Guidance on the Duty of “Fair Presentation” under the Insurance Act 2015

Guidance on the Duty of “Fair Presentation” under the Insurance Act 2015 10 Jan

Although the Insurance Act 2015 (the “Act”) has been in force for some time, there has been scant judicial guidance as to how the Court’s will approach the question of whether a Policyholder is in breach of the duty of fair presentation under the Act.  Would previous case law on the non-disclosure of “material” facts be relevant or would some other standard be applied?

The High Court last month gave welcome guidance on this issue in the case of Berkshire Assets (West London) Limited v AXA Insurance UK plc [2021] EWHC 2689 (Comm).

The case involved a claim by Berkshire under a Contractors All Risks (“CAR”) and Business Interruption (“BI”) policy (the “Policies”) following property damage at one of Berkshire’s properties caused by an escape of water from a sprinkler pipe.

AXA denied liability on the basis that, when the Policies were renewed in November 2019, Berkshire failed to disclose the fact that one of its directors, Michael Sherwood, was subject to criminal proceedings in Malaysia.  AXA argued that, had it been made aware of the proceedings, it would not have insured Berkshire, so it was entitled to avoid the Policies.

Duty of Fair Presentation

Under the Act (s.3(1)), an Insured is required to “make to the insurer a fair presentation of the risk”, which includes disclosing every “material circumstance” which it knows (or ought to know).  Mirroring the case law before the Act, s.7(3) states that a circumstance is considered “material” if “it would influence the judgment of a prudent insurer in determining whether to rake the risk and, if so, on what terms”.

Materiality

The Court concluded that the approach to the issue of materiality developed over the years by the Courts should continue to apply.   It summarised this as being that:

Whether or not a fact is material is a question of fact to be determined by the circumstances of each case;

The test of materiality was to be applied at the point of the insurance being placed, not by reference to subsequent events;

Whether there has been a fair presentation of the risk should be assessed primarily from the perspective of the Insurer (the “prudent insurer” test);

There is no requirement to show, with hindsight, that that the risk was affected – facts raising concerns about the risk at the time of placement can be material;

A material circumstance need not be decisive in the hypothetical prudent Insurer deciding whether or not to take on the risk (and on what terms) – it need only be something the Insurer would take into account when reaching a decision on cover.

Moral Hazard

The issue of “Moral Hazard” was also raised in the proceedings, in terms of whether the criminal proceedings constituted a moral hazard that should have been disclosed to AXA.  Although there is no clear definition of what is a moral hazard, the Court concluded that a criminal charge of a will very often (though not always), be considered a moral hazard, such that it would amount to a material circumstance to be disclosed.

Outcome

Although clearly unconnected with the actual loss, the Court held that the information concerning the criminal proceedings against Mr Sherwood did constitute a “material circumstance” which should have been disclosed to AXA.  The Court was also satisfied (based upon evidence from the AXA underwriters) that, had the information been disclosed, AXA would not have written the risk.   AXA was able to rely on clear underwriting guidelines that supported its evidence, which were a key factor in the Court’s determination.

The case therefore reasserts the principles applied by Courts concerning what are regarded as material circumstances that should be disclosed to Insurers.  It also highlights the importance of expert evidence (Berkshire’s expert was criticised for having little insurance expertise) and clear evidence from underwriters, backed up with documentary evidence (such as underwriting guidelines), to support the argument that a risk would not have been accepted had the relevant circumstances been disclosed.