Andrew Pieri, Partner within Keoghs Property, Risk and Coverage Team and Nikita Bhandal, Assistant Lawyer, was instructed by New India Assurance Limited in a claim for an indemnity for property damage following a fire at the claimant’s care home and successfully obtained judgment in the insurer’s favour.
A trial which lasted over five days was held in the Business and Property Courts in Birmingham before HHJ Rawlins sitting as a High Court Judge. The judge held that the claims of the seven insureds for an indemnity and declarations should be dismissed and the claimant’s policies avoided from inception for a breach of the duty of utmost good faith, from 2013 to 2016 and breach of the duty of fair presentation, from 2017 to 2019.
The first claimant entered into a policy of insurance with the defendant, New India Assurance Co Ltd on 23 June 2013, pursuant to which the defendant agreed to indemnify the first claimant against various losses.
The first claimant made a claim on their policy. The claim arose from a fire at the first claimant’s care home (Tynefield Care Ltd). Upon being notified of the claim, New India carried out their usual investigations into the claim and discovered that one of the directors at Tynefield Care Ltd, Mr Khosla, had an insolvency background which he did not declare to New India. This being, that Mr Khosla was a director of a company which entered into administration in 2006. Had New India known of Mr Khosla’s insolvency history, it would not have provided policy coverage and, consequently, New India refused to indemnify the first claimant and their policy was avoided.
New India avoided from inception and on renewal five other care home policies of which Mr Khosla was a director for the same reason, and consequently, each insured brought a claim for a declaration that New India was not entitled to do so.
New India further avoided the claimant’s policies for the years from 2017, when Mr Khosla was a de jure director and in the years prior to that, from inception in 2013, which Mr Khosla was a de facto and shadow director of Tynefield from 2013–2017. It was admitted by the claimant’s throughout the course of the proceedings that Mr Khosla was a de facto and shadow director of Tynefield Care Ltd. When Tynefield Care Ltd was incorporated in 2006, Mr Khosla was a de jure director and ceased to be a director in 2011 following advice from his accountant, because his insolvency history may have had to be disclosed to, inter alia, banks when seeking finance. Mr Khosla denied ceasing his position as a director to avoid disclosure to insurers. In 2017, 11 years after Mr Khosla’s insolvency history, Mr Khosla was appointed as a de jure director of Tynefield Care Ltd. The judge had found that Mr Khosla believed the need for disclosure of his insolvency background was limited to ten years post the insolvency event.
The claimants allege that Mr Khosla’s insolvency background was not material at the time of the fire, in 2019, at the inception of the policy, in 2013 and at each renewal, from 2014 to 2018.
The judge heard evidence from underwriting experts on the issue of whether a prudent underwriter would regard Mr Khosla’s position as a de facto/shadow/de jure director and his insolvency history as material to the risk undertaken by the defendants in entering into the policies of insurance with the claimants. The judge preferred the evidence of New India’s expert, Mr Stephen Coates and found that Mr Khosla’s insolvency history was material at inception and renewal when Mr Khosla was a de facto and shadow director (2013 to 2017) and at each renewal from 2017, once Mr Khosla was a de jure director.
The judge’s findings were inter alia:
“… the combination of Mr Khosla acting as a shadow director of the first and third – sixth claimants at the inception of the first and third – sixth claimants’ policies and his having previously been a de jure director of KFL which had gone into administration in 2006 (between 7 and 10 years prior to the inception of the first and third – sixth claimants policies with the defendant) raises two possible concerns (both of which are touched on in Mr Coates’ report): (i) as to why the first and third – sixth claimants de jure directors were following the instructions of someone who is not a de jure director; and (ii) that Mr Khosla, the shadow director, was a de jure director of a company that went into Administration 7 – 10 years earlier, which was, on its facts an unremarkable insolvency. Whilst I cannot say whether a prudent underwriter would, if asked to provide insurance for the first time, refuse to provide that insurance, or only agree to do so on more stringent terms than would otherwise be the case, because of those concerns, it seems to me clear that a prudent underwriter would, at least be influenced or affected by those concerns and would not simply disregard them entirely, in considering the insurance risk.” (para 111(c)).
The judge found that had New India known of Mr Khosla’s insolvency history, New India would not have incepted or renewed the policies. Although the judge did not rely on this fact, New India’s policy of not incepting or renewing policies where a director had an insolvency history (either personal insolvency or having been a director of a company that became insolvent) is longstanding and was the subject of the Court of Appeal’s decision in Doheny v New India Assurance Company Ltd [2004] EWCA Civ 1705.
The finding of the court was that Tynefield was not deliberate or reckless, but because New India would not have renewed on any terms New India was entitled to avoid.
The findings of the judge satisfied the pre-2015 Insurance Act remedy for avoiding the policies from inception and on each renewal for a breach of the duty of utmost good faith. The judge’s findings further satisfied the Insurance Act 2015 remedy for failing to disclose a material circumstance.
Paragraph 3 of Schedule 1 to the 2015 Act states that paragraphs 4 to 6 of the Schedule apply where, as here, there is a qualifying breach of the duty of fair presentation, by the insured, but that breach was not deliberate or reckless. Paragraph 4 provides that “if, in the absence of the qualifying breach, the insurer would not have entered into the contract on any terms, the insurer may avoid the contract and refuse all claims, but must in that event return the premiums paid.” The judge was satisfied that New India would not have incepted or renewed the claimant’s policies. The judge states at paragraph 225 to have “accepted that the defendant had a strict policy of refusing to incept policies if it was disclosed to it that a director (which I have accepted would include Mr Khosla being a de facto/shadow director) of an insured had been a director of another company which had gone into liquidation (except an MVL) or Administration.”
The judge found that in relation to each policy New India was entitled to avoid due to Mr Khosla being a de facto and shadow director (to November 2017) and a de jure director (from November 2017) whose insolvency history was not disclosed at inception or on renewal.
Tynefield’s claim for an indemnity for fire damage, business interruption and increased insurance costs was dismissed and New India was entitled to a declaration that it was entitled to avoid the six policies from inception, and on renewal of each over the period 2013 to 2019, and return the premiums paid. The claimants were ordered to pay New India’s costs.
The judgment presents a valuable analysis of the issues arising from de facto and shadow directorship and its bearing on the disclosure obligations of insureds where those in actual control of a company have a material insolvency history.
The case illustrates the importance of the disclosure of insolvency histories, an issue that has arisen in a number of post-Insurance Act 2015 cases, see Young v Royal and Sun Alliance PLC, [2019] SLT 622 and Ristorante Limited T/A Bar Massimo v Zurich Insurance PLC [2021] EWHC 2538. As Doheny v New India Assurance Company Ltd [2004] EWCA Civ 1705 shows, however, these issues are not new and while the legal analysis may be different post-Insurance Act 2015, in particular with regard to remedy, the outcome is the same.
The case also emphasises the importance of underwriting experts addressing matters by reference to a reasonable underwriter and an objective test, and not addressing materiality by reference to subjective impressions: for this reason (among others) the claimant’s underwriting expert evidence was rejected.
If you would like to discuss this topic further, please get in touch.
Nikita Bhandal, Assistant Lawyer, Property Risks and Coverage
Email: nbhandal@keoghs.co.uk
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