Anybody buying an insurance policy owes a duty of the utmost good faith to the insurer both to disclose material facts and to avoid making any misrepresentations. Breach of that duty can result in the insurer avoiding the policy even if the non-disclosure was not deliberate. However, some policies limit the right of the insurer to avoid the policy to when the non-disclosure has been deliberate or fraudulent. This was the situation in the case of Mutual Energy Ltd v Starr Underwriting Agents Ltd & Another, a case which was decided by the High Court last month.
In that case the insured, MEL, operated an undersea cable link between the electricity system of Scotland and Northern Ireland. Five insurers (including the two defendants in the case) provided insurance cover against the risk of the connection failing. Subsequently there were two separate cable failures resulting in a claim of over £41m by MEL. Three of the insurers agreed to pay out on the claim but the other two refused on the grounds that there had been deliberate non-disclosure on the part of MEL, namely the failure to disclose previous cable failures.
The relevant clause within the insurance policy stated: “the Insurers agree not to … avoid this insurance as against any … claim … unless deliberate or fraudulent non-disclosure or misrepresentation … by that Insured is established”.
The issue which the court had to decide was whether the reference in the insurance policy to “deliberate … non-disclosure” meant that the contract could be avoided in circumstances where the insured had honestly but mistakenly decided not to disclose a particular document or fact; or whether, as MEL contended, the words meant that avoidance was only available if there had been a deliberate decision not to disclose a particular document or fact which MEL knew was material such that non-disclosure would involve an element of dishonesty.
The court took the view that commercial business sense dictated that the insured should be punished if it had behaved dishonestly but not if it had made an honest but deliberate mistake. There had been an honest but mistaken decision by MEL not to disclose that there had been historic problems with the cables but that did not amount to it being deliberate or fraudulent. “Deliberate” non-disclosure meant that MEL must have known what it was doing and therefore an element of dishonesty was required. On the facts of the case, the judge decided that MEL had not behaved dishonestly and that there had been no deliberate non-disclosure.
This decision will be of comfort for insured parties but less so for insurers. The insurers in this case were asking the court to interpret a wide meaning of the word “deliberate”. Had the court had accepted their arguments so that “deliberate” included honest mistakes then it would have allowed insurers to avoid insurance policies for negligent non-disclosure.
If you are involved in any dispute with an insurer and require assistance then please contact Luke Patel at Blacks Solicitors on 0113 227 9316 or email him at “LPatel@LawBlacks.com”.