The Facts
The duty of fair representation requires the insured to notify the insurer of every material circumstance and risk, when obtaining insurance. This disclosure must be of all material circumstance the insured knows, or ought to know (i.e. what should have been revealed on a reasonable search of information available to the insured).
In this particular case, a fire occurred at the insured’s property and £7.2 million was claimed from his insurers, Royal and Sun Alliance Plc. The insurer denied the claim on the basis that the insured had failed to disclose information to them under section 3(1) of the Act, the duty of fair representation.
The insured had provided RSA with a questionnaire, created using the broker’s software, which asked whether “any proposer, director or partner of the…[insured’s] Business” had been declared “bankrupt or insolvent…”, amongst other possible material circumstances. The insured responded “none”, from a drop-down list of responses, as they believed it was in reference to the insolvency of the current insured company. The insurer then sent an email to the insured stating that the cover was subject to confirmation that “the insured has never been declared bankrupt or insolvent”.
What the insured failed to mention was that one of the directors had been the director of four previous companies which had been declared insolvent. In any event, the insurer stated he was unaware that there had been a drop-down list on the questionnaire and didn’t know what he was responding ‘none’ to, due to its bespoke nature.
The insured argued, firstly, that they had not misrepresented their response as it was technically correct in that neither the proposer nor the company had been declared bankrupt or insolvent. It was also argued that the insurer had waived their right to disclosure as they had asked a “limiting question” in their email, as it only related to the insured and not to other companies that the insured had previously been involved in. The argument was, therefore, that the insurer had waived their entitlement to disclosure of prior insolvencies. The insurer denied this argument and stated that their query was setting out the basis on which the cover was being offered; it was not a question for the insured to respond to.
The Decision
The pre-Act case law shows that a waiver can be established in two ways, and the Act does not alter this:
- Where an insured submits information containing something which would reasonably prompt an insurer to make enquiries, and the insured fails to do so.
- Where an insurer asks a “limiting question”, which enables an insured to be reasonably justified in thinking the insurer had no interest in information falling outside the scope of the question.
The Judge found that the email from the insurer did not contain a “limiting question”, as it only stated that the policy was subject to certain matters. No reasonable person reading the email would have believed the insurer had waived their right to disclosure. In this case, it was held to be reasonably assumed that a reference to the “insured”, in the email, includes the directors acting in their previous roles.
Comment
A key takeaway from this judgment is that it highlights the possible shortcomings of placing insurance with bespoke software. In this instance, RSA were unable to determine what had been disclosed by Mr Young which led to confusion. This contrasts with a more typical scenario, where a proposal form would be sent by the insurer for completion by the insured. In these circumstances, insurers must ensure that their proposal forms are clearly in line with the duty of fair representation; enquiring about all the necessary information to avoid opening themselves up to the possibility of a waiver being established in line with the pre-Act case law.
Although this is a Scottish case, it can still be used as persuasive evidence in the law of England and Wales and may even be referred to the UK Supreme Court; so, although it is not certain that the same ruling would be made in England, it is likely. The judgment refers to the Act having “shifted the burden of identifying what is material, to the insured, in the form of the duty to make a fair presentation of the risk”. As a result of this, insureds may now struggle to establish that the insurer has presented a “limiting question”, thus making it harder to prove that the insurer’s right to disclosure has been waived.
