In Brit Underwriting Ltd v F & B Trenchless Solutions Ltd  EWHC 2237 (Comm) Carr J had to determine whether insurers were entitled to avoid a contractor’s combined liability policy (‘the Policy’) for material non-disclosure and misrepresentation, including whether insurers had affirmed the policy so as to lose any right to avoid. Her decision is considered by Richard Liddell and Diarmuid Laffan of 4 New Square.
The facts were largely uncontroversial. In 2012 Morgan Sindall (‘MS’) invited the insured (“FBTS”) to tender for the construction of a micro-tunnel under a railway line and level crossing in Nottinghamshire (‘the Site’). In its proposal, FBTS emphasised its experience of tunneling in the locality, and estimated that the proposed tunnel would cause the overlying tracks to settle by 2-4mm. On this basis the project would comply with the requirement of Network Rail (‘NR’) that all under-track crossings lead to no more than 5mm of settlement. FBTS’s proposal was incorporated into its sub-contract with MS.
Between 11 June and 9 July 2013, the tunnel was installed by FBTS. On 9 July FBTS was informed by MS that the track had settled by 11-12mm, which prompted FBTS to commission a surface settlement assessment. By 17 July, the settlement had increased to 15-18mm. MS communicated its concern about the situation to FBTS, and that NR might have to impose speed restrictions on the track if settlement progressed any further. On 8 August, FBTS learned from MS that a void had appeared in the road above its tunnel. FBTS took the view that the void was attributable to previous works for which it was not responsible.
FBTS’s insurance cover expired on 14 August 2013. Prior to this and with a view to obtaining renewed cover, FBTS’s insurance broker had outlined its risk to a Lloyd’s broker on the basis that it did not tunnel under active railway lines (‘the misrepresentation’); however, it was FBTS’s case that it had not seen the (mis-)representation before it went out on FBTS’s behalf or at any material time. On 19 August 2011 FBTS concluded the Policy with Brit.
On 27 August 2013, a freight train derailed above the tunnel due to severe track-settlement of around 100mm. The Rail Accident Investigation Board (‘RAIB’) investigated the derailment and (a) found that it was likely to have been caused by significant voids found beneath the tracks and (b) attributed those voids to FBTS’s flawed approach to the construction of the tunnel and over-mining.
On 29 August 2013, Brit received an email from FBTS to its retail insurance broker, which referred to the above mentioned settlement and the void in the road in July and August 2013 respectively. Brit’s underwriter passed this information on to the claims department, which then began to investigate the claim.
MS subsequently wrote to FBTS indicating that it would seek a contractual indemnity in respect of its own losses as well as any resulting third-party liabilities.
On 21 January 2014, Brit purported to avoid the Policy on the basis that it was rendered void by material non-disclosure and, independently, the misrepresentation. Brit sought a declaration that its avoidance of the policy was valid.
FBTS contended that the settlement of the tracks and void were not material to its agreement with Brit, and that it had not made the impugned representation. It further argued that neither the undisclosed matters nor the (mis-)representation had induced Brit to contract, and that Brit had affirmed the policy.
Accordingly, the key issue to be determined was whether Brit was able to establish (on balance of probabilities) that it was induced to provide cover to FBTS on the terms agreed as a result of material non-disclosure or the misrepresentation.
In her methodical and cogent judgment dated 31 July 2015, Carr J set out a number of well-established legal principles:
a) Material non-disclosure. The insured must disclose every material circumstance that is known or ought to be known to it. A circumstance will be material if it would influence the judgment of a prudent insurer in making the decision as to whether to insure, or the level of premium; and it is for the court to make its own evaluation of whether a circumstance is material or not. The assessment of materiality takes place from the objective standpoint of the hypothetical prudent insurer; the insured’s own assessment is not determinative. It is sufficient that the prudent insurer would have taken the matter into account. The reason for the insured’s failure to disclose a material matter is irrelevant, be it mistake or fraud or anything else.
b) Misrepresentation. The same ‘prudent underwriter’ test determines the materiality of a representation while its meaning is determined objectively. There is no requirement that the insurer prove that the misrepresentation was negligent or fraudulent.
c) Inducement. The insurer can only avoid the policy if the material non-disclosure or (mis-)representation was a substantial cause affecting its decision to enter the policy on the terms agreed, albeit it need not have been the sole effective cause.
d) Affirmation. The onus is on the insured to establish that the insurer, having full knowledge of its right to avoid a policy for misrepresentation/non-disclosure, has made an unequivocal election by words or conduct to keep the policy in force.
Carr J readily concluded that the unexpected settlement and void were facts that should have been disclosed by FBTS.
The learned judge dismissed a number of arguments advanced by FBTS (including that MS and FBTS had not initially thought the void attributable to FBTS’s works) on the basis that they relied on FBTS’s assessment of the situation, and thus failed to acknowledge the objective nature of the test for materiality. The crucial factors as regards the materiality of the settlement was the degree to which it had outstripped FBTS’s projections and associated contractual obligation to MS, thus opening up the possibility of a claim. Similarly, FBTS’s belief as to the causation of the void was irrelevant. Given the timing of its appearance, and pending full investigation, it was material to Brit’s assessment and should have been disclosed. As regards inducement, Carr J was wholly satisfied that had proper disclosure been made, Brit would not have written the risk on the terms that it did.
Brit also succeeded on its misrepresentation ground. It was held that from an objective viewpoint, FBTS’s statement of risk indicated that it did not tunnel under active railway lines. This being a more hazardous activity than tunneling under inactive lines; it was clearly a matter that could affect the mind of an objective underwriter. It was held that it had induced Brit to contract on the terms of the Policy.
Finally, Carr J rejected FBTS’s argument that Brit had made an affirmation by delaying between the end of August 2013 – when it was aware of most of the matters on the basis of which it ultimately avoided the policy – and January 2014 when it purported to avoid. It was held reasonable for Brit to take 4-5 months for its investigations, and not to destabilise its relationship with FBTS by immediately reserving its rights. Brit was found, in any event, to have made a reservation of rights at the start of October 2013, rendering any subsequent actions incapable of signifying affirmation.
This decision acts as a reminder of the objective nature of the test for materiality and of the potentially serious consequences of failing to disclose relevant facts. It should act as a similar warning that representations made in statements of risk, including those made by agents, should be assiduously checked for accuracy prior to communication.
It is possible, if not likely, that the present case would have been brought to a different conclusion if it had fallen under the auspices of the Insurance Act 2015 (‘the 2015 Act’): under the 2015 Act, an insurer would only be able to avoid a policy in its entirety if it can show that (1) the alleged breach of the ‘duty of fair presentation’ (which incorporates duties to disclose material facts and to make accurate representations) was deliberate or reckless, or that (2) if it had been appraised of the relevant matters, it would not have entered the policy at all.
The evidence elicited during the present case did not speak to the relevant tests under the 2015 Act. However, the outcome might well have been different if (a) the 2015 Act was applicable and (b) FBTS’s breaches of its duty of ‘fair presentation’ were found neither deliberate nor reckless, and that Brit would have entered the policy in any event, albeit on different terms. In such a case, the 2015 Act would have allowed the Court to hold the insurer bound by the terms of the policy that would have been entered but for the relevant failure to disclose or misrepresentation. The insurer would then have been allowed to deduct any increase in premiums that would have resulted from the insured’s indemnity. Crucially, it is possible that in cases such as the present, the insured would not in the future be left without cover.
It is interesting to note that Carr J felt able to decide the relevant issues of materiality on the basis of settled principle, the agreed facts, common sense and without recourse to the underwriting evidence led before her. It is submitted that under the scheme of the 2015 Act as described, it is likely that the underwriting evidence – particularly as to the counterfactual of what would have happened if material facts had been disclosed – would have taken a far more prominent role.