THE POLICYHOLDER’S KNOWLEDGE
WHOSE KNOWLEDGE SHOULD BE DISCLOSED?
6.11 Where a natural person seeks insurance, the issue of knowledge is relatively straightforward: as Lord Justice Staughton put it, “the actual knowledge of a natural person means what it says – he knows what he knows”.5
6.12 Where a corporation seeks insurance, however, the position is more complex.
The issue is not unique to insurance law: it arises frequently within the general law, and section 18 of the 1906 Act must be interpreted against that background.
3 [1996] 1 WLR, 1136; [1996] 1 All ER 774, discussed further below.
4 Above at 809 a –c.
5 PCW Syndicates v PCW Reinsurers [1996] 1 WLR, 1136; [1996] 1 All ER 774 at 779 j.
Attributing knowledge: general legal principles
6.13 The traditional approach to attributing knowledge within a corporation is to identify “the directing mind and will” of that corporation. In some cases, however, this is too narrow. For example, when a supermarket sells a video classified as
“18” to a 14 year old, it is clearly the knowledge of the sales clerk rather than the board which is relevant.6 The courts have therefore developed a broader test, based on the purpose of the relevant statute or regulation.
Directing mind and will
6.14 In Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd, Viscount Haldane LC explained the “directing mind and will” test as follows:
A corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation.7
6.15 In HL Bolton (Engineering) Co Ltd v TJ Graham & Sons Ltd, Lord Denning distinguished between a company’s directors and managers and other employees:
Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the company and control what it does. The state of mind of those managers is the state of mind of the company and is treated by the law as such.8
6.16 Simply holding a managerial position, however, may be insufficient in the context of a large company. For example, in Tesco Supermarkets Ltd v Nattrass, the court held that a store manager was not the “directing mind and will” of the company after hearing evidence that the company had more than 800 store managers.9
6.17 In most cases the “directing mind and will” is confined to the board, or the senior management team, though in limited liability partnerships it would probably include all the members. It has elements of flexibility. For example, in Stone and Rolls Ltd v Moore Stephens the acts of the only person beneficially interested in the company’s shares were held to be attributable to the company.10
6 This example was quoted by Staughton LJ in PCW Syndicates v PCW Reinsurers at 780e.
7 [1915] AC 705 at 713-12 (emphasis added).
8 [1957] 1 QB 159 at 172.
9 [1972] AC 153.
10 [2009] UKHL 39, [2009] AC 1391.
A broader test
6.18 In Meridian Global Funds Management Asia Ltd v Securities Commission, Lord Hoffmann held that the court should not look solely at the corporate hierarchy but should also consider the purpose of the provision in question. The test should further that purpose:
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 the 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.11
6.19 For example, in Re Supply of Ready Mixed Concrete (No 2), Director General of Fair Trading v Pioneer Concrete (UK) Ltd, a company was held liable for the acts of employees in contravening a restrictive practices order, even though the board had instructed them not to.12
6.20 This broader test recognises that it is sometimes necessary to attribute the acts or thoughts of individuals who were not part of “the directing mind and will” of the corporation. Otherwise directors could insulate the corporation by delegating their functions and claiming to have no knowledge of what was done.13
6.21 The court stressed, however, that they were not proposing to extend the general test to include all employees - the test depended on the facts of each particular case.14
Attributing knowledge for the purposes of section 18
6.22 So how should knowledge be attributed to further the purpose of section 18 of the 1906 Act? In PCW Syndicates, Lord Justice Staughton observed:
I can see no reason to restrict the knowledge of a company under s18 to what is known at a high level, by the directing mind and will. I would have thought that knowledge held by employees whose business it was to arrange insurance for the company would be relevant, and perhaps also the knowledge of some other employees.15
6.23 We think that this is broadly correct and applies to all corporate policyholders.
Section 18 must clearly apply to anything known to the directing will and mind of the company. In the case of a large publicly quoted company, this would normally be members of the board. If the board know material circumstances, these should be disclosed. It should be no excuse that the board concealed information from their risk manager.
11 [1995] 2 AC 500 at 507.
12 [1995] 1 AC 456.
13 See further, Bank of India v Morris [2005] EWCA Civ 693, [2005] 2 BCLC 328 and Safeway Stores v Twigger [2010] EWCA Civ 1472, [2011] Bus LR 1629.
14 Above at 511.
15 [1996] 1 WLR, 1136 at 1142, [1996] 1 All ER 774 at 780 g.
6.24 It is also appropriate that knowledge should be attributed to the employees and agents who arrange insurance.
6.25 We think, however, that it is unhelpful to talk about “perhaps” including the knowledge of some other employees.16 This is an issue on which businesses and insurers need more certainty. We think that the more helpful way of including information known by other employees is to place the persons arranging insurance under a duty to make reasonable enquiries (including questioning other employees). Below we consider the extent to which insurance managers should investigate.