Fair presentation of risks: materiality for a prudent insurer

In Berkshire Assets (West London) Ltd v AXA Insurance UK Plc [2021] EWHC 2689 (Comm), the High Court confirmed that the materiality of a circumstance is to be determined at the time the risk is placed, even if it is proven to be immaterial at a later date.

Materiality: a recap

• Section 3(1) of the Insurance Act 2015 (IA 2015) provides that: “Before a contract of insurance is entered into, the insured must make to the insurer a fair presentation of the risk…”
• Pursuant to section 3(4)(a) IA 2015, this means that the policyholder must disclose every material circumstance that they know, or ought to know
• “Materiality” is defined at s.7(3)(4) of the IA 2015 as follows: “… 7(3) A circumstance ... is material if it would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms.”

Factual background

AXA Insurance (the Insurer) provided a Construction All Risks policy to Berkshire Assets (West London) Limited (the Policyholder) for a property development, for the period 30 November 2018 to 29 November 2019.

At policy inception, the Policyholder confirmed that none of its directors had “either personally or in any business capacity, been convicted of a criminal offence or charged (but not yet tried) with a criminal offence”.

In August 2019, criminal charges were filed in Malaysia against one of the Policyholder’s directors, a Michael Sherwood. This was not disclosed to the Insurer when the policy was amended in August 2019, nor at policy renewal in November 2019.

At renewal, the Policyholder (by one of its directors other than Mr Sherwood) signed the policy documents that provided: “You must make a fair presentation of the risk and if you do not tell us about any changes or fail to advise us of any inaccuracies or omissions, the policy may not protect you in the event of a claim”.

In January 2020, the Policyholder notified the Insurer of a substantial water damage claim following an escape of water at the property development.

The Insurer declined cover in February 2020 when it discovered the Malaysian criminal charges, contending that the Policyholder’s failure to disclose them at renewal was a breach of the duty of fair presentation under section 3(1) IA 2015.

Court proceedings: materiality

The Insurer argued, in support of its declinature, that had the true position been known, the Insurer would not have renewed the policy on the terms that it did.

The Court considered the following issues:

1. Was the fact that Mr Sherwood had been subject to criminal charges a “material circumstance” for the purposes of the duty of fair presentation?

2. If it was, and if it had been adequately disclosed, would the Insurer have agreed to insure the Policyholder under the renewed policy?

In answer to question 1, the Court referred to the IA 2015 definition of a material circumstance, namely whether or not it would “influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms.” It is not by accident that the Law Commission preserved the concept of materiality in IA2015; the Court emphasised that the principles relevant to determining a material circumstance are “well established by authority”, and that the definition under s.7 of IA 2015 has not resulted in any change to those principles.

Applying existing case law, the Court acknowledged that it is well established that the charge of a criminal offence will often constitute a material circumstance (March Cabaret Club v London Assurance [1975] 1 Lloyd’s Rep. 169).

Further, it was confirmed that the case of Brotherton v. Aseguradora Colseguros (No. 2) [2003] EWCA Civ 705 “is intended to, and does, represent the law”. In Brotherton, it was held that when underwriters accept a risk, they are influenced “not merely by facts which, with hindsight, can be shown to have actually affected the risk but with facts that raise doubts about the risk”. The fact that the Malaysian criminal charges had, subsequently, been dismissed did not matter; the materiality of the criminal charges were to be determined at the time of renewal, not with the benefit of hindsight. At the time when disclosure ought to have been made, the Insurer would not have been in a position to determine whether or not the charges (under Malaysian law) were well-founded or whether they in fact involved any allegations of personal wrongdoing or moral hazard by the director. The Insurer would not have been bound to accept the Insured’s explanations of the position.

In answer to question 2, and based on evidence from the Insurer’s underwriters, it was held that a criminal charge against a director would have been regarded as material, such that the risk would not have been acceptable to the Insurer. The Policyholder’s claim was therefore dismissed.

Comments

This case confirms the important principle as set out in Brotherton; allegations of criminal wrongdoing can still be material and disclosable. A failure to disclose can be grounds for an avoidance, even if those allegations are subsequently withdrawn.