VIEWS ON THE KNOWLEDGE TEST

6.54 The issue of what a policyholder “ought to know” is a major concern to large companies. As John Hurrell of Airmic (the risk managers’ association) put it:

35 Above at 1138C; [781e].

36 [1996] 1 All ER 791.

37 Above at 807j – 808a; see also 810b.

The current law was drafted before the existence of large, complex, multinational organisations and it fails to make clear what the risk manager has to do. In a large company it is simply not possible for the risk manager to anticipate every piece of information that an underwriter might deem material.³⁸

6.55 He pointed out that many members had included terms in their contracts to define whose knowledge was relevant.

For example, one member has it as “knowledge residing in the insurance department,” not in the heads of every employee throughout the company world wide. Other members have defined and agreed prior to inception the range of remedies open to the insurer, depending on the circumstances.³⁹

6.56 On the other hand, “helpful though these initiatives might be, they simply paper over the cracks in our outdated insurance law”.⁴⁰

Responses to our 2007 proposal

6.57 In our first Consultation Paper, we proposed to re-enact section 18(1) in slightly simpler terms. We said simply that the duty of disclosure should be limited to facts which the business policyholder knew or ought to have known.⁴¹

6.58 At least 34 respondents agreed with our proposal, mostly without comment, though one respondent commented that they had not appreciated the full extent of the burden the law imposes on a purchaser of insurance. At least five respondents disagreed with any change, and wished to retain the current wording of section 18. These included the Lloyd’s Market Association, the ABI, Global Life Reinsurance, Fortis, and the British Maritime Law Association.

6.59 A few respondents, however, said that they did not understand how the “knew or ought to know test” operated and that there was a need for further clarification on the issue. We have listened carefully to these arguments.

6.60 One respondent highlighted the difficulty in determining whose knowledge should be attributed to a company:

38 Jonathan Swift, Comment – insurance law reform: Reform can’t wait; Post Magazine [14 April 2010].

39 Above.

40 Above.

41 Insurance Contract Law: Misrepresentation, Non-Disclosure and Breach of Warranty by the Insured (2007) LCCP 182/SLCDP 134, para 5.44. The main reason for the change of words was to allow remedies to distinguish between fraudulent and negligent conduct. We did not wish people to be deemed to know things they did not know because of the slightly clumsy wording of section 18(1) of the 1906 Act.

In a company composed of three equal directors, who will be considered the controlling mind of the company for insurance purposes? Where one of those directors is solely responsible for obtaining insurance, will it be reasonable for her to rely on unverified information provided by the other two? Will that remain reasonable where a clear inference can be drawn against one of the directors that they alone intended to mislead the insurer?

6.61 The City of London Law Society also asked about the attribution of knowledge:

For example, in relation to an insurance taken out by a company, would reasonableness be judged by reference to the company’s systems, or of employee A who was responsible for operating them, or of employee B who failed to pick up the information in question or picked it up but failed to report it to A? It would be helpful if the position could be clarified.

6.62 Jonathan Hirst QC argued that the policyholder’s obligations to make reasonable enquiries should be made explicit:

The issue of deemed knowledge is a difficult one. Certainly, the current section 18(1) of the 1906 Act can be harsh. However, I am concerned that to simply abolish it sends out the wrong message, especially in large organisations where there will be ample room for argument about whose knowledge should be attributed to the organisation. I would suggest that, as part of your proposal that question should be whether the insured who is unaware of a material fact, and therefore did not disclose it, was reasonable or negligent, it should be made explicit that the insured should make reasonable enquiries.

6.63 BILA emphasised that issues of knowledge raised particularly difficult policy issues, and that their members’ views were split on this issue. It said that some members thought that:

The insured’s knowledge of facts should be judged by the reasonableness of his conduct and that, in particular, the insured should not be entitled to disclaim knowledge of facts due to deficiencies in its organisation or the incompetence of its employees.

Other members believe that insurers should continue to assume risk that the insured’s business is badly run, and should not be entitled to assume (and effectively extract a representation to that effect) that the insured’s business is well managed.

6.64 The Chamber of British Shipping’s response advocated more rigorous enquiries on both sides:

It is accepted that the potential insured must be both candid and careful but, equally, the insurer must clearly indicate the scope of information required and extent to which further investigations might be necessary. This perhaps argues for better pre-information with more rigorous inquiries on both sides.

6.65 Derrick Cole and Geoffrey Lloyd agreed. They felt that there should be greater obligations on both sides to ensure there was adequate disclosure. They felt that a commercial risk survey “was not an unnecessary luxury” but “a sound investment” when it came to making a disclosure.

6.66 We have been persuaded that it is not enough for the legislation merely to refer to information which a company knows or ought to know. For large corporate policyholders the issue is of major practical concern: they need to know who needs to make enquiries of whom. At present, the law is unhelpfully confused on this issue.

6.67 We think that the law needs to do more to encourage better exchange of pre-contract information on both sides. In particular, the policyholder has a duty to make reasonable enquiries, and we think it would be helpful to make this explicit on the face of the statute. This is part of a reciprocal exchange. In Part 5, we discussed the insurer’s duty to make enquiries.

The Airmic guide

6.68 In 2011, Airmic published its guide, Disclosure of Material Facts and Information in Business Insurance. The guide attempts to give guidance to buyers about what information should be disclosed and what procedures a company should go through before preparing its disclosure document. It notes that:

For many large, complex international companies, the disclosure obligations of the MIA have become very onerous. Identification, collection and collation of all material information related to the risk can be a very difficult task and involves multiple sources of information.⁴²

6.69 The guide notes that:

Disclosure procedures should be proportionate to the size, nature and complexity of the business. For many companies, the disclosure procedures will be simple and will merely involve completion of a proposal form by an authorised person. However, for large complex businesses, formal disclosure procedures are likely to be required.⁴³

6.70 Airmic suggests that the company should start by allocating roles and responsibilities. These might include

(1) a knowledgeable person (or persons), who holds or has access to material information;

(2) a responsible person, who has the task of compiling the material information; and

(3) an authorised person to sign-off the information as full and accurate and seek assurance that the disclosure procedures are suitable and sufficient.

42 Part 1, Introduction – current market practice at p 5.

43 Part 2, Disclosure procedures – design of disclosure procedures at p 6.

6.71 The guide emphasises that it is important to document roles and responsibilities, and if possible agree them with the insurer.

6.72 Law reform will never be a substitute for detailed guidance of this type, but we think that the law should establish a clear framework, which can be augmented by more detailed industry guidance and agreements.

PROPOSALS FOR REFORMING HOW KNOWLEDGE IS ATTRIBUTED