A recent decision shows the consequences of failing to disclose material facts to insurers - dangers the Insurance Act 2015 should help alleviate
A recent decision in the Commercial Court in BRIT UW Ltd and F & B Trenchless Solutions Ltd (31 July 2015) demonstrates the dangers of failing to disclose material facts to insurers. The insurer, BRIT, was successful in avoiding liability under a contractor’s combined insurance liability policy following a failure to disclose material facts. F & B is a specialist tunnelling contractor constructing micro tunnels. The policy had been taken out with BRIT on 19 August 2013. BRIT claimed that there had been a failure to disclose substantial and progressive earth settlement and a void which occurred in July and early August 2013, immediately prior to the inception of the policy on 19 August 2013. This was in an area where F & B had only recently constructed a micro tunnel at Stoke Lane in Gedling, Nottinghamshire (the site), beneath a railway line and a level crossing as a subcontractor to Morgan Sindall plc. BRIT claimed, furthermore, that F & B had misrepresented that it did not, and would not in the future, carry out tunnelling works on railway lines that were active. The Nottingham-Newark railway line had in fact been closed by Network Rail on 19 July 2013 in order to enable re-signalling work to be carried out. The line was first reopened to freight trains on 26 August 2013.
The court concluded that the failure to disclose the existence of the earth settlement and the void constituted a failure to disclose
On 27 August 2013 a freight train pulling wagons loaded with a cargo of diesel derailed when passing over the level crossing. Some of the wagons left the track and ran for 800 metres before coming to a stop. All of the wagons on the train remained upright but damage was sustained both to the wagons and the track. It was accepted that the cause of the derailment was severe settlement of the railway tracks caused by a void in the ground underneath. The line remained closed for repairs until 8 September 2013. The potential liabilities for F & B are substantial. These include a claim against it by its main contractor, Morgan Sindall, for some £2.67m for the remedial work together with a claim for an indemnity against any claim by Network Rail arising out of the derailment.
BRIT avoided the policy by letter of 21 January 2014 alleging material non-disclosure. The law is clear. It needed to prove that on the balance of probabilities, it was induced to provide cover to F & B on the terms agreed as a result of a non-disclosure or misrepresentation of a material fact. A fact is material if it would influence the judgment of a prudent insurer in fixing the premium or determining whether to assume and take the risk. In this instance it succeeded. The court concluded that the failures to disclose the existence of the earth settlement and the void, and the false representation that it did not, and would not in future, work under or in close proximity to active railway lines constituted a failure to disclose. They had induced BRIT to underwrite the risk on the terms that it did. Had proper disclosure been made, it would not have written the risk on those terms.
A contractor insuring his design and construct risks may not know whether a defect is that of design, which should be disclosed, as opposed to bad workmanship which will not be an insurable risk
BRIT emphasised that it was exceptional for it to avoid a policy. It was something done only once every three to four years. However, it is difficult to always know the extent of the disclosure that needs to be made when renewing a policy with an insurer. For example, a contractor insuring his design and construct risks may not know whether a defect is that of design, which should be disclosed, as opposed to bad workmanship which will not be an insurable risk. The Insurance Act 2015 which comes into force in August 2016 should assist the disclosure process. It introduces the requirement for a fair representation of risk. It also changes the law concerning the knowledge of the insured and the insurer for the purposes of the duty of fair presentation. The duty of disclosure is satisfied by disclosing all relevant circumstances which the insured knew or ought to have known. If this test is not satisfied, the act introduces an additional second test which will be satisfied if the insured provides the insurer with “sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances”.
It is not suggested that the introduction of these tests will prevent disputes on policy coverage arising in the future but it at least introduces a framework which should encourage insurers and their insureds alike to revise their policy wordings and introduce strict protocols relating to those matters which ought to be disclosed.
Jeffrey Brown is a partner in the London office of Veale Wasbrough Vizards