In 2015 the English High Court held that an insurer can avoid (that is, refuse to honour) a policy of insurance due to non-disclosure of a substantial over-valuation, even where it is an innocent omission.
Since the case was heard, the legal framework has changed considerably with the introduction of the Insurance Act 2015. We examine briefly what would have been different.
The superyacht MY "GALATEA" was purchased in 2007 as a new-build for €13 million. It was insured for €13 million until it suffered a substantial fire while at its moorings in December 2011.
However, in November 2009 the superyacht was professionally valued at €7 million and the ownerproceeded with an advertised marketing strategy for sale at €8 million in May 2011. However, none of these facts were disclosed to the insurers.
In May 2011 a 12 month policy was entered into for an aggregate agreed value of €12 million. This consisted of €3.2 million for Increased Value and €9.5 million for Hull & Machinery.
The producing broker had inserted a €13 million figure into the proposal form, which the insured had previously approved, albeit with the valuation details left blank.
The producing broker then submitted the form to the Insurers via a placing broker with no approval or agreement from the insured.
Both the valuation of €7 million and the advertised sale price of €8 million were material facts that an Insurer would wish to consider and had not been disclosed. , although this was an innocent error.
The insurers were induced by this non-disclosure of material facts and they were therefore entitled to avoid the policy, that is, refuse to pay out.
The producing broker was negligent for failing to ensure that the proposal form stated the insured's opinion of the market value of the yacht.
The placing broker did not owe a duty of care directly to the insured. They also did not breach any duty of care owed to the producing broker.
This case was subject to the old Marine Insurance Act 1906. However, Mr Justice Leggatt noted that a different outcome relating to non-disclosure would have occurred from 12 August 2016, when the Insurance Act 2015 would come into effect.
Under the 2015 Act, the Court would have needed to consider what the Insurers would have done if a fair presentation of the yacht's value had been stated; given that the non-disclosures were neither fraudulent or reckless.
Also, if the Insurers would have agreed to a policy but on different terms, the contract will be interpreted to reflect those terms. In this case, the insurance policy would have been deemed to be for an agreed value of €8 million and insurers would not have been entitled to refuse to pay out.
Prior to the 2015 Act, the insured had a duty of utmost good faith of disclosure to the Insurer. Whereas the insured must now (since the 2015 Act came into force) make a 'fair presentation' of the risks.
Although this is a less onerous test, the insured is still obliged to disclose all material facts available to them. This enables the insurer to make further enquiries should it so wish. If done, the insurer will no longer be able to avoid a policy completely.
The Insurance Act 2015 places greater responsibility on persons arranging, or placing, policies as they are deemed to know all material facts. Accordingly, the insured's management team, brokers, captain and other representatives have an enhanced duty to ensure they are privy to all material facts (by making proper enquiries) when placing cover.
Whilst the Insurance Act 2015 has made it more difficult for an insurer to avoid cover, it is still entitled to do so where the insured has deliberately or recklessly misled the insurer.
Also if the insurer is not made aware of all material facts when cover is placed, the insurer may be entitled to, amongst other remedies, reduce the amount it pays out or retain an increased premium.
Finally, "Agreed Value” cover can still be obtained from a selection of underwriters but full disclosure must be made and the agreed value investigated with the underwriters, for an insured value which is higher than the advertised sale value, to avoid complications in the unfortunate event of a claim.
Contributor: Laura Johnson
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at August 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.