The Test for Inducement in Contracts Prior to the Insurance Act 2015: Zurich Insurance PLC v Niramax Group Limited  EWCA Civ 590
In Zurich Insurance PLC v Niramax Group Limited, dealing with a contract…
In Niramax Group Limited v Zurich Insurance Plc  EWHC 535 (Comm) the High Court considered the principles applicable to cases of avoidance for material non-disclosure, in a claim by a policyholder against its insurers. All counsel were from 4 New Square. The insured was represented by Ben Elkington QC and Ben Smiley, and insurers were represented by Graham Eklund QC and Carl Troman. The Court’s decision is considered by John Williams of 4 New Square.
Niramax collected and recycled waste. Its main premises (the recycling facility) were located at Thomlinson Road, Hartlepool. Niramax also processed tyres at sites on Tofts Road, Hartlepool, and ran a waste transfer station in the nearby town of Washington (“the Washington Site”). Prior to 2007, part of this waste processing business was run by SWS – a separate subsidiary of Niramax’s parent company, “NHL”. Niramax purchased the business of SWS in 2007, and from then on ran the business across all four sites.
SWS and Niramax held a suite of insurance policies with Zurich, which covered a variety of risks relating to its plant and machinery. One was a contractor’s plant policy (“the Policy”), which provided all risks cover for mobile plant. The policy originally incepted in 2006, and was renewed thereafter, up to and including the 2014-15 policy year. Niramax placed buildings cover separately with a variety of underwriters.
Significantly for the purposes of Niramax’s claim, in 2015 it placed an order for the Eggersmann plant; which was due to arrive before the end of the 2015 policy year. Niramax requested that Zurich extend the Policy to cover the Eggersmann plant. Zurich was reluctant (for reasons discussed further below). However, after a lengthy back and forth between Zurich’s underwriting team and Niramax’s broker, a Mr Sweeney, Zurich agreed to extend the Policy to cover the Eggersmann plant from September 2015 until the renewal date of the Policy in mid-December – on the payment of an additional premium of £32,782.62.
On 4 December 2015, a fire broke out in the engine compartment of a “grabber” at the Thomlinson Road site. This was extinguished promptly – but staff failed to notice that burning embers had spread to a neighbouring building, which housed the Eggersmann plant. It was destroyed, along with other items of machinery.
Niramax made a claim under the Policy which, at trial, was valued at around £4.5 million. The majority of this claim related to the loss of the Eggersmann plant, which it valued at around £4.3 million. Zurich refused to pay, and stated that it was entitled to avoid the Policy for material non-disclosure and misrepresentation. Niramax then brought proceedings in the High Court.
Zurich’s primary defence at trial was that there had been material non-disclosure of facts relating to Niramax’s buildings cover.
For the 2010/11 policy year, Niramax’s buildings cover was placed with Paladin, which subsequently withdrew from the market. From 2011 to 2014, cover was placed through a Lloyd’s broker (Mr Smith) with a variety of underwriters. For the 2014/15 year, Niramax’s underwriters did not offer renewal terms, and Mr Sweeney sought quotes from Mr Smith, and “Recyclesure” – a company specialising in recycling industry risks. Recyclesure provided the more competitive quote, for a policy with Millennium Insurance (“Millennium”), and this was accepted by Niramax.
Millennium’s quote was subject to survey, which took place in February 2014. Mr Sweeney was subsequently sent a report detailing a number of “risk requirements”. Three risk requirements (an automatic fire detection system, CCTV cameras and hot-spot checking procedures) related to the Washington Road site. Seven risk requirements related to Thomlinson Road – one of which was: “3 x fixed Shredders within Black Sand Building: It is necessary to protect shredders by means of an automatic Fire Suppression System. Timescale: within 30 days of survey (by 16 March 14)”.
Throughout 2014 Direct Insurance (on behalf of Millennium) sent chasers to Mr Sweeney asking for updates on the installation of the fire suppression system at Thomlinson Road. This culminated in Millennium imposing special terms on 22 October 2014: the excess under the Millennium Policy was increased to £250,000 per claim, and Niramax was required to self-insure for 35% of the balance of any loss. Notwithstanding this, no fire suppression system was installed before the end of the policy year.
In December 2014, Niramax sought a renewal quote from Millennium, and a number of other placing brokers, including Mr Smith. Millennium offered renewal terms on the basis of an installation of fire suppression systems at Thomlinson Road, but did not offer cover for Washington Road. A quotation was also provided by Aspen via Mr Smith. Niramax completed proposal forms for Aspen, which included a denial by Niramax that it had ever been subject to special terms imposed by an insurer. This was plainly incorrect, given the history of the Millennium policy.
The Aspen quote was accepted, and Aspen were on risk for the 2015/16 policy year.
The Policy which formed the basis for Niramax’s claim (the contractor’s plant policy) originally incepted in 2006, with SWS as the insured. Niramax was added as an insured in 2007/08. The Policy provided all risks cover for loss or damage to owned and hired-in mobile plant. The Policy was renewed with Zurich on broadly similar terms in subsequent years, up to and including the 2014/15 policy year. For 2014/15, the premium was £23,714.40 – an increase of 20% on the previous year. The premium was, despite this increase, below what should have been offered due to the use of an incorrect multiplier.
In mid-2015, mindful of the arrival of the Eggersmann plant, Niramax (through Mr Sweeney) requested that Zurich add the Eggersmann plant to the Policy. Initially, Zurich refused to extend cover to the Eggersmann plant as it was fixed plant, and the Policy only covered mobile plant. It was suggested that the new machinery should instead be covered under Niramax’s property policy. Mr Sweeney persisted, and eventually Zurich agreed to cover the Eggersmann plant until the date of renewal of the Policy in December 2015 – subject to conditions including:
The fire occurred prior to renewal on 4 December 2015, and on renewal, Zurich declined to cover Niramax’s fixed plant under the Policy.
Throughout, Niramax argued that it was entitled to an indemnity under the Policy. This included an indemnity for the loss of the Eggersmann plant, which was covered under the Policy at the time of the fire.
By contrast, although Zurich consistently maintained that it was entitled to avoid the Policy, the reasons it advanced at the time of avoidance substantially differed from those relied on at trial. At the time of avoidance, Zurich put its case as follows -:
Zurich later dropped the Morfitt Defence, and the breach of conditions defence. At trial, Zurich’s case instead rested on the following grounds.
Zurich argued that Niramax failed to disclose or misrepresented those material facts both on renewal of the Policy in December 2014, and when it was extended to cover the Eggersmann plant in September 2015. On this basis, Zurich sought to avoid its obligations to indemnify Niramax, in whole or in part.
It is for the party pleading non-disclosure (here, Zurich) to show that the relevant matter was “material” to the decision to write the risk. The Marine Insurance Act 1906 (“the 1906 Act”) states that an insured 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 to him” (s 18). A fact is material if it would “influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk” (s 18(2)).
The judgment cited a number of further principles relevant to materiality, relying on the decisions of Carr J in Brit UW Ltd v F & B Trenchless Solutions Ltd  Lloyd’s Rep IR 69, and Leggatt J in Involnert Management v Aprilgrange Ltd  2 Lloyd’s Rep 289 [133.iii]. These include the need for courts to take an objective approach to assessing materiality, based on the judge’s independent appraisal of the alleged material circumstance in light of the facts at hand. Expert evidence is “helpful and important to ensure that the court’s findings are grounded in commercial reality”, but it is ultimately for the court to decide whether it is rational to take any particular matter into account.
Second to materiality, Zurich had to show that any non-disclosure or misrepresentation relied on induced it to write the contract which was in fact written, on a “but for” basis [133.iv]. In the words of Clarke LJ in Assicurazioni Generali SpA v Arab Insurance Group  2 CLC 242 at :
In order to prove inducement the insurer or reinsurer must show that the non-disclosure or misrepresentation was an effective cause of his entering into the contract on the terms on which he did. He must therefore show at least that, but for the relevant non-disclosure or misrepresentation, he would not have entered into the contract on those terms. On the other hand, he does not have to show that it was the sole effective cause of his doing so.
The burden for proving inducement is “not a heavy one” . But the judge acknowledged that caution had to be exercised given that (1) avoidance is a draconian remedy which should not be lightly granted and (2) genuine evidence on inducement could nevertheless be inaccurate due to the effects of hindsight and party interest, and the difficulty of examining hypotheticals. The latter proved especially relevant given the shift in Zurich’s case prior to trial.
In relation to the risk requirements/special terms defence, both parties advanced expert evidence on the issue of materiality. The experts (broadly speaking) agreed that Niramax’s non-compliance with risk requirements under the buildings policy, and the imposition of special terms by Millennium, were material. Those facts shone a light on Niramax’s attitude to risk management, and demonstrated “poor housekeeping” . The judge rejected an argument by Niramax that it was “actively engaged in compliance” during the course of 2014 – noting its “lackadaisical” approach to sourcing a suitable fire suppression system .
The question of inducement was more complex. It raised three key preliminary issues: (1) the identity of the underwriter (2) the effect of any extra information provided if fuller disclosure had been made, and (3) the nature of the underwriting process.
First, the court had to identify which member of Zurich’s underwriting team would have made the final decision on whether to offer cover (in December 2014, and September 2015), had proper disclosure been made. The judge found – in accordance with the case advanced by Zurich – that the decision would have been referred up the chain to Mr Penny, the head of its engineering risks department. It followed that “what Mr Penny would have done” became the crucial question when considering inducement .
On the second issue, the judge accepted an argument advanced by Niramax that any findings on inducement should also account for the effect on underwriters of positive information about Niramax’s business practices, which would have come out if fuller disclosure had been made. However, this argument cut both ways. If a full underwriting assessment had been given, it may also have brought into play “some less attractive features” . In the round, the judge found that a fuller presentation would not have had much effect on the overall balance of the underwriting decision.
On the third issue, the judge rejected Niramax’s case that even if proper disclosure had been made, it would not have had any impact on the underwriting process . Niramax based its submission on the fact that Zurich had treated the mobile plant policy in a “commoditised and streamlined” way . There was no proposal form, and Zurich calculated premiums based only on sums insured, trade and claims experience. Niramax argued that Zurich would have done the same at the time of the 2014 renewal, even if proper disclosure had been made; but the judge found this position unpersuasive. Had proper disclosure been made, the usual process for “vanilla” risks would not have been followed, and underwriters would have undertaken a more detailed analysis .
That left the ultimate question – what would Mr Penny have done, if presented with the new information? The conclusion: “it is more likely than not that if he had been aware of the facts in question Mr Penny would have reluctantly offered renewal terms in December 2014 but would have refused the extension to cover the Eggersmann plant in September 2015” .
A critical factor in Mr Penny’s deliberations both in 2014 and in 2015 was the undesirability of recycling risks. In the years prior to 2013, the waste and recycling industry had come to be seen as a hazard for insurers, particularly due to fire losses . In mid-2013, Mr Penny had instructed his underwriting team to stop covering fixed plant waste risks on engineering contractor’s plant policies, and a 10% rate increase was subsequently levied on such risks . By late 2014, the judge found that Zurich had effectively stopped writing new policies for waste risks, and was “kicking…out” much of its existing waste business . This hostility to waste risks continued as time went on, and by the time the Eggersmann plant was added in late 2015, Mr Penny’s attitude would have been even more adverse than it was at the time of renewal in December 2014 .
In December 2014, Mr Penny would still have written the Policy – though with a higher premium to reflect the correct multiplier. This would have been done out of a sense of “fair play”, and given the “less than striking” nature of the extra information which should have been disclosed . On this basis, the judge found that the test for inducement was not satisfied. This was despite the factual finding that if proper disclosure had been made, the Policy would only have been written on different terms (applying the correct multiplier).
However, Mr Penny would not have agreed to extend the Policy to cover the Eggersmann risk in 2015. As the judge found: “By September 2015 the thinking in Zurich had moved further along the timeline of hostility to waste risks. So, the backdrop on this aspect would be no better for Niramax than it was as at December 2014, but rather worse. And at this stage we hypothesise that Mr Penny is presented with a fixed plant risk of considerable size which has no place in the mobile plant policy – as Mr Penny himself had made clear to his team in July 2013 – together with these facts relating to the risk requirements and special terms.” 
When the Eggersmann plant extension was written in, after coaxing by Mr Sweeney, it was a marginal decision even without further disclosure. Had proper disclosure been given, three factors would have carried the decision “from a very reluctant write to a polite but firm refusal” :
Given those findings, the Millennium Renewal Terms and the Aspen Defence fell away, as they only related to the 2015 extension. In any event, they would have had little or no effect on inducing Mr Penny in the circumstances of the case -.
On the remaining defences advanced:
Zurich was ordered to return the premium received for the September extension (£32,782.62), and no indemnity was due for the Eggersmann plant.
Otherwise, the Policy stood, and Zurich was bound to indemnify Niramax for the items of mobile plant which were covered by the original Policy (as renewed in 2014) and damaged in the fire: two Liebherr excavators, and a Liebherr material handler. According to the Policy wording, Zurich was to pay “the market value of the item at the time of the loss or damage”, and Zurich’s internal guidance was that this meant “the cost of a replacement item of similar age and condition” .
The judge preferred the (higher) valuations of Niramax’s expert (Mr Correa) of £126,000 and £127,500 for the two excavators, and £167,750 for the material handler. In part, this was due to Mr Correa’s greater relevant expertise in loss adjusting, by comparison with the expert instructed by Zurich, Professor Sheldon. The judge also preferred Mr Correa’s methodology -:
Although it was not necessary given her findings on liability, the judge also preferred Niramax’s valuation of the Eggersmann plant (£4,308,582) to Zurich’s (£3,765,828) -. The machine was effectively brand new, and it was therefore appropriate to take the indemnity value as being the cost of a new replacement machine (in accordance with a subsequent quotation provided by Eggersmann).
Non-disclosure cases turn, to a large extent, on their particular facts. But the decision in Niramax is a helpful illustration of how courts approach and apply the rules on material non-disclosure under the 1906 Act – in particular, in relation to the vexed issue of hypotheticals. Similar considerations are likely to apply to cases falling under the new provisions in Part 2 of the Insurance Act 2015.
One contentious element of the judge’s reasoning relates to her finding that the “original” Policy stood – even though it would not have been written on the same terms if proper disclosure had been made (because Mr Penny would have accounted for the correct multiplier as part of the premium). The judge refused permission to appeal on this ground, but her findings on inducement raise interesting questions about how the test should be applied in circumstances where the policy would in fact have only been written on different terms.
In Zurich Insurance PLC v Niramax Group Limited, dealing with a contract…
In Niramax Group Limited v Zurich Insurance Plc  EWHC 535 (Comm)…