Non-disclosure of fact: materiality and the requirement to show inducement.
Two very different recent cases illustrate how the law in this area is applied by the Courts. In neither case was the insurer successful, albeit for different reasons.
The Court of Appeal in Laker Vent Engineering Lt v Templeton Insurance Ltd [2009]All ER (D) 97(Feb), and the Central London County Court in Lewis v Norwich Union Healthcare Ltd (unreported) both reaffirmed that an insurer who seeks to avoid a policy for non-disclosure of material facts must demonstrate on the evidence that their actual underwriter was induced to grant the cover by the non-disclosure. The requirement can be satisfied on a balance of probabilities, and the insurer need only show that the non-disclosure (or misrepresentation) was an effective, not the effective, cause of the granting of the cover. There is no presumption of law which assists the insurer here, and, although inducement may be inferred from the facts, there will usually need to be some written evidence of inducement if the underwriter him/herself is not called to give evidence.
Laker Vent concerned legal expenses insurance in the construction industry, and the assured's failure to disclose an incipient dispute with a third party to its insurers. Lewis concerned permanent health insurance and the insured's failure to disclose a visit to his GP regarding a knee pain. Both cases are largely fact-specific. In Lewis the undisclosed fact was agreed to be material to the risk (but there was no inducement, as noted above) but in Laker Vent the undisclosed dispute was not material, because the dispute, at the time of creation of the insurance contract, did not represent, viewed objectively, a "real risk of escalation to the point of formal dispute resolution procedures beyond the risk ordinarily inherent in any complex construction contract."
The legal expenses policy in Laker Vent was a claims made PI policy with a condition precedent requiring notice in writing "immediately the insured is aware of any cause, event or circumstance which has given or is likely to give rise to a Construction Claim". In his leading judgment Aikens LJ reconciled the opinions of Toulson LJ and Rix LJ in the earlier decision in HLB Kidsons v Lloyd's Underwriters [2009] 1 Lloyd's Rep 8, by ruling that the test of whether a circumstance "may" (or in the Laker Vent case "is likely to" ) give rise to a claim is essentially an objective one. This was undoubtedly the approach adopted by Rix LJ in Kidsons but some doubts have been expressed as to whether Toulson LJ had not opted for a mixed objective/subjective test. Aikens LJ's opinion is that both distinguished Court of Appeal Judges had earlier meant the same thing, and he ruled that, on an objective assessment, the incipient third-party dispute was not at the relevant time to be regarded as likely to give rise to a claim, and so there was no late notification defence available to insurers.
There remains a possible difficulty under claims made policies. This concerns laundry-list notifications of myriad circumstances, some of which might be too vague and/or remote to be objectively viewed as likely to give rise to a claim, and whether these can in fact constitute valid notifications to insurers. This difficulty arises where such circumstances, having been advised to insurers but not accepted by them as valid notifications, are therefore not covered under the expiring policy, but may also be excluded from the renewed cover, leaving claims which may later arise out of those circumstances potentially uninsured.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.