Insurer’s coverage: how to effectively ‘extinguish’ a claim

Young v Royal and Sun Alliance Insurance PLC [19.5.2020]

This recent Scottish decision confirms that insureds must provide fair presentation of all material risks prior to the commencement of a policy of insurance to ensure that coverage will be provided and any failure to this will enable an insurer to void the policy.

Background

The pursuer entered into an insurance policy with the defender in March 2017 in respect of commercial premises (a well-known nightclub) in Glasgow.

In March 2018, the premises were extensively damaged by fire and thereafter required to be demolished. The pursuer’s policy covered fire damage and so the pursuer made a claim to be indemnified under his policy.

In June 2018, the defender provided notice to the pursuer that they were declining coverage and subsequently voiding the policy on account of the pursuer having failed to disclose important information prior to the commencement of the policy. Specifically, the pursuer had failed to disclose that he had been the director of four companies that had been dissolved after an insolvent liquidation or had been placed in insolvent liquidation in the five year period prior to the commencement of the policy.

The pursuer subsequently raised an action against the defender in the Court of Session for £7.2 million. The defender, however, confirmed they were entitled to void the policy, as pursuant to the Insurance Act 2015 (the Act), before a contract of insurance is entered into, the insured must make a fair presentation of the risk. That fair presentation requires disclosure of every material circumstance which the insured knows or ought to know that would influence the decision of the insurer. The pursuer, however, alleged that the defenders, in the absence of an enquiry, had waived their entitlement to be provided with the undisclosed information.

At first instance, the court held that the undisclosed information was material and that had it been disclosed, the defender would not have entered into the contract of insurance with the pursuer. The pursuer appealed this decision to the Inner House who needed to decide whether the defender had waived their entitlement to be provided with the undisclosed information.

Decision

The Inner House upheld the decision at first instance. The pursuer had provided all the information (via his Brokers) that he intended to provide to the defender when requiring a quotation and the defender then assessed, accepted and priced the risk of the policy based on that information.

By offering terms, the defender did not expressly or impliedly waive disclosure of information not disclosed in the market presentation. A waiver involves abandonment of a known right. The defender did not know that there had been any breach of the duty of fair representation. The defender could not therefore make an informed decision to waive that breach.

Comment

It was unreasonable to suggest that it could be implied that the defender waived the pursuer’s disclosure of any material circumstance. The defender priced the contract of insurance on the basis that the assumptions contained within their terms, which served as a pre-condition of liability under the contract, were accurate.

This decision serves to underline the importance of insureds providing fair and early presentation of risk to insurers prior to the commencement of a policy of insurance. Doing so should provide certainty for the insured that coverage will be provided for losses arising out of prospective claims whilst also allowing insurers the opportunity to fully assess their own levels of risk.

In short, the mantra to be adopted by insured’s towards insurers when taking out a policy of insurance should always be: if in doubt, always disclose! 

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