Insurance Act 2015 - High Court Criticises the Marine Insurance Act 1906

A recent decision of the High Court demonstrates the stark differences in the implications and consequences of non-disclosure under the Marine Insurance Act 1906 and the new Insurance Act 2015 which is due to come into force on 12 August 2016.

In the case of Involnert Management Inc v Aprilgrange Ltd, AIS Insurance Services Limited, OMPS Special Risks Limited [2015] Lloyd’s Rep 289 insurers were entitled to avoid a policy covering a yacht for €13 million due to the owner’s non disclosure of the fact that the yacht had been valued at €7 million and was on sale for €8 million at the time of inception of the policy.

Despite finding in the insurers’ favour, the Court stated obita dicta that the “just result” in the circumstances would be to treat the insurance as valid but at a reduced coverage sum to reflect the realistic market value of the yacht. However, the currently applicable Marine Insurance Act 1906 does not allow for such a result. It was said that, until the Insurance Act 2015 comes into force, it remains “a blot on English insurance law” that an insurer is permitted to avoid liability altogether in such cases.

Background

On 3 December 2011, the claimant’s yacht “Galatea” caught fire and was damaged beyond economic repair. The yacht was insured against all risks for €13 million so the claimant sought to recover this sum from its insurers.

The defendant insurers sought to avoid liability under the policy on various grounds, the principal ground being that the owner had failed to disclose that it had been advised and believed that the yacht was worth significantly less than the sum insured. At the time of inception, the yacht was being advertised for sale with an asking price of €8 million and a valuation had been obtained indicating that the yacht had a market value of €7 million.

The claimant explained that the yacht had been built and purchased around 4 years prior to the incident and was insured for its full purchase value. The insurance was simply renewed at the same coverage level each year thereafter. It denied the insurers’ allegations of non-disclosure and misrepresentation. It also joined its brokers into the proceedings and claimed damages for any shortfall in its recovery against the insurers for negligence in arranging and placing the policy.

The High Court had to consider whether the policy could be avoided due to non-disclosure and/or misrepresentation (and also non-compliance with certain contractual terms) and, if so, whether the claimant’s producing and/or placing broker was liable to it in negligence.

Ruling of the High Court

The Court held that, although the difference in the yacht’s market value and insured value had arisen by “accident rather than design”, the valuation of the yacht and the fact that it was on sale for €8 million was material and should have been disclosed and that this non-disclosure induced the insurers to agree to insure the yacht for €13 million. The insurers would not have insured the yacht for €13 million if the relevant disclosure had been made. In consequence, the insurers were entitled to avoid the policy under section 18 of the Marine Insurance Act 1906.

In relation to the insurers’ allegation of misrepresentation, it was held that the proposal form submitted on behalf of the owners which stated that yacht had a value of €13 million did constitute a misrepresentation but that this did not entitle the insurers to avoid the policy on this ground as, on the evidence, the content of the proposal form did not induce the contract.

On the issue of the claimant’s negligence claim against its brokers, the Court held that the producing broker should have checked with the owner regarding the market value of the yacht and that its failure to do so was negligent. The claimant was only awarded €2 million however as the court held that the claimant’s failure to comply with certain terms of the policy (namely submit a proof of loss or notice of abandonment) would have barred its recovery of sums in excess of this amount in any event.

Marine Insurance Act 1906

The insurer was held to be entitled to avoid the policy under section 18(1) of the Marine Insurance Act 1906 which deals with non-disclosure and reads as follows:

“The assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract”.

Case law has further established that the insurer must prove that the relevant non-disclosure induced it to contract on the terms agreed.

On the facts of the case, the Court was satisfied that the criteria for the remedy set out in section 18 was met and that the policy could be avoided.

However, the Court did make it clear that it was of the opinion that the outcome provided by the 1906 Act was unjust. It was highlighted that the provision puts the insurer in a better position as a result of the owner’s innocent failure to make full disclosure than it would have been in if full disclosure had been given.

It opined that it would be just if the policy was treated as valid but the coverage was reduced to €8 million in line with the true market value of the yacht. Such a result will be achieved in cases to which the new Insurance Act 2015 applies when it comes into force.

It was stated that until the new Act comes into force, “it remains a blot on English insurance law that in a case of the present kind the insurer is permitted to avoid liability altogether”.

Insurance Act 2015

The Insurance Act 2015 was enacted in order to replace the Marine Insurance Act 1906 which was notorious for favouring the insurer to the detriment of the insured. The purpose of the new Act was to strike a more even balance between the interests of the insurer and the insured. The Act will apply to non-consumer contracts only as consumer policies are dealt with under the Consumer Insurance (Disclosure and Representation) Act 2012.

Section 3 of the Act introduces a new duty of ‘fair presentation’ which is essentially the old duty of disclosure and non-misrepresentation merged into one new duty. Under the duty of fair presentation, before the contract of insurance is entered into, the insured must make a fair presentation of the risk to the insurer. This will involve disclosing every material circumstance affecting the risk and answering any enquires that the insurer may have in relation to those circumstances.

The remedies available to the insurer under the new Act differ dramatically. The 1906 Act allowed the insurer to avoid a policy if there had been a material non-disclosure or misrepresentation that induced it to contract on the terms agreed. The new 2015 Act only allows an insurer to avoid the policy if the insured’s breach of its duty of fair presentation was deliberate, reckless or if, in absence of the breach, the insurer would not have entered into the contract on any terms whatsoever.

In all other cases, if the insurer would have still provided insurance but would have charged a higher premium it will be entitled to reduce proportionately the amount to be paid on a claim under the policy. If the insurer would have entered into the insurance contract but on different terms, the contract is to be treated as if it had been entered into on those different terms.

The implications of the new provisions are that the circumstances in which an insurer can avoid a policy and escape liability altogether will be far more limited.

Conclusion

The above case demonstrates the difference between the consequences of non-disclosure and misrepresentation under the Marine Insurance Act 1906 and the forthcoming Insurance Act 2015. It also highlights the Court’s dissatisfaction with the current rights and remedies against the insured available to insurers under the 1906 Act.

The new Act promises a fairer and more even playing field for policy holders. The changes will undoubtedly have a significant impact on the approach taken by insurers at both the underwriting and claims stage. Insurers will need to satisfy themselves that they have made all necessary enquires before accepting risks as, unlike the current position, they may be precluded from later avoiding the policy if they later discover an untoward previously undisclosed fact. Policy holders and their brokers may therefore find that the proposal process is therefore more meticulous and time consuming due to greater enquiries from increasingly vigilant insurers.

The exact extent of the impact that the new Act will have on the insurance industry will only be known after the long anticipated Act comes into force on 12 August 2016.