Welcome to the latest in the series of blogs from Fenchurch Law: 100 Cases Every Policyholder Needs to Know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.
Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.
Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.
Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.
#9 (The Good)
The next case selected for consideration from our collection of 100 Cases Every Policyholder Needs to Know is UK Acorn Finance v Markel.
This case considered the scope of contractual discretion exercised by an insurer under an Unintentional Non-Disclosure clause and whether that discretion had been exercised in a fair and arbitrary way when considering whether a misrepresentation made by the insured was fraudulent or intended to deceive.
UK Acorn Finance Ltd (“UKAF”) was a bridging finance lender who had obtained judgments in default in excess of £13m following allegedly negligent overvaluations on a number of agricultural properties. The Judgments were obtained against Westoe 19 (formerly named Colin Lilley Surveying Ltd (“CLS”)) who had entered into liquidation.
UKAF issued a claim against Markel pursuant to s.1 and s.4 of the Third Parties (Rights Against Insurers) Act 1930 for indemnity under a professional indemnity insurance policy issued by Markel in favour of CLS.
Markel sought to avoid the policy on the basis of alleged misrepresentations and non-disclosures made by CLS prior to renewal regarding the work it had done with sub-prime lenders. Before the Court, a lot of emphasis was placed upon whether or not the question raised by the Markel prior to renewal regarding work done with sub-prime lenders was understood by the insured and what was actually meant by “sub-prime lenders”. The term was not defined in the policy or within the renewal documentation. It was apparent that a lot of correspondence had been passed between Markel, CLS’s broker and CLS on this issue but ultimately, CLS confirmed it did not do work with sub-prime lenders.
The policy contained an Unintentional Non-Disclosure Clause (“UND clause”) which stated:
“In the event of non-disclosure or misrepresentation of information to Us,
We will waive Our rights to avoid this Insuring Clause provided that
(i) You are able to establish to Our satisfaction that such non-disclosure or misrepresentation was innocent and free from any fraudulent conduct or intent to deceive…”
Relying on the UND clause, Markel alleged that misrepresentations made by CLS regarding its work with “sub-prime” lenders were fraudulent and/or intended to deceive and consequently, avoided the policy and declined the claim.
The Court’s decision
Whilst there were a number of issues for the Court to determine in relation to whether the alleged misrepresentations were warranties, inducement and waiver, the crux of the Court’s decision was whether, in light of the UND clause, Markel was entitled to avoid.
The Claimants argued that it was for the Court to decide, as a matter of fact, whether the representations relied upon by Markel were free from any fraudulent conduct or intent to deceive, i.e. by the Court stepping into the shoes of the decision-maker. Markel disagreed and argued that the Court’s role should be limited to determining whether Markel’s decision to avoid the policy was one that was open to a reasonable decision-maker to make on a Wednesbury unreasonableness basis.
Construction of the UND clause was considered in light of numerous authorities and in particular, the Supreme Court judgment of Braganza v BP Shipping Limited  UKSC 17. The nature of the UND clause is one by which “one party to the contract is given the power to exercise a discretion, or to form an opinion as to relevant facts” – as per Lady Hale in Braganza.
Following Braganza, where such a term is present in a contract permitting one party to exercise a discretion, there is an implied term that the relevant party “will not exercise its discretion in an arbitrary, capricious or irrational manner” (Mid Essex Hospital Services NHS Trust v Compass Group UK  EWCA Civ 200.
When seeking to imply a Braganza implied term to give effect to the UND clause, the Court identified the need for consideration of the principles applicable to implied terms, as set out in Marks and Spencer Plc v BNP Paribas securities  UKSC 72. Those principles are, namely:
i. Terms are to be implied only if to do so is necessary to give the contract business efficacy or if it was so obvious that it goes without saying;
ii. The term is a fair one or one that the court considers the parties would have agreed had it been suggested to them; and
iii. No term may be implied if it would be inconsistent with an express term.
Based upon the wording of the UND clause, in particular that the insured is to demonstrate to the satisfaction of the insurer that the misrepresentation was innocent and free from any fraudulent conduct or intent to deceive, the Judge concluded that it was wrong, as a matter of principle, to conclude that the Court could substitute itself for the contractually agreed decision-maker, as observed by Lady Hale in Braganza.
On the basis that Markel had a power to exercise a discretion or form an opinion as to relevant facts (i.e. whether the misrepresentations were innocent or fraudulent), the Judge considered it was necessary to imply a Braganza term in order to eliminate the possibility of the defendant making decisions in an “arbitrary, capricious or irrational manner”. The Judge considered that such an implied term was necessary to give the UND clause business efficacy and because the necessity for implication of such a term is so obvious that it goes without saying. The implied term did not contradict the agreement of the parties; on the contrary, it was giving effect to that which both are treated as having intended. As such, the test in Marks and Spencer Plc v BNP Paribas was satisfied.
Having determined the construction of the contract and the need for a term to be implied in accordance with Braganza, the Judge concluded the real issues which arose were three in number:
i. Did Markel, via its loss adjuster (who conducted the claims investigation):
a) fail to take into account any facts and matters that he ought to have taken into account; or
b) take into account any facts and matters that he ought not to have taken into account;
ii. would the decision have been the same even if any such errors had not occurred; and
iii. was the decision one that no reasonable decision-maker could have arrived at on the material that ought properly to have been considered.
When considering these issues in accordance with the principles identified in Associated Provincial Picture Houses Ltd v Wednesbury Corporation  1 KB 223, the Judge noted that it was necessary to bear in mind the often quoted direction in Re H (Minors) (Sexual Abuse: Standard of Proof) that “the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probabilities”. Applying that notion to the wording of the UND clause, it required the decision-maker at Markel to bear in mind that it is inherently more probable that a misrepresentation had been made innocently or negligently, rather than dishonestly, based on an analysis of all the evidence. The more serious the allegation against the insured, the stronger the evidence of such dishonesty or fraud is required.
Whilst the Judge expressed that it would be a mistake to expect an insurance company in the position of the Defendant to adopt the same microscopic investigation as a Court, having considered all of the evidence, he concluded that Markel failed to approach the dishonesty issue with an open mind or bearing in mind that it was more likely that a misrepresentation has been made innocently or negligently rather than dishonestly. The Judge felt that too much weight was given to certain evidence, leading Markel to the conclusion that the misrepresentation was dishonest, resulting in the decision-maker failing to properly take into account other relevant evidence which should have been taken into account.
Ultimately, the decision was not one that Markel could safely arrive at if in reaching that decision, it had taken account of factors which ought not to have been considered or failed to take account of factors that ought to have been considered.
Implications for the policyholder
This decision illustrates the approach taken by the Courts when applying the principles in Braganza where one party to a contract has a discretionary power to make a decision as to a matter of fact, in particular in relation to Unintentional Non-Disclosure clauses. Insurers will need to be mindful of the need to act in a manner which is not arbitrary, capricious or irrational and should take extra care to ensure that sufficient evidence is obtained to support a conclusion where the allegations made are severe. The decision is a useful tool for policyholders who have made innocent misrepresentations to insurers prior to inception and renewal but also serves as a reminder that in circumstances where questions asked by an insurer are unclear or ambiguous, the insured and its broker should make effort to ensure they fully understand the questions being asked to avoid any later disputes.