The Insurance Act 2015 replaced an insured's pre-contract duty of disclosure with a duty of fair presentation. In Axa Verischerung Ag v Arab Insurance Group  EWCA Civ 96 the Court of Appeal considered this duty and, in particular, the issue of inducement which insurers need to establish to access remedies under the Act.
The duty of fair presentation
Under the duty of fair presentation insureds must disclose information which would affect the judgment of the prudent insurer in deciding whether to accept a risk and, if so, on what terms.
Remedies under the Act will only be available if there is a 'qualifying breach' of the duty of fair presentation. This requires the insurer to establish that it was induced to enter into the contract as a result of the failure of the insured or its broker to provide a fair presentation of the risk. The question therefore is whether, but for the breach, the insurer would have entered into the contract at all or would have done so on different terms.
Although the insurance policies in Axa Verischerung Ag v Arab Insurance Group pre-date the Insurance Act, in determining the question of whether the appellant was entitled to avoid the relevant policies, the Court considered the duty of fair presentation and the issue of inducement. The judgment is therefore of note for policies written both before and after the Act came into force.
Axa Verishcherung Ag (Axa) sought to avoid two loss-making reinsurance treaties for marine energy construction risks entered into with Arab Insurance Group (ARIG), on the grounds that:
- ARIG had failed to disclose loss statistics for previous marine energy construction risks (the Statistics);
- had the Statistics been disclosed to Axa's underwriter, the level of past losses would have led the underwriter to decline to write the treaties.
In reaching its decision, the Commercial Court considered the likely result of the 'hypothetical broke' (ie what would have been raised by the insured/broker in presenting the risk?) and its outcome.
The court found that disclosure of the Statistics would have influenced the judgment of a prudent underwriter in considering whether to write the treaties. Therefore, a fair presentation of the risk would have required ARIG to disclose the Statistics. However, although there had been a breach of the duty of fair presentation, the court held that Axa had failed to discharge the burden of proving inducement namely that, but for ARIG's failure to disclose and explain the Statistics, its underwriter would not have written the treaty or would have done so on different terms.
Accordingly, the claim was dismissed.
Axa appealed, arguing that there was no proper basis for the 'hypothetical broke' suggested by the judge and that the findings on inducement (that Axa would still have written the business following a fair presentation) were erroneous.
The Court of Appeal considered two issues relevant to the duty of fair presentation, namely materiality (ie would the Statistics have influenced the judgement of a prudent underwriter?) and inducement (ie had the Statistics been disclosed, would the underwriter have changed his approach?).
In doing so the Court of Appeal dismissed the appeal on the grounds that the judge had been entitled to conclude Axa had not established it would not have written the treaties if a fair presentation had been made. The judge was reasonably in doubt as to what Axa's underwriter would have done if he had been presented with the Statistics and explanatory notes by ARIG or its broker.
In handing down the judgment the Court of Appeal looked at issues relating to the duty of fair presentation and inducement, summarised as follows:
- Materiality - a presentation by an insured will be judged objectively in order to determine whether it was fair ie by reference to what a reasonably prudent underwriter would consider needed to be disclosed in order to give a fair presentation of the risk.
- Inducement - there is a subjective test based on a hypothetical situation assuming disclosure of the relevant information. The fact that the underwriter "could have been interested in something is irrelevant if in fact he would not have been".
The court also held that the judge was entitled to consider a 'hypothetical broke' and what, if any, additional factors would also have influenced the underwriter's decision to write the risk. Although the onus of proving inducement is on the insurer, the insured must prove that it would have raised additional matters had a fair presentation been made.
The Court of Appeal noted that it would be 'undesirable' for an insurer to be faced at trial with what the insured/broker says would have been the hypothetical broke. Instead, these matters should be raised in the pleadings or witness statements to give insurers notice of the hypothetical factual case it has to meet.
This judgment provides guidance on the courts' approach to the duty of fair presentation and inducement in relation to policies governed by the Insurance Act 2015. Non-disclosure of material information is insufficient without evidence of inducement. Demonstrating inducement requires a subjective review of factors which the actual underwriter would have had available at the relevant time.
But it is the concept of a 'hypothetical broke' which is interesting in this case. On the facts, the 'hypothetical broke' involved not only issues which should have been disclosed to amount to a fair presentation but also additional factors which might have influenced the underwriters' decision. It is the latter which insureds will have to grapple with as the evidential burden falls on them if they wish to rely on such additional factors. But, as Lord Justice Christopher Clarke commented "the dividing line between what a fair presentation required and what additional matters the broker would have urged may be difficult to determine…".