25 Feb What is the meaning of “deliberate or fraudulent” in a non-disclosure clause in an insurance policy?

Insurance contracts are contracts of ‘utmost good faith’. Accordingly, a business buying insurance owes a duty to the insurer both to disclose material facts and to refrain from making material misrepresentations. This is an onerous duty, which distinguishes insurance contracts from other types of commercial contracts where the principle of “let the buyer beware” applies.

The law relating to business insurance contracts (that is, all insurance contracts except those entered by individuals wholly or mainly for purposes unrelated to their trade, business or profession) derives from the common law.

Subject to limitations and exceptions, before the conclusion of an insurance contract the insured must disclose to the insurer the material facts that he knows, or is deemed to know, about the risk it wants to be insured. This duty was created by the common law and embodied in statute.

Breach of the duty of utmost good faith has serious consequences for the insured. If an insurer discovers that the insured has breached the duty by a material non- disclosure, or misrepresentation which induced the insurer to enter the contract in the terms that it did, generally, the insurer cannot claim damages but it may avoid the policy from inception so that it is entitled to treat the policy as if it never existed. The insurer is entitled to the remedy of avoidance even if the non- disclosure was innocent or negligent.

The Insurance Act 2015 will come into force on 12 August 2016 and will abolish the sole remedy of avoidance and replace it with a new range of proportionate remedies, depending on the state of mind of the insured.

It is not unusual for certain insurance policies, for example professional indemnity policies, to include non- disclosure clauses, which aim to limit
the e ect of the duty of non-disclosure. Typically, such clauses limit the insurer’s right to avoid the policy to cases where the non-disclosure (or misrepresentation) is fraudulent.

In a recent case of Mutual Energy Ltd v Starr Underwriting Agents Ltd and another [2016], the court considered whether the insured had deliberately failed to disclose information to the insurers, within the meaning of a non-disclosure clause in the insurance policy.

A preliminary issue was considered on what was meant of the words “deliberate or fraudulent non-disclosure” in a non-disclosure clause in an insurance policy. It was held that the words “deliberate or fraudulent non-disclosure” meant that an element of dishonesty by the insured was required before insurers would be allowed to avoid the policy for non-disclosure.

The insured must have taken a deliberate decision not to disclose something, which the insured knew it should have disclosed to insurers. An honest but mistaken belief that the particular information did not need to be disclosed would not suffice.

This decision is of particular interest because there are no reported decisions on the meaning of the phrase “deliberate or fraudulent non-disclosure” in an insurance context. There are however, several decisions on the meaning of the word “deliberate” in the context of a breach of contract.

While the interpretation given by the judge accords with business sense, it is not surprising that insurers argued for a wider meaning of the word “deliberate”.

If it entails an element of dishonesty, an insurer claiming a deliberate non- disclosure is in essence pleading fraud. In practice, this is diffcult to do unless there is clear evidence. If the judge had accepted the insurers’ contention that the term encompassed an honest but mistaken decision not to disclose, it would in e ect have meant allowing insurers to avoid the policy for negligent non-disclosure, which they had expressly agreed not to do.

This decision will continue to be relevant after the Insurance Act 2015 comes into force in August 2016. Parties are allowed to contract out of the Act and, therefore, in principle, it will be possible to retain non- disclosure clauses in policies.

The court’s decision was that the words “deliberate or fraudulent” in a non-disclosure clause in an insurance policy, meant that an element of dishonesty
by the insured was required before the insurer would be allowed to avoid the policy for non-disclosure. In other words, the insured would intentional fail to disclose something to the insurer, which the insured knew it should disclose. It therefore requires the insurer to know that what it was doing was wrong.

(This article should not be treated or relied upon as legal advice and you should seek legal assistance for your own individual circumstances)