal at a normal rate, bearing in mind the Provident’s points system. In May 1996 he changed his Renault for a Mercedes and was charged an additional premium. He did not disclose his conviction. In July 1996 when Mr Beach had the accident with Mrs Kaur, the speeding conviction came to light. Independent’s computer records showed a notation that non-disclosure would have resulted in a 25% load at renewal. This however was on the basis that the conviction together with the previous accident Mrs Kaur had suffered would have had that automatic effect. In fact, without the earlier accident, which had in fact been settled satisfactorily, the non-disclosure of the conviction would have made no difference to load. The Provident had continued to collect monthly payments from Dr Singh in respect of his Policy and this continued even after the Provident had purported to avoid the Policy. The matter proceeded to Arbitration under the PIAS Scheme and in June 1997 the Arbitrator held that the Provident had been entitled to avoid the Policy on the grounds of non-disclosure. It was common ground that the Arbitrator’s award was binding as between Dr Singh and the Provident, but not between Drake and the Provident.

The legal burden of proving that the non-disclosure of the speeding conviction induced the contract, rested on the Provident. It was common ground that a higher premium would not have been claimed if the Provident had been aware both of the conviction and also the previous no-fault accident. (The subsidiary question was whether the Insurers were entitled to avoid on the basis of the information, which he had at the time of the contract or on the basis of the true state of affairs at that time. There was no known authority on this point. However, there seemed to be no reason why it should not be the case that the Insurer bore the risk that the true facts as at the time of the contract and conclusively established by the time of contract, do not support the right to avoid).

However, it seemed clear that if the speeding conviction had been disclosed, the Provident would have entered into the contract on the same terms. Provident failed to show that the non-disclosure induced the contract. The provident was not therefore entitled to avoid its policy.

2. Was the Provident’s right to avoid limited by the doctrine of good faith?

The duty of good faith and a contract of insurance was mutual and bound the Insurer as well as the Insured. The doctrine of good faith should be capable of limiting the Insurers right to avoid in circumstances where that remedy would operate unfairly. Once an Insured had been found wanting in good faith in the matter of pre-contractual non-disclosure, it was likely to be hard to conclude that the same doctrine of good faith prevented the Insurer from exercising his right to avoid. It might be that the existence in modern times of widespread insurance contracts of a consumer nature presented new problems to the law and that it might be necessary to give wider effect to the doctrine of good faith and recognise that its impact might demand that ultimately regard should be had to a concept of proportionality implicit in fair dealing. In this case however, it was not open to the Court to go behind the finding of the Judge that the Provident had acted in perfectly good faith in avoiding the contract.

The Provident was not entitled to avoid its Policy.

3. Was Drake a volunteer?

In Legal and General -v- Drake, Drake had been in the position occupied by Provident and the Court of Appeal had found that the Legal and General’s rights to recover the excess over 50% seemed to be a conclusive objection to a right of contribution. That case had been considered by the Privy Council in Eagle Star Limited -v- Provincial Insurance Plc. The Privy Council did not regard the mere existence of the rateable proportion clause as excluding the operation of the equitable rule of contribution. The situation is complex.

4. The question however is not whether Drake could recover the money from Mrs Kaur or Mr Beach, but whether the payment made in the circumstances in which it occurred was voluntary as against Provident so as to remove the equity for Drake’s prima facie right to recover a contribution from it. It had been made clear to the Provident that Drake was in dispute with Provident as to Provident’s liability to join in in indemnifying Mrs Kaur/Dr Singh and that it would pay under reserves and litigate the issue with Provident if it had to. If Drake had insisted that the settlement with Mr Beach and the indemnification of Mrs Kaur should await the outcome of its litigation with Provident, it would not only have brought the insurance industry into disrepute, but would have relegated substance to mere form.

Drake was not a volunteer – Appeal allowed.

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