Transcript Can an Insurer avoid for under

Can an Insurer avoid for:
(a) under-valuation of property;
(b) under-declaration of estimated
income?
Roger Doulton M.A (Oxon), MCIArb,
F.R.S.A.
Partner - Barlow Lyde & Gilbert LLP
To begin at (or very nearly at!) the
beginning ….
‘Subject to the provisions of this section, the 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 by him. If the
Assured fails to make such disclosure, the Insurer may avoid the
contract.’
Section 18(1) Marine Insurance Act 1906
Representation of fact
‘A representation as to a matter of fact is true, if substantially
correct, that is to say if the difference between what is
represented and what is actually correct would not be considered
material by a prudent Insurer.’
Section 20(4) Marine Insurance Act 1906
Expectation or belief
‘A representation as to a matter of expectation or belief is true if
made in good faith.’
Section 20(5) Marine Insurance Act 1906
What is the status of a valuation or
estimate?
Absent dishonesty, and within the insurance context, a valuation
or estimate is treated by the Courts as a representation of
expectation or belief.
In another context…
‘It is material to observe that it is often fallaciously assumed that a
statement of opinion cannot involve the statement of a fact. In a case
where the facts are equally well known to both parties, what one of them
says to the other is frequently nothing but an expression of opinion. The
statement of such an opinion is in a sense a statement of fact, about the
condition of the man’s own mind, but only of an irrelevant fact, for it is of
no consequence what the opinion is. But if the facts are not equally
known to both sides, then a statement of opinion by one who knows the
facts best involves very often a statement of a material fact, for he
impliedly states that he knows facts which justify his opinion.’
Per Bowen LJ
Smith -v- Land & Home Property Corporation [1884]
In another context…
‘I am therefore entirely of the same opinion as the Judge, that this
is a case in which the representation was not merely confined to
the fact that the vendor entertained the belief but also,
inescapably, there goes with it the further representation that he,
being competently advised, had reasonable grounds for
supporting that belief.’
Per Lord Evershed
Brown -v- Raphael [1958]
In another context…
‘I agree that it is not a guarantee that the tenant will go on paying
his rent but it is to my mind a guarantee of a different sort, and
amounts at least to an assertion that nothing occurred in the
relations between the landlord and the tenant which can be
considered to make the tenant an unsatisfactory one. That is a
statement of a specific fact again.’
Per Bowen LJ
Smith -v- Land & Home Property Corporation [1884]
So you might think …
…. that, within the context of insurance (non-disclosure and/or
misrepresentation) a valuation or estimate carries with it an
implied representation that it had been reasonably arrived at.
And that…
…as a result an insurer could avoid for misrepresentation if this
were not the case
BUT …
You would be
WRONG!
The rot sets in
‘What then was meant by the appellant’s representation that, as at
January 1991, he believed that the full contents value was £16,000?
The Judge below considered 3 possible meanings:
(i)
That £16,000 was in fact the full value;
(ii)
That the appellant honestly believed that £16,000 was the full
value and had reasonable grounds for his belief;
(iii)
That he honestly believed that £16,000 was the full value’
Per Simon Brown LJ
Economides -v- Commercial Union [1997]
And continued ….
‘Can one in an insurance context, consistently with section 20(5) of the
1906 Act, find in a representation of belief an implied representation that
there are reasonable grounds for that belief? In my Judgement not.’
Per Simon Brown LJ
Economides -v- Commercial Union [1997]
‘I find it impossible to see how, consistently with section 20(5), an
objective test of reasonableness can be imported by way of an implied
representation.’
Per Gibson LG
Economides -v- Commercial Union [1997]
And continued…
‘He accepts, as he inevitably must, that the appellant had to have
some basis for his statement of belief in this valuation; he could
not simply make a blind guess: one cannot believe to be true
that which one has not the least idea about. But, he submits, and
this is at the heart of the argument, the basis of belief does not
have to be an objectively reasonable one… he was under a duty
of honesty not a duty of care.’
Per Simon Brown LJ
Economides -v- Commercial Union [1997]
And continued…
‘Again in Highlands Insurance Co -v- Continental Insurance Co [1987]
the relevant representation was made by a professional underwriter.
With such cases can be contrasted a case such as the present where
the statement is made by a layman with no relevant skills. Like Simon
Brown LJ I regard section 20(5) of the Marine Insurance Act 1906 as
providing the conclusive answer on the point. On its face it applies to all
representations as to matters of expectation or belief… I find it
impossible to see how, consistently with section 20(5), an objective test
of reasonableness can be imported by way of implied representation.’
Per Gibson LJ
Economides -v- Commercial Union [1997]
Are there any limits to the scope of this
outcome?
‘Thus, if it can be proved that the person who expresses the opinion did
not hold it, or could not, as a reasonable man having his knowledge of
the fact, honestly have held it, the statement may be regarded as a
statement of fact’ … [ a misrepresentation as to his state of mind].’
Chitty on Contracts
Approved by Longmore J in Credit Lyonnais -v- E.C.G.D [1996]
Approved by Simon Brown LJ in Economides -v- Commercial Union [1997]
‘With such cases can be contrasted a case such as the present where the
statement is made by a layman with no relevant skills.’
Per Gibson L J
Economides -v- Commercial Union [1997]
So what about non-disclosure of the failure to
take proper [business like] steps when
providing a valuation or estimate?
‘The Recorder found that the Plaintiff wilfully shut his eyes to the reality
of the situation. If there was such Nelsonian blindness on the Plaintiff’s
part, then that would be equivalent to actual knowledge and would not
be constructive knowledge. But that would be tantamount to dishonesty
on the part of the Plaintiff… the Recorder does not go so far… the
Recorder simply says that the Plaintiff failed to make enquiries. Mr
Kinsler does not suggest that this was a finding of wilful or reckless
failure to make enquiries. It is a finding of constructive knowledge. But
here again the answer lies in the 1906 Act. As section 18(1) has been
interpreted, in my view correctly, there is no need for a private individual
to disclosure what he doesn’t actually know.’
Per Gibson LJ
Economides -v- Commercial Union [1997]
By Contrast…
 A commercial Insured must disclose that which ‘in the ordinary
course of business’ it ought to know.
Two questions arise: Might this extend to a duty to disclose that the valuation or
estimate had not been obtained/given with appropriate skill and
care or thought/absent professional advice?
 Within the context of misrepresentation could it be argued that
there was an implied representation that the valuation or estimate
was based on reasonable grounds?
Misrepresentation
‘Reinsurers submit that the question for the Court to determine is
whether, considering ‘by whom and in what circumstance the
representation and question was made’ the representation is
properly characterised as a representation only of ‘expectation or
belief’ (as Combined contends), or of or as including ‘an
assertion of a specific fact’ (as Reinsurers contend). If the
former, it will be sufficient if the representation was made in good
faith. If the latter, there must have been some reasonable
justification for the belief.’
Per Cresswell J
Rendall -v- Combined [2005]
Misrepresentation
‘Reinsurers contend that the representation to Mr Boyd that
‘estimated travel data … estimated days of travel for Class 1 is
160,000’ in the fax dated 10 February 2000 is properly
characterised as a representation which includes an implicit
assertion that the figure put forward to Mr Boyd had been arrived
at by reference to Aon’s historical information and experience…’
Per Cresswell J
Rendell -v- Combined [2005]
Misrepresentation
‘Combined submits that, as a matter of construction, the words
‘estimated days of travel for Class 1 is 160,000’ in the fax dated
10 February 2000 clearly meant that Combined …. estimated …
(i.e. expected) that the total number of days of travel … would be
likely to undertake during the (future) annual period of insurance
was 160,000. Not only is this how the words would have been
understood by any reasonable reinsuring underwriter… but it was
also how Mr Boyd in fact understood them.’
Per Cresswell J
Rendell -v- Combined [2005]
Misrepresentation
‘I do not consider that the words in question on analysis
constituted an assertion of a specific fact. In particular, I do not
find in the words in question an assertion of a specific fact that
the estimate ‘had been based on Aon’s historical information and
experience of the business travel undertaken…’. It should be
remembered that (as the experts agreed), in the absence of
historical data, travel days can be, and often are, estimated
based on other information such as knowledge of the industry,
the Insured’s business and employee occupations. An estimate
of future travel can be arrived at in a number of different ways.’
Per Cresswell J
Rendell -v- Combined [2005]
And non-disclosure?
‘I accept Combined’s submission that the presentation was fair
because Reinsurers were specifically told that the days of travel
were estimated. This carried with it no implication about how the
estimate had been arrived at. It could have been based on hard
data or on Judgements or assumptions or any mixture of these.’
Per Cresswell J
Rendell -v- Combined [2005]
What if Insurers have built in a remedy for
under-valuation/inaccurate estimating?
‘It has therefore become the also invariable practice for Insurers to declare that the policy is
‘subject to average’ or ‘subject to the under-mentioned condition of average’ which means that, if
the sum insured does not represent the value of the property insured at the time of the loss or
damage, the Insured is to be his own insurer for the proportion of the insurance and must
therefore bear a part of the loss accordingly.
Ordinarily, therefore, it appears, under-insurance, so far from being regarded as material nondisclosure justifying the avoidance of the policy, results instead in averaging, or indeed in full
recovery without penalty. Why then should the position be so very different in the present case,
not least given that the policy itself expressly envisages at least some degree of underinsurance…
And that leads me to the second point. Just how substantial must be the extent of underinsurance… before it is said, assuming allows that the Assured had knowledge of these facts, that
the policy can be avoided on grounds for non-disclosure?
I raise [these points] because, in other circumstances, it seems to me that they are likely to have
considerable importance and accordingly should not be lost sight off.’
Per Simon Brown LJ
Economides -v- Commercial Union [1997]
To conclude

In an insurance context it is impossible – consistently with section 20(5) of the Marine Insurance Act 1906 –
to find in a representation of expectation or belief, an implied representation that there are reasonable
grounds for that belief.
Per Simon Brown L J - Economides

Once statute deems an honest representation as to a matter of expectation or belief to be true, there is no
scope for enquiry as to whether there were objectively reasonable grounds for that belief.
Per Peter Gibson L J - Economides

What may at first blush appear to be a representation merely of expectation or belief can, on analysis, be
seen in certain cases to be an assertion of a specific fact. In this event the case is governed by subsections
(3) and (4) of the Marine Insurance Act 1906 rather than subsection (5).
Per Simon Brown L J - Economides

It is important to keep in mind by whom and in what circumstances the representation in question was made.
Per Peter Gibson L J - Economides

There must be some basis for a representation of expectation or belief before it can be said to be made in
good faith.
Per Simon Brown L J - Economides
The Insured’s obligation
‘In my judgment, if insurers wish to place upon their assured an
obligation to carry out specific enquiries or otherwise take steps
to provide objective justification for their valuations, they must
spell out these requirements in the proposal form.’
Per Simon Brown L J
Economides -v- Commercial Union [1997]
And the solution?
 Some appropriate questions in the proposal form
 A warranty that valuations and/or estimates have been arrived at
in a business like manner?
 Revised average clauses? Combined with a clause specifically
preserving the right to avoid?*
 A warranty that valuations and/or estimates are accurate plus or
minus a specified percentage?*
* Both of these would ideally require a mechanism for assessing
the appropriate valuation or estimate