DLA Piper's Practical Guide for Claims Managers in 2022 - Part 2: The Duty of Fair Presentation
In the second edition of our monthly series of Practical Guides for Claims Managers, we focus on the insured's duty of fair presentation under the Insurance Act 2015 (Act).
In business insurance, the duty of fair presentation governs the insured’s obligation to disclose to insurers material information about the risk prior to the cover being placed. It also applies in respect of variations to the cover (eg endorsements) agreed after the contract has been entered into.
The duty also imposes the same obligation upon a reinsured in the reinsurance context (and in this guide references to insured, insurer and insurance can be read as including reinsured, reinsurer and reinsurance).
In some respects, the duty largely replicates the principles which were applicable for many years before the Act came into force in 2016. In other ways, for example in relation to the remedies available to the insurer when an insured breaches the duty, the Act marked a fundamental change in approach.
Since 2016, there have been few legal decisions which have considered the new duty of fair presentation. But the cases that have been decided provide a useful insight into how the duty applies, as well as a reminder of some longstanding principles that remain relevant.
In this guide, we focus on the key issues that both claims managers and underwriters should be aware of when considering whether an insured has satisfied its obligation to make a fair presentation of the risk and, if it has not, what the consequences may be for the insured’s cover.
Key questions we are often asked include:
1. What is the nature of the duty of fair presentation?
Before a contract of insurance is entered into the insured must make a fair presentation of the risk to the insurer (section 3(1) of the Act).
To satisfy this obligation, the insured must take the following steps:
- The insured must disclose every material circumstance which the insured knows or ought to know. We discuss below what this means in practice.
- Or, failing that, the duty will be satisfied if the insured gives disclosure of sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing material circumstances. To an extent, this is a codification of a common law principle that applied before the Act came into force. It emphasises that the burden is not exclusively on the insured – there is an onus on the insurer to carefully consider the information disclosed to see if it is necessary to ask further questions. We consider this in more detail below.
Further, the insured must make its disclosure in a manner which would be reasonably clear and accessible to a prudent insurer. This requirement is designed to avoid the insured making 'data dumps' of large amounts of irrelevant information, which the insurer might have difficulty processing or reviewing.
On the other hand, the insured’s fair presentation can be set out in more than one document or oral presentation. The insured can also withdraw or correct information before the contract of insurance is entered into.
The burden on the insured is also mitigated in other ways. For example:
- Where the insured’s disclosure contains representations as to facts, those facts need only be "substantially correct". A material representation is substantially correct if a prudent insurer would not consider the difference between what is represented and what is actually correct to be material.
- Where the disclosure contains representations of expectation or belief, the insured must make them in good faith.
These rules are to discourage insurers from seeking to rely upon minor, immaterial inaccuracies in detailed information, or where an expectation or belief that is genuinely held nonetheless turns out to be wrong, as a basis for claiming that the insured is in breach of the duty.
2. Whose knowledge is relevant?
For the purpose of the duty, the insured will be taken to know that which is within the knowledge of:
- The insured's senior management, and
- The individual(s) responsible for the insured's insurance, namely those who participate in the process of procuring the insured’s cover, whether as the insured’s employee or agent.
Therefore, the insured will be taken to know not only material circumstances that are within its own knowledge, but also those known to brokers and risk consultants if they are involved in the placing process. However, if the broker or agent obtained such knowledge through a business relationship with someone not connected with the insured, then that will not be knowledge that falls within the scope of the insured’s duty of fair presentation.
3. Is Knowledge limited to the actual knowledge of the relevant individuals?
No, knowledge extends more broadly than just the actual knowledge of the individuals in question. The insured will be taken to 'know' any circumstances that it would have discovered if it had made a reasonable search of information available to it.
An individual’s knowledge for these purposes will also be taken to include anything which the individual suspected and which they could have confirmed if they had not deliberately refrained from making the relevant enquiries. So, the insured cannot avoid the duty to disclose material circumstances simply by turning a 'blind eye' to genuine suspicions if a reasonable enquiry would have revealed those circumstances or confirmed the insured’s suspicions.
All of this emphasises the need for an insured to carefully undertake reasonable enquiries of relevant individuals within its organisation before it can be confident it has satisfied the obligation to make a fair presentation.
4. What exactly is a "material circumstance"?
A circumstance can be any kind of information, and includes any communication made to, or information received by, the insured.
Such a circumstance is material if it would influence the judgment of a prudent insurer in determining whether to write the risk and, if so, on what terms. This is essentially the same test for materiality as applied before the Act. Influencing the judgment of the prudent insurer does not require the circumstance in question to have been decisive in the underwriter’s mind – it need only be one factor in the prudent insurer’s decision making.
The Act provides the following non-exhaustive, illustrative examples of things which may be material circumstances:
- Special or unusual facts relating to the risk.
- Any particular concerns which led the insured to want to take out insurance cover.
- Anything which those concerned with the class of insurance and field of activity in question would generally understand as being something that should be contained in a fair presentation.
In summary, any information within the insured’s actual or presumed knowledge (as discussed further at Questions 2 and 3 above), or any genuine expectation or belief of the insured, will be material if it would have been a factor in a prudent insurer’s decision-making when considering whether to accept the risk or the terms on which they wrote it.
In the first (and, to date, only) reported English case to consider the issue of materiality under the Act, Berkshire Assets (West London) Limited v AXA Insurance UK plc  EWHC 2689 (Comm), the court helpfully re-stated the applicable principles, noting that many of them hadn’t changed from the law that applied prior to the Act:
- Materiality is a question of fact and will depend on the circumstances of the case.
- The court is entitled to take into account all the evidence that was, or would have been, available to the insured at the time the insurance was placed.
- The test is an objective one, but it must be considered principally from the point of view of the insurer.
- Materiality is to be tested at the time of placement – not at any later stage, for example when a loss is presented or by reference to later events.
- It is also clear that facts raising doubts as to the risk are sufficient to be material. It is not necessary for the facts to be shown, with hindsight, to have actually affected the risk.
So, in the Berkshire Assets case, the insured had claimed under Contractors All Risks and Business Interruption policies following water damage suffered at one of its properties. The insurer successfully argued that the insured had failed to disclose that, at the time of placement, one of its directors was the subject of criminal charges in Malaysia. It was not clear at the time whether the charges involved allegations of fraud or dishonesty and the charges were subsequently dropped. However, the insurer said that, if it had been told about the charges, it would have applied internal underwriting guidelines and declined the risk.
The court agreed that the charges were material circumstances. It was not relevant that the charges were dropped – the insurer could not have known at the time that this would happen and is not obliged to apply hindsight. The insurer was also not under an obligation to make detailed enquiries upon placement to ascertain whether the charges alleged dishonesty. Note also that this was a case where the material circumstances in question – the moral hazard associated with one of its directors facing criminal charges – bore no causal relation at all to the claim that the insured had presented.
5. Does an insured have to disclose all such material circumstances?
Not necessarily. Section 3(5) of the Act says that, in the absence of enquiry, the insured is not required to disclose a circumstance if any of the following scenarios applies:
- It diminishes the risk – this reflects the pre-Act position.
- The insurer already knows it – but this is limited to things known by those individuals personally involved in underwriting the risk (whether as employees or agents of the insurer). Also note that, as with the knowledge of an individual acting for the insured, an individual involved for the insurer will be fixed not just with their actual knowledge, but also their 'blind eye' knowledge if they suspected something that would be material, but deliberately refrained from making enquiries to confirm the position.
- The insurer ought to know it – but this is limited to situations where the information is held by the insurer’s organisation and it is readily available to the underwriter or other individual who is personally assessing the risk, or where an employee or agent of the insurer knows the information and ought reasonably to have passed it on.
- The insurer is presumed to know it – this applies to things which are common knowledge or which an insurer offering insurance of the class in question would reasonably be expected to know in the ordinary course of business.
- It is something as to which the insurer waives information – we discuss this further at Question 7 below.
6. How is materiality established?
When disputes arise, unless the circumstances in question would so obviously be material to a prudent insurer’s assessment of the risk that the court can reach this conclusion without further assistance, the issue of materiality is usually tested by obtaining the following types of evidence:
- Factual evidence from the underwriter(s) as to why they consider the circumstances that were not properly disclosed would have been material to their decision-making.
- Expert evidence from an independent underwriter or broker. The expert will be asked to place themselves in the position of the actual underwriter at the time of underwriting and ask themselves whether the circumstances which it is alleged were not properly disclosed would have influenced their judgment if they had been disclosed.
The court will then consider all the evidence to decide if the test of materiality has been met.
7. When will the insurer be said to have waived disclosure of material circumstances?
The most obvious situation in which this might arise is when the insurer has required the insured to complete a proposal form. But note that it is possible for the insurer to waive disclosure of material circumstances in any communication with the insured.
The mere fact that the insured has been asked to complete a proposal form does not waive the duty. The insured is obliged to disclose all material circumstances in response to the questions asked.
Further, unless the proposal form can be reasonably read as indicating this, the insured’s duty to make a fair presentation is not limited to correctly answering just those matters raised in the proposal form. The insured must still proactively disclose all material circumstances, unless they fall within the exceptions summarised at Question 5 above, even if they relate to a topic that the form does not cover. Often the proposal form will expressly require this.
However, sometimes the proposal form, or a follow-up enquiry by the insurer, will ask a 'limiting question' which requires only a certain type of information to be disclosed; for example, details of losses or claims in the last five years. A question of this type would indicate that the insurer does not consider a loss that occurred more than five years ago to be material and has waived the obligation to disclose it.
The exercise is one of interpretation of the proposal form or other communication by the insurer to decide whether a reasonable person reading it would be justified in thinking that the insurer had restricted its right to receive all material information.
8. When will the insurer be said to be on notice to make further enquiries?
As mentioned, the insured will satisfy its duty to make a fair presentation if it discloses sufficient information to put a prudent insurer on notice that they need to make further enquiries for the purpose of revealing material circumstances.
Again, this involves an objective reading of the information disclosed by the insured from the perspective of the insurer: would a prudent insurer who is reviewing the information that the insured has disclosed consider that further enquiries are needed to reveal (other) material circumstances?
If the answer to this is yes, and the insurer does not make those necessary enquiries, then it will not be able to argue later that the insured has not made a fair presentation.
Whether the prudent insurer would have made follow-up enquiries may depend on all the circumstances, including how straight-forward it may have been to make such enquiries and whether the insured’s likely response would have made any difference to the insurer’s decision to provide cover or the terms on which it would have been prepared to do so.
If it is established that the insured has failed to disclose all material circumstances, and is in breach of its duty to make a fair presentation of the risk, the next question is what is the insurer’s remedy?
Prior to 2016, there was only one remedy available to the insurer in response to a pre-contractual non-disclosure or misrepresentation of material circumstances: that was avoidance ab initio, namely the insurer was entitled to treat the insurance contract as though it had never existed. Since 2016, the Act has introduced significant flexibility in respect of the insurer’s remedy for breach, through a suite of so-called proportional remedies.
Which remedy applies depends principally upon what the insurer in question would have done in response to the application for cover if the material circumstances had been disclosed. This is often described as the 'inducement' question: was the underwriter induced by the breach of duty to underwrite the risk and, if so, how?
The issue of 'inducement' is always a question of fact. At this stage of the analysis, it does not matter that an objective, prudent insurer might have done something different in the same circumstances – it only matters what the actual underwriter’s response would have been.
As such, it requires a counter-factual analysis to be undertaken. Relevant sources of evidence for this analysis will include:
- The contemporaneous underwriting file.
- Any relevant underwriting guidelines in use by the insurer at the time of placement.
- The views of the underwriter(s) and others who considered the risk.
- Commercial factors other than technical underwriting considerations may also be relevant: for example, if the insurer would have been persuaded to write the risk anyway (even if on more onerous terms) to help preserve a good relationship with the client or broker, this may also be taken into account in the counter-factual analysis.
For these reasons, when a dispute arises, it will almost always be necessary to interview the underwriter(s), and anyone else who was involved in the decision to write the risk, to understand what their decision would have been if the material circumstances in question had been properly disclosed and they had known the true picture.
Such exercises also shine a spotlight on the underwriting file and the communications that took place with the insured (or its broker) at the time of underwriting: a well-maintained file that records the underwriter’s thought process and perception of the risk, the reasons for writing the risk on the terms they did, and any reservations they may have had, can make all the difference if a dispute arises later on (and can avoid any professional embarrassment if the file needs to be disclosed as evidence to the insured or the court).
The table below summarises the different legal remedies available to the insurer and when each one applies.
|How would the underwriter have responded if they had known the material circumstances?
|Remedy available under the Act
|A. Written the risk on different terms (other than terms related to premium) eg the underwriter would have imposed a relevant exclusion
|If the insurer requires, the contract is to be treated as if it had been entered into on those different terms.
|B. Charged more premium
|The amount of the claim to be indemnified will be reduced proportionately. For example, if the underwriter would have charged double the premium to reflect an increased risk, the insured will be limited to recovering 50% of its claim. Schedule 1 of the Act contains a handy formula for calculating the proportion of a claim that will be payable.
|C. Declined the risk entirely
The insurer will be permitted to avoid the policy from inception and refuse all claims. This is done by notice to the insured.
In these circumstances, the follow-up question at D below also arises.
|D. Was the insured’s breach of duty either deliberate or reckless (ie fraudulent)?
If yes, the insurer is permitted to avoid the policy, refuse all claims AND retain all premium.
If no, the insurer is permitted to avoid the policy, refuse all claims BUT must refund the premium.
The Duty of Fair Presentation – Practical Takeaways:
These are some tips to bear in mind:
- Once a claim has been notified, claims professionals should compare what is, by that time, known about the risk against the disclosure provided by the insured prior to inception of the policy (or a relevant endorsement/variation) to determine whether there may have been any failure to disclose material circumstances at the time the risk was underwritten.
- Remember that it is not necessary for a circumstance to be causally related to the loss that has actually occurred for it to be material. The test is whether it would objectively have been a factor in a prudent underwriter’s assessment of the risk.
- If a question as to fair presentation arises, the relevant claims handler should ask to see the full underwriting file straightaway. This will normally need to be produced in any dispute. Any notes, documents or correspondence that record the underwriter’s assessment of the risk, the reasons for the terms offered, including any reservations about the risk, may be crucial evidence. The file should include all placement communications (and notes of discussions) with the insured and/or their broker.
- Internal underwriting guidelines will also be relevant if they address what underwriters must do in response to the provision of certain types of information, or the assessment of certain types or risk, including any limits on authority and escalation procedures. Minutes of internal underwriting committee meetings that considered the risk may also be relevant.
- If it is alleged by the insured that the insurer ought to have known the material circumstances, it may be necessary to check any internal databases or records which would have been readily available to the underwriter.
- Check any proposal form, or other communications from underwriters to the insured/broker, to see how questions were posed and whether they may have been limiting in nature, in which case issues of waiver may arise.
- Enquire whether appropriate follow-up enquiries were made by underwriters following provision of placing information by the insured.
- Even with a reservation of rights (ROR) in place, it is important that an insurer does not engage in conduct (or inaction) which could waive its rights or estop the insurer from relying on its right to an appropriate remedy in the event of a breach of the insured’s duty of fair presentation. This is particularly important if the insurer wishes to assert a right to avoid the policy. (Practical guidance on RORs will follow later in this series.)
DLA PIPER UK LLP
Leon Taylor is a Partner and Head of DLA Piper’s Insurance and Reinsurance Disputes team in the UK, Jane Childs is a Partner, and Oliver Saunders is a Legal Director in the team. The UK Insurance and Reinsurance Disputes team forms part of DLA Piper's leading, multi-disciplinary, global insurance sector, consisting of over 400 lawyers who advise and represent major insurance and reinsurance companies internationally across all aspects of their business, including claims, disputes and investigations, transactional, regulatory and all forms of commercial advisory work.
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This publication is intended as a general overview and discussion of the subjects dealt with under English law at the time of original publication and does not create a lawyer-client relationship. It is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation.