In Niramax Group Ltd v Zurich Insurance Plc  EWHC 535 (Comm) the High Court held it was material to the assessment of a risk under an all risks contactors’ mobile plant policy (the Policy) that the insured had failed to disclose the fact that risk requirements concerning a separate buildings policy remained outstanding and that special terms had been imposed.
But for the non-disclosure, the risk would have been referred to a more senior underwriter who would have demanded a higher premium on renewal of the Policy and would have refused an extension which had been granted for additional plant. Mrs Justice Cockerill held that the insurer was entitled to avoid the extension of the Policy in relation to the additional plant.
This is a decision under the “old law”, prior to the Insurance Act 2015 coming into force, but the Court’s careful scrutiny of materiality and inducement are instructive for any analysis of an alleged breach of the duty of fair presentation under a post-2015 Act policy. Further, difficulties faced by insureds in complying with policy terms or insurers’ risk requirements under the current COVID-19 restrictions may themselves be material circumstances for disclosure under the duty of fair presentation.
Niramax, a recycling company, purchased from Zurich, in December 2014, a suite of policies for the 2014/15 policy period designed to cover its mobile plant and machinery, which included the Policy.
Niramax separately purchased buildings insurance with Millennium Insurance for the 2014/15 policy period. Millenium’s buildings insurance quote was subject to a survey, following which a report was prepared in February 2014. The report highlighted a number of risk requirements Niramax had to comply with, which Millenium stated were condition precedents to their liability, including the fitting of a fire suppression system at one of Niramax’s sites by March 2014. This requirement was imprecise and although Niramax made some attempts to fit one, it failed to move it forward. As Millenium did not receive confirmation that the risk requirements had been complied with, in October 2014 it imposed special terms on the buildings insurance policy increasing the deductible per claim and requiring Niramax to self-insure for 35% of the balance of any loss.
In mid-2015, Niramax purchased a multi-million pound machine (the “Eggersman plant”). Zurich declined to extend the Policy to the Eggersman plant because the type of machinery was not suitable for insurance under the Policy which was designed for contractors’ mobile plants. Rather, Zurich said the Eggersman plant was a large fixed machine and instead suited to being insured under Niramax’s property policy. Eventually, despite agreeing the risk was not appropriate, Zurich agreed to extend the Policy to insure the Eggersman plant at least until expiry of the Policy, as a gesture of goodwill towards Niramax as a longstanding insured client.
In December 2015 a fire started and spread which caused damage to the Eggersman plant and other plant items to a value of over £4.5 million.
Zurich initially declined cover based on a series of alleged non-disclosures some which ultimately formed part of the defence at trial. The alleged non-disclosure which appears to have carried significant weight until shortly before trial, but which was ultimately not pursued, concerned the alleged failure to disclose a conviction for a serious offence of a shadow director, which was perceived as representing a serious moral hazard.
On being sued by Niramax, Zurich avoided the Policy. The key arguments maintained at trial by Zurich included that Niramax failed to disclose: (a) its own failure to comply with the Millennium risk requirements imposed in February 2014; and (b) the Millennium special terms imposed in October 2014 on the buildings policy. The non-disclosures were alleged both in respect of the Policy renewal in December 2014 and in mid-2015 on the addition of the Eggersman plant. Zurich argued that had it been aware of these facts it would have referred the matter to a more senior underwriter, who would have declined cover or charged a much higher premium.
In a long and detailed judgment on the facts, the judge summarised the law briefly which “barely requires to be stated” given its familiarity. By section 18 of the Marine Insurance Act 1906 an assured 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.”
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”, which rests on the Court’s own appraisal. An insurer can only avoid the contract if (s)he was actually induced by the misrepresentation or non-disclosure to write the precise contract which was written. The burden of proof was on Zurich to make out the avoidance.
Cockerill J held that despite the lack of clarity around Millenium’s requirements for the fire suppression system on the buildings insurance, Niramax had demonstrated a lackadaisical approach and did not comply with a number of other requirements that were clear. The lack of active engagement with Millenium’s requirements was a material circumstance because it manifested a poor attitude to compliance with risk management imposed by insurers.
The Court then considered whether the non-disclosures induced Zurich to enter into the Policy and grant the extension, which but for the non-disclosures Zurich would not have done. The Court highlighted that it is important to keep in mind that an individual underwriter’s evidence as to what he or she would have done had the material circumstance been disclosed is necessarily hypothetical. For that reason such evidence needs to be tested vigorously, especially where the relationship with the insured is long-standing (such that the underwriter might be reluctant to refuse cover to an established insured client).
In this case the Court scrutinised the underwriting process carefully and broke the question down to: (a) whether the risk would have been referred by a more junior underwriter to a more senior underwriter; and (b) whether that senior underwriter would have declined the risk in light of the information that should have been disclosed. In answering these questions, the Court considered in detail the character and experience of the underwriter witnesses, the processes they adopted as well as the nature of the non-disclosures. This was a searching exercise, particularly where the senior underwriter’s evidence acknowledged the effect on his views of the moral hazard argument which was not ultimately pursued at trial.
Weighing up all these factors, on the first question, the Court held that the risk would have been referred to a more senior underwriter both at renewal stage and on addition of the Eggersman plant. On the second question, it held that on the balance of probabilities the more senior underwriter would have offered renewal terms in December 2014 but would have refused the extension to cover the Eggersman plant in mid-2015 on the basis that the plant was higher risk and inconsistent with underwriting policies established by that individual. The Court also held that the premium imposed would have been higher.
Niramax’s claim succeeded in part in relation to the non-Eggersmann plant equipment but Zurich avoided the extension to the Policy validly such that the extra premium charged by the insurer for the extension to that plant was to be repaid. As a result the insured failed to recover for the majority of its loss.
This decision emphasises the need for full disclosure of all material circumstances surrounding a risk upon placement and highlights the perils for insureds who fail to comply with insurer requirements relative to one policy which shortcomings may need to be disclosed to insurers on other policies. Although the Policy was written under the law prior to the Insurance Act 2015, the Court’s approach to scrutinising the conduct and decision-making of individual underwriters is instructive in terms of the analysis likely to apply where an insurer seeks to avoid a policy or rely on proportionate remedies under the Insurance Act 2015.
One of the key points for policyholders to take away during the current period of disruption due to COVID-19 is that it may be difficult to comply with some policy terms or requirements on existing coverages. Where this occurs it will be necessary to consider whether such difficulties, or other changes to their businesses, are themselves material circumstances to be disclosed at renewals or mid-term alterations and adjustments as part of discharging their duty of fair presentation.