Abstract

Principles as to inducement to an insurer by misrepresentation or non-disclosure

Article

If there has been material misrepresentation or non-disclosure, an insurer can avoid the contract only if it had been induced by it to write the precise contract which was written: Synergy Health (UK) Ltd v CGU Insurance Plc (t/a Norwich Union) [2011] Lloyd's Rep IR 500 at [185]. To prove inducement, as to which it has the burden of proof, it must demonstrate that the non-disclosure or misrepresentation was an effective cause, not necessarily the sole effective cause, of its entering into the contract on its terms, or at least that, but for them, it would not have entered into the contract on those terms: Assicurazioni Generali SpA v Arab Insurance Group [2003] 2 CLC 242 [62].

The burden of proving inducement is not a heavy one: Wise v Grupo Nacional Provincial SA [2004] 2 Lloyd's Rep 483 at [99]), but caution is necessary because avoidance is a draconian remedy which should not be lightly granted: Kausar v Eagle Star [2000] Lloyd's Rep IR 154 at pp. 157-158, and because of the danger of the effect of hindsight on genuine evidence on a hypothetical construct by an interested party: Niraman Group v Zurich Insce [2020]EWHC 535 (Comm).

In evaluating an insurer’s evidence as to whether there was such inducement, it is important to remember that the evidence is necessarily hypothetical, which by its nature is open to exaggeration, embellishment or honest error in its own interests. The litigation process itself can overwrite witnesses' memories so that their evidence, even in the best of good faith, may be questionable: Gestmin v Credit Suisse [2013] EWHC 3560 (Comm); Niraman Group v Zurich Insce (supra). And so, the evidence must be rigorously tested by reference to logical self-consistency, and to such independent evidence as may be available: North Star Shipping v Sphere Drake Insurance [2005] 2 Lloyd's Rep 76.

There is a difference of judicial opinion on the issue of materiality to inducement. One is that because of the width of the general principle of the utmost good faith, material circumstances should not b confined to what is directly relevant to the assessment of the risk: Sharp v Sphere Drake Insurance plc; The Moonacre [1992] 2 Lloyd's Rep 50. the other is that  the duty of disclosure is founded upon the likelihood that matters affecting the cover will be within the peculiar knowledge of the insured: Société Anonyme d'Intermédiaires Luxembourgeois v Farex [1995] LRLR 116. It seems to be the modern view of experts that materiality is a wider concept than matters relevant to risk: Niraman Group v Zurich Insce (supra).