Insolvency questions in insurers’ proposal forms have generated a rich seam of English case law about the duty of fair presentation, most recently in this decision which no doubt put a smile on the policyholder’s face [seriously? pass the novocaine – ed.].
C1 and C2 had previously owned a building from which they operated a dental business. The building was transferred to C1, and the operation of the dental business was transferred to C2.
Two members of C1 (an LLP) had been companies that later became insolvent.
Aviva insured C1 for buildings property damage and Zurich insured C2 for contents and business interruption.
At renewal, Aviva’s proposal form asked C1 if C1 or its “directors or partners involved with the business or any other business” had been declared bankrupt or insolvent in the past 10 years. C1 answered “no”.
Zurich’s proposal form asked C2 if any “partners, directors, or family members involved in the business” had been declared bankrupt or insolvent. Again, C2 answered “no”.
In 2021, a fire broke out at the practice causing significant damage.
C2 brought proceedings for indemnity against Zurich.
Zurich sought to avoid the policy on the basis that C2 did not present the risk fairly by failing to disclose that two of C1’s members had become insolvent. C2 argued that Zurich’s insolvency question quoted above was narrow and implicitly waived any obligation on C2 to disclose this fact.
The court accepted C2’s argument and held that C2 had fairly presented the risk.
The court confirmed that the applicable test was whether a reasonable person reading the proposal form would be justified in thinking that the insurer had (a) restricted its right to “all” material information on a particular issue and (b) consented to the omission of information on that point.
The court held that, if an insurer expressly asks about the insolvency of specific persons by name or category, then a reasonable policyholder justifiably think it was asking about those persons only, and that there was no need to disclose other insolvencies.
The effect of Zurich’s insolvency question was therefore to waive any obligation on C2 to disclose insolvency information about any entity other than C2 and its current directors.
This case highlights how the duty of fair presentation can be narrowed by the questions insurers ask at placement – and those they don’t. Underwriters should check that their proposal forms, particularly insolvency questions, do not inadvertently waive their right to information which is material to the risk.
If you would like advice on proposal forms, speak to our expert team.
Andrew Schütte - Partner and Head of Reinsurance
Email: aschutte@keoghs.co.uk
Neema Daniel - Assistant Solicitor
Email: ndaniel@keoghs.co.uk
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