A FAIR PRESENTATION

5.12 It is now common for the courts to describe the policyholder’s duty in terms of making “a fair presentation of the risk”. A search of reported judgments shows that the phrase “fair presentation of the risk” has been used in at least 15 insurance non-disclosure cases in the past ten years.⁷

5.13 The “fair presentation of the risk” is a more limited concept than “every material circumstance”. As a recent case puts it:

A minute disclosure of every material circumstance is not required.

The assured complies with the duty if he discloses sufficient to call the attention of the underwriter to the relevant facts and matters in such a way that, if the latter desires further information, he can ask for it. A fair and accurate presentation of a summary of the material facts is sufficient if it would enable a prudent underwriter to form a proper judgment, either on the presentation alone, or by asking questions if he was sufficiently put upon enquiry and wanted to know further details, whether to accept the proposal and, if so, on what terms.⁸

5.14 This raises the question of what information should be included in “a fair presentation”. The cases suggest that the policyholder should provide some standard information, together with information about particularly unusual or special circumstances. The policyholder should also mention any particular concerns which motivated it to seek the insurance.

The need to disclose past losses

5.15 The case of Marc Rich & Co v Portman illustrates some of the problems which can arise from disclosure.⁹ Marc Rich & Co traded in crude oil, for which they chartered ships to transport oil around the world. They were liable to pay demurrage¹⁰ to the charterers if there was more than a set period of delay in unloading. They sought to insure themselves against this risk.

5.16 The head of the insurance department at Marc Rich & Co, Mr Gibson, gave the judge a graphic account of his experience in obtaining insurance:

7 This does not include appeals on the same case.

8 Garnat Trading & Shipping (Singapore) Pte Ltd and Another v Baominh Insurance

Corporation [2010] EWHC 2578 (Comm); [2011] 1 Lloyd's Rep. 589, by Clarke J. The case proceeded to the Court of Appeal, and this formulation was not questioned.

9 [1997] 1 Lloyd’s Rep 225.

10 This is a sum, sometimes fixed in advance, payable where there is a delay.

Mr Gibson told me that he was surprised that the underwriters agreed terms so readily. He had expected that he would have had to answer a host of questions about Marc Rich’s experience at [various ports].

He did not regard it as a matter for him to volunteer information on claims’ experience or other matters until he knew what sort of questions he was going to be asked. He elaborated this by saying he did not expect to get the insurance at all because it was unusual for insurers to write a “commercial risk” such as demurrage. He had previously regarded demurrage as totally uninsurable.¹¹

5.17 In fact, the insurers accepted the risk readily, without asking any questions.

Following a substantial claim, the insurers sought to avoid the policy on several grounds, including the fact that Marc Rich & Co had not disclosed its previous loss experience.

5.18 At first instance, Mr Justice Longmore found for the insurers on this point. He commented:

A presentation which makes no reference to an existing loss experience can only be fair if the losses are modest or insignificant; a prudent Underwriter will be entitled to assume that if losses exist, they are not such as to be worth mentioning.¹²

5.19 In fact, the losses were substantial. The court found that there was a material non-disclosure and the insurers were entitled to avoid the policy.

5.20 This reasoning was confirmed on appeal. The Court of Appeal held the presentation had not been fair. As Lord Justice Leggatt put it:

In my judgment a presentation cannot be fair if there is silence as to material losses, as there was here.

5.21 He quoted with approval a statement made by Lord Justice Scrutton in 1926:

I have always understood the proper line that an underwriter should take, except in matters that he is bound to know, is absolutely to abstain from asking any questions, and leave the assured to fulfil his duty of good faith, and to make full disclosure of all material facts without being asked.¹³

5.22 The court also considered whether the insurer had waived information about previous losses by not asking about them. Lord Justice Leggatt held that it had not:

11 [1997] 1 Lloyd’s Rep 225 at p 299.

12 [1996] 1 Lloyd’s Rep 430 at 442-444.

13 Greenhill v Federal Insurance Co Ltd (1926) 24 Lloyd’s LR 383 at 391; [1927] 1 KB 65.

An insurer cannot waive a class of information he does not know exists. That requires a fair presentation of the risk. It is obvious that a presentation cannot be fair if unusual facts are not disclosed. The insurer is entitled to assume the fairness of the presentation. Without it he cannot sensibly be said to refrain from asking questions. He must be on notice of the existence of information before he can be said to waive it.¹⁴

5.23 We are not sure that it is right to say that information about previous loss is so unusual that an insurer cannot be expected to ask questions about it. For many types of insurance, insurers routinely ask about previous losses. Indeed, in many jurisdictions the policyholder is not required to disclose this information in the absence of questions.¹⁵

5.24 The policy justification for requiring the policyholder to volunteer information about previous losses is not that the issue is unusual but that it is so common the insurer will need it and the policyholder should know to include it. It is administratively simpler in the large commercial market to expect the policyholder to present the risk. The case is, however, a salutary lesson for any Head of Insurance who, like Mr Gibson, fails to volunteer information because he expects to be asked questions.

Other standard information which should be disclosed

5.25 There are several other types of standard information which the courts have held should be included in a fair presentation of the risk.

5.26 First the policyholder should disclose the criminal convictions of directors or senior staff.¹⁶ This is not because criminal records are particularly unusual. The figures show that well over a quarter of adult males between the ages of 18 and 52 in England and Wales have at least one criminal conviction for non-trivial offences.¹⁷ It is however accepted that criminal convictions raise issues of moral

14 [1997] 1 Lloyd’s Rep 225, at 234.

15 See Part 3.

16 For example in ERC Frankona Reinsurance v American National Insurance Company [2005] EWHC 1381 (Comm) the reinsured failed to disclose that its managing agents’

Chief Operating Officer had a criminal record. In Inversiones Manria SA v Sphere Drake Insurance Co Plc (The Dora) [1989] 1 Lloyd’s Rep 69 at 94-95, the policyholders insured a yacht without mentioning that the skipper had a criminal record.

17 Official estimates show that in 2006, 28.2% of adult males aged between 18 and 52 had a criminal conviction for a non-trivial offence. This includes all indictable and triable-either-way offences plus the more serious summary offences such as assault and criminal damage. The figures include serious driving offences (driving whilst disqualified, driving with excess alcohol, dangerous driving and driving without insurance) but not less serious offences such as careless driving. The equivalent proportion of women aged 18 to 52 is 6.5%. See Ministry of Justice Statistical Bulletin “Conviction histories of offenders between the ages of 10 and 52” (July 2010) at http://www.justice.gov.uk/downloads/statistics/mojstats/criminal-histories-bulletin.pdf. Equivalent statistics in relation to Scotland do not appear to be available.

hazard. Where the conviction is not spent within the terms of the Rehabilitation of Offenders Act 1974,¹⁸ the insurer is entitled to be told about it.

5.27 Similarly, the courts have held that information about any insolvency associated with the policyholder should be disclosed. An example is Sugar Hut Group Ltd &

Ors v Great Lakes Reinsurance (UK) Plc.¹⁹ The claimants were a group of companies which ran four nightclubs. Three old companies previously associated with the clubs had gone into administration due to financial difficulty. The court found that this was a material fact which should have been disclosed. As it was not disclosed, the insurers were entitled to avoid the contract. Mr Justice Burton held that the insurers had not waived this information by asking more limited questions about the trading history of the insured companies. He pointed out that the proposal form specifically invited the policyholder to disclose “any other facts not covered by the questions in this form”.²⁰

5.28 Again, insolvency and bankruptcy are common: in 2011, in England and Wales, there were 21,843 corporate insolvencies²¹ and 119,850 individual insolvencies.²² In Scotland, the provisional figure for corporate insolvencies in 2011 is 1,530;²³ and for the financial year 2010/2011, there were 19,423 personal insolvencies.²⁴ 5.29 It appears that some categories of standard information are so fundamental that

the policyholder should include them in any presentation of the risk. Below we consider ways in which more can be done to clarify these categories.

Special or unusual facts

5.30 The policyholder must also disclose any special or unusual facts which increase the risk. In CTI v Oceanus Mutual Underwriting Association (Bermuda) Ltd, Lord Justice Kerr put the point as follows:

18 The Rehabilitation of Offenders Act 1974 provides that some convictions can be ignored after a period of rehabilitation during which there has been no further conviction. The period varies according to the sentence given. Once the period has expired the conviction is spent and need not be disclosed; see s 4. The Act may be subject to amendment by the Rehabilitation of Offenders (Amendment) Bill, although any such amendment will apply only to England and Wales.

19 [2010] EWHC 2636 (Comm), [2011] Lloyd’s Rep IR 198.

20 Above at [498]. See also Doheny & ors v New India Company Ltd [2004] EWCA Civ 1705.

21 This includes: compulsory liquidations, creditors’ voluntary liquidations, receiverships, administrations and company voluntary arrangements: see Insolvency Service, Insolvency Statistics (February 2012) at

http://www.insolvencydirect.bis.gov.uk/otherinformation/statistics/201202/index.htm

22 The total includes 41,845 bankruptcies, 49,056 Individual Voluntary Arrangements and 28,949 Debt Relief Orders.

23 http://www.insolvencydirect.bis.gov.uk/otherinformation/statistics/201202/index.htm#tables.

24 http://www.aib.gov.uk/scottish-insolvency-statistics-quarter-3-2011-12. This includes bankruptcies and 7,980 protected trust deeds.

The doctrine of waiver cannot be applied to undisclosed facts which are unusual or special, so that their non-disclosure distorts the presentation of the risk. In such cases, the underwriter is not put on enquiry about the existence of such facts.²⁵

5.31 Lord Justice Kerr gave Greenhill v Federal Insurance Co Ltd as an example: here the policyholder insured cargo across the Atlantic from Halifax to Nantes, without mentioning that it had already suffered injury before it arrived in Halifax.

5.32 The same point was made in 1913, when Mr Justice Scrutton commented that time policies on ships differ so much that a reinsurer should not presume that they contained any particular terms.²⁶ If the reinsurer wants to know the terms and conditions, it should ask. But this does not apply where:

It is quite clear that the policy may be for such an extraordinary risk, as where the ship may have liberty to do unusual or dangerous things, that there may be clauses in the original policy which an underwriter offering ought to disclose because they are so out of the usual that a reinsuring underwriter would not expect them.

5.33 There are many examples of special and unusual facts which a policyholder should realise would be material to the insurer. In taking out life insurance,²⁷ one should normally disclose a death threat and we would expect the same principle to apply, for example, where a business received an arson threat. Again, a business would be expected to mention that it had recently acquired an explosives factory; or that (in product liability insurance) its products were used in nuclear power plants.

Concerns which led to the placement of the insurance

5.34 It is also established that a policyholder should disclose any general concerns which led to the insurance being sought.

5.35 In Aiken v Stewart Wrightson Members Agency Ltd²⁸ the claimants were Lloyd’s names who used managing agents, PUM, to enter a contract of reinsurance. The reinsurers avoided the reinsurance on the grounds that PUM had failed to disclose the full extent of the claimant’s exposure to asbestosis claims, and this decision was upheld in arbitration. The names then claimed damages for breach of contract and negligence against PUM for this non-disclosure, among other things.

25 [1984] 1 Lloyd’s Rep 476 at 498.

26 Property Insurance Co Ltd v National Protector Insurance Co Ltd (1913) 108 LT 104, at 106.

27 Leen v Hall (1923) 16 Lloyd’s LR 100, KBD.

28 [1995] 3 All ER 449, [1995] 2 Lloyd’s Rep 618. This decision was confirmed on appeal although it should be noted that the appeal did not relate to the issue of non-disclosure:

[1996] 2 Lloyd’s Rep 577.

5.36 On the facts, the court found that the underwriter and deputy underwriter at PUM had a general concern about exposure to asbestosis claims in light of recent US litigation. In relation to what should have been disclosed, the Court held that:²⁹

… because of the rule that the opinion of the particular assured as to the materiality of a fact is not the test to be applied, it was the duty of PUM as prudent managing agents … to consider with care what required to be disclosed to a prospective reinsurer. This duty applied especially to the matters which were giving PUM concern and were arguably, if not obviously, material to the prudent insurer; in particular, the mounting claims for asbestosis and DES which were the reason why the reinsurance was sought in the first place.

5.37 It is clear that a policyholder should disclose any particular concerns about the risk which led to the insurance being sought.

WAIVER

The need to ask questions

5.38 Under the Marine Insurance Act 1906, the duty of disclosure is limited by section 18(3), which sets out four types of circumstance which need not be disclosed. In particular, section 18(3)(c) states that the insured need not disclose:

Any circumstance as to which information is waived by the insurer;

5.39 In most legal contexts, waiver is a relatively narrow doctrine, which applies where a party makes an unequivocal representation in full knowledge of the facts. In this context, the courts have developed the concept of waiver in a specialist way. It has been used to prevent an insurer from refusing a claim where the policyholder presented the risk fairly, in a way which would prompt a reasonably careful insurer to make further enquiries, but the insurer failed to make appropriate enquiries.³⁰

5.40 Lord Justice Rix elaborated on the principle as follows:

Ultimately, it seems, the question is: Has the insurer been put fairly on inquiry about the existence of other material facts, which such inquiry would necessarily have revealed?³¹

29 [1995] 2 Lloyds’s Rep 618 at 643.

30 The Scots law position on waiver is similar; see Reid & Blackie, Personal Bar (2006), pp 238 – 242.

31 WISE (Underwriting Agency) Ltd v Grupo Nacional Provincial SA [2004] EWCA Civ 962;

[2004] 2 All ER 613, [64] by Rix LJ.

5.41 This test is an objective one, applying the standard of a reasonably careful insurer. Lord Justice Rix described this hypothetical insurer as being “neither a detective on one hand nor lacking in common sense on the other”, noting that

“mere possibilities will not put him on inquiry”.³²

5.42 This doctrine may be illustrated with some examples. In Cohen v Standard Marine Insurance Co, the object of the policy was an obsolete battleship which had been purchased for scrapping.³³ The ship was to be towed from England across the North Sea to Germany and then broken up. During the voyage, the vessel was abandoned by the tugs and stranded on the Dutch Coast where it became a constructive total loss. The insurers denied liability on the grounds that the policyholder had failed to disclose the fact that the vessel had no steam power of its own. Mr Justice Roche held that the insurer must be presumed to know that a dismantled warship which needed a tow was not likely to have her own sources of power. By failing to ask questions about whether the ship had its own source of power, the insurers had waived disclosure about this.

5.43 A more recent example is Garnat Trading & Shipping (Singapore) Pte Ltd and Another v Baominh Insurance Corporation.³⁴ At first instance Mr Justice Clarke found that the policyholder had disclosed the relevant information on the wind and wave height limitations that their floating dock could withstand. He commented, however, that even if the policyholder had not disclosed this information, a reasonable insurer would surely inquire into such matters. Failure to do so would amount to waiver of the information. The Court of Appeal upheld his findings.

How far must the insurer ask questions?

5.44 There is discussion within the case law about how often the insurer is obliged to ask questions. In some formulations, it has been suggested that issues of waiver arise rarely, and only after the policyholder has shown that it made a fair presentation of the risk. This was the view taken by Mr Justice Hobhouse in Iron Trades Mutual v Compania de Seguros:

If a proposer has made a fair presentation of the risk, he has discharged his duty; if he has not, then a failure by an insurer to inquire will not relieve the proposer of his duty to make proper disclosure.³⁵

5.45 By contrast, in WISE (Underwriting Agency) Ltd v Grupo Nacional Provincial SA, Lord Justice Rix suggested that there is a more extensive doctrine, “founded on the concept of fairness”:

32 Above, at [64].

33 (1925) Comm. Cas. 139.

34 [2010] EWHC 2578 (Comm); [2011] 1 Lloyd's Rep 589.

35 [1991] ReLT 213, at 224.

It would not in my judgment be fair to castigate a presentation as unfair and thus put an assured in peril of the draconian remedy of avoidance where an insurer had waived the relevant information.³⁶

5.46 Thus the requirement to ask questions arises not simply from the doctrine of waiver, as set out in section 18(3), but also from the mutual duty of good faith.

5.47 The doctrine of good faith was first set out in 1766, in Carter v Boehm, where Lord Mansfield was fully alive to the danger that insurers could use omissions in the presentation of the claim to justify taking premiums and then refusing claims.

As Lord Mansfield explained:

The underwriter, here, knowing the governor to be acquainted with the state of the place; knowing that he apprehended danger, and must have some ground for his apprehension; being told nothing of either; signed this policy, without asking a question. If the objection 'that he was not told' is sufficient to vacate it, he took the premium, knowing the policy to be void; in order to gain, if the alternative turned out one way; and to make no satisfaction, if it turned out the other: he drew the governor into a false confidence … If he thought that omission an objection at the time, he ought not to have signed the policy with a secret reserve in his own mind to make it void; if he dispensed with the information, and did not think this silence an

The underwriter, here, knowing the governor to be acquainted with the state of the place; knowing that he apprehended danger, and must have some ground for his apprehension; being told nothing of either; signed this policy, without asking a question. If the objection 'that he was not told' is sufficient to vacate it, he took the premium, knowing the policy to be void; in order to gain, if the alternative turned out one way; and to make no satisfaction, if it turned out the other: he drew the governor into a false confidence … If he thought that omission an objection at the time, he ought not to have signed the policy with a secret reserve in his own mind to make it void; if he dispensed with the information, and did not think this silence an