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 pre-dating the Insurance Act 2015, the Court of Appeal held that to establish inducement in cases of non-disclosure it was necessary for the insurer to show that the non-disclosure was an efficient cause of the underwriter writing the insurance on less onerous terms than would have been the case had the disclosure been made. It is not sufficient merely to establish that the less onerous terms would not have been imposed ‘but for’ the non-disclosure. The case highlights an issue as to whether the same result would be reached under the Insurance Act 2015.
THE FACTS AND THE FIRST INSTANCE JUDGMENT
The Respondent, Niramax, was in the business of waste collection and waste recycling. The mobile plant it used was covered by the Appellant (“Zurich”) under a policy of insurance renewed on 14 December 2014 (“the Policy”). The risk was underwritten by a junior employee at Zurich, applying a “commoditised and streamlined” process that had only three inputs into a calculation of premium, namely the amount of the cover, the nature of the trade, and the claims experience. When entering these variables, instead of categorising the risk trade as waste, with an automatic premium of 6%, it was categorised by the junior employee as contractor’s portable plant, with a premium of 2.25%, to which a loading of 40% was applied. Further the excess of £500 was very low for a risk of this type. On 5 September 2015, a fixed shredding machine, known as the Eggersmann plant and valued at £4.2m, was added to the Policy, increasing the overall plant cover to just over £5m.
On the night of 4 December 2015 a fire broke out at Niramax’s main premises. The fire destroyed a number of items of mobile plant and the Eggersmann plant. Zurich declined the claim on the grounds of non-disclosure of material facts at the renewal in December 2014, and separately when the Eggersmann plant was added to the Policy in September 2015. In particular, it said Niramax had failed to disclose that it had not complied with a number of risk requirements which had been imposed by its property insurer, Millennium Insurance, and that this had resulted in Millennium imposing special terms requiring Niramax to self-insure for 35 per cent of any loss and in any event to bear the first £250,000 of any loss.
Zurich alleged that it was entitled to avoid the Policy from renewal on 14 December 2014; or in the alternative that it was entitled to avoid the extension of the Policy when the Eggersmann plant was added. Zurich further alleged that if the non-disclosed facts had been disclosed in September 2015 it would have cancelled the Policy.
At first instance, Cockerill J held that there had been a material non-disclosure of Millennium’s risk requirements and special terms and that had proper disclosure been made the risk would have been referred to a more senior underwriter within Zurich, Mr Penny. However, after hearing evidence from Mr Penny the Judge concluded that although he would have thought long and hard about whether to refuse renewal, he would not have done so. She accepted that had the material facts been disclosed at the time of the extension of the Policy to add the Eggersmann plant, Zurich would have declined to insure the Eggersmann plant, but found it still would not have cancelled the Policy. Accordingly, Niramax’s claim succeeded in part, namely for recovery of the value of the mobile plant, but not the Eggersmann plant.
In reaching the conclusion she did in relation to the 2014 renewal, Cockerill J noted that it was not in issue that the premium charged by Zurich was incorrectly calculated because of the junior underwriter’s error which “self-evidently left the premium below the level it would have been” had an automatic premium of 6% been used. Moreover, she accepted that had Niramax made proper disclosure on renewal in 2014, Mr Penny would have corrected this error: he would have renewed the Policy, but only at the correct price for the risk. Such a difference in terms, however, would not have related to the relevant non-disclosed fact, but only to an earlier error by Zurich’s employee, meaning the non-disclosure would not have been causative of the different terms. Accordingly, the effect of the Judge’s ruling was the inducement was not made out even though the Policy would have been written on different terms ‘but for’ Niramax’s non-disclosure.
THE APPEAL AND RESPONDENT’S NOTICE
Zurich appealed, arguing, among other things, that the judge erred on the issue of inducement. It contended that inducement was established as a matter of law, because the premium would have been higher had the disclosure been made; and that this was sufficient to meet the causation test for inducement irrespective of the amount of the increase or the thought process by which the additional premium would have been calculated.
Niramax resisted the appeal and also filed a Respondent’s Notice in which it maintained that the judge had fallen into error in saying that using a figure of 2.25% and then adding a weighting of 40% would “self-evidently” have left the premium below that which would have been reached if 6% had been applied. In fact, it said, there was no proper evidential basis for the judge to conclude that if Mr Penny had corrected the error in the approach in 2014 it would have resulted in a higher premium than had in fact been charged. That was not self-evident. Accordingly, it could not even be said that but for the non-disclosure the Policy would have been written on different terms, even as to premium.
THE COURT OF APPEAL’S JUDGMENT
The Court of Appeal, Popplewell LJ giving its judgment, dismissed Zurich’s appeal.
It accepted that although the way the evidence and argument had been presented at first instance had avoided real focus upon it, the point in Niramax’s Respondent’s Notice was well-founded, and that this alone was a reason the judgment should be upheld. Perhaps itself conscious this was so, at the appeal hearing Zurich did not press its legal argument that ‘but for’ causation was sufficient to make out inducement, but rather sought to argue, unsuccessfully, that properly understood, the judge had in fact made findings that Mr Penny would have charged additional premium not, or not only, to correct the “mistake”, but also to reflect the increased risk which the undisclosed facts would have revealed. If this were so, Zurich said, the causation test for inducement would be met even if it was necessary for the non-disclosure to be an efficient cause. The Court of Appeal rejected this line of argument on the basis that (i) there was no permission to pursue it, and (ii) on a fair reading of the judgment it was clear that Cockerill J had held that the only difference of approach which Mr Penny would have adopted would have been to increase the premium to correct the junior underwriter’s error; and that any increase would not have been related to the non-disclosed fact.
Nevertheless, as Zurich had not abandoned its contention that ‘but for’ causation was sufficient, the Court dealt with it, even though it had been “dismissed from the forefront of Zurich’s] argument to a point at which it was barely visible in the rear view mirror.”
It held that the judge had correctly applied the test for inducement: “in order for non-disclosure to induce an underwriter to write the insurance on less onerous terms than would have been imposed if disclosure had been made, the non-disclosure must have been an efficient cause of the difference in terms. If that test of causation is not fulfilled, it is not sufficient merely to establish that the less onerous terms would not have been imposed but for the non-disclosure.” (paragraph 30). Popplewell LJ stated that this conclusion was supported both by authority and principle.
As to authority (paragraphs 31 to 35):
- Pan Atlantic Insurance Ltd v Pine Top Ltd  1 AC 501 established the necessity to prove inducement in cases of both misrepresentation and non-disclosure, despite the absence of any such express requirement in sections 18 and 20 of the Marine Insurance Act of 1906. The speech of Lord Mustill equated the test for inducement with that applicable to misrepresentation in the common law generally. The rationale was that “there had to be some effect which the undisclosed or misrepresented facts have on the mind of the underwriter”.
- The requirement in the general law of misrepresentation that there be such an effect on the mind of the representee has long been established. In Edgington v Fitzmaurice (1885) 29 Ch D 459 it was held that the misrepresentation must be an effective cause, although not the sole cause, of the representee acting as did, in the sense that it must influence him in his decision and be part of the cause of what he did: see per Cotton LJ at p. 480-481, Bowen LJ at p. 483 and Fry LJ at p. 485.
- In St Paul Fire & Marine Insurance (UK) Ltd v McConnell Dowel Constructors Ltd  2 Lloyd’s Rep 116, Evans LJ confirmed at pp.124-5 that the test the test for inducement in a case of non-disclosure was that set out in Edgington v Fitzmaurice, and said that this was no different from the expression Stephenson LJ had used in JEB Fasteners Ltd v Marks Bloom & Co  1 All ER 583, 589b of “a real and substantial” cause
- In Assicurazioni Generali SpA v Arab Insurance Group  EWCA Civ 1642, at  Clarke LJ had said that “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.” However, he was not equiparating the two tests, as his use of “at least” demonstrated. In many cases if an insurer cannot satisfy the effective cause test he will also be unable to satisfy the but for test; but that is not always so, as the current case demonstrated.
As to principle, Popplewell LJ observed (at paragraph 36) that “if a non-disclosure has not had any influential effect on the mind of the insurer, in the sense that if disclosed it would not have played any part in his underwriting judgment, there is no connection at all between the wrongdoing of the assured and the terms on which the insurance is written by the insurer. It is difficult to see any justification for affording the insurer a windfall remedy in such circumstances.”
To satisfy the requirement for inducement, it was therefore necessary for the non-disclosure to be an “efficient cause” of the fact that different terms were not offered, not merely a but for cause. The expression “efficient cause”, rather than “effective cause” was appropriate because it reflected the language used in Financial Conduct Authority v Arch Insurance (UK) Ltd  UKSC 1 to distinguish between a but for test and what was historically called a proximate cause, in characterising the causative link between the insured peril and the loss in insurance cases.
Applying the correct test for inducement to the Judge’s findings, the Court held she was right to conclude that there was no inducement. An important feature of the case was that rating the risk for the purposes of calculating premium at Zurich took no account of attitude to risk, which was what the undisclosed facts went to, save to the extent that it was reflected in the claims experience which was independently one of the criteria taken into account. It was a formulaic streamlined process based only on the amount insured, nature of the trade and claims history (on the Judge’s findings). Accordingly, Niramax’s attitude to risk, and therefore the undisclosed facts, was irrelevant to the rating of the risk, save to the extent that they were reflected in the claims record. The non-disclosure cannot therefore have had any causative efficacy in the renewal being written on cheaper terms than would have occurred if disclosure had been made.
Put another way, it was the mistake as to the calculation of the premium, not a failure by Niramax to disclose matters, which was the sole cause of the policy being written more cheaply than it would have been by Mr Penny. The non-disclosure provided the opportunity the mistake on calculation which meant that the but for test of causation was fulfilled. But the mistake by the junior underwriter was the sole efficient cause of the policy being written more cheaply than it would otherwise have been priced by Zurich, through Mr Penny.
It is suggested that the decision is clearly correct and unsurprising. Leaving aside the analysis of existing authority, the point of principle in favour of requiring the non-disclosure to be an efficient cause identified by Popplewell LJ is compelling.
The case, however, highlights the question some commentators have already posed as to whether the same analysis would be applied under the Insurance Act 2015 where there has been a breach of the duty of fair presentation
Section 8(1) of the 2015 Act provides that:
“The insurer has a remedy against the insured for a breach of the duty of fair presentation only if the insurer shows that, but for the breach, the insurer –
(a) would not have entered into the contract of insurance at all, or
(b) would have done so only on different terms.” (emphasis added)
It is easy to see insurers contending that a different approach should be taken to inducement under the 2015 Act and supporting such an argument with at least two points. Firstly, section 8(1) uses the term ‘but for’; it does not use more nuanced language of causation, despite the concept of proximate or effective cause being so familiar to the law of insurance, and despite the Explanatory Notes to section 8 stating that “it reflects the current law on inducement as developed following the decision Pan Atlantic”. These notes, of course do not form part of the statute, have not been endorsed by Parliament, and cannot be amended by it.
Secondly, the way the 2015 Act has made insurers’ remedies proportionate to the insured’s breach has, it might be said, eroded one of the points of principle that influenced Lord Mustill in Pan Atlantic. In a passage cited by Popplewell LJ in Niramax, Lord Mustill commented at p.549C-D on why it would not be just for insurers to have a windfall remedy where there as no connection between the wrongdoing of the insured and the terms on which the insurance is written:
“The existing rules, coupled with a presumption of inducement are already stern enough, and to enable an underwriter to escape liability when he has suffered no harm would be positively unjust, and contrary to the spirit of mutual good faith recognised by section 17 [of the Marine Insurance Act 1906], the more so since non-disclosure will in a substantial proportion of cases be the result of an innocent mistake.”
On the facts in Niramax, had the non-disclosure not taken place, Zurich would not have had the windfall of escaping liability altogether, but only been entitled to reduce proportionally the amount to be paid on the claim (see section 6 of the 2015 Act).
Nevertheless, even leaving aside the Explanatory Notes, the 2015 Act cannot have been intended to depart from the pre-existing law on inducement in insurance, or to separate the approach to inducement in insurance from the general law of contract. While the remedies for breach of the duty of fair presentation are proportionate to the breach, so providing some protection against excessively harsh outcomes for insureds, the underlying point of principle remains, namely that an insurer should not be entitled to a remedy where the breach has not caused harm. Moreover, on different facts, an insurer in Zurich’s position might be able to say that but for the non-disclosure it would not have written the policy on any terms, even though that refusal would not have been because of the undisclosed fact; thus, the very unfairness identified by Lord Mustil would still arise. Given that in Pan Atlantic the House of Lords felt able to imply a requirement of inducement into the Marine Insurance Act 1906, a Court today might equally feel able to construe the 2015 Act as requiring more than just ‘but for’ causation so as to avoid such an outcome.