Introduction and summary

In a recent decision, Cometsambre SA v Lloyd’s Insurance Company SA, the English High Court provided important guidance regarding a (non-consumer) insured’s duty to make a fair presentation of risk under the Insurance Act 2015 (the “Act”).

The Court addressed a number of issues which frequently arise in relation to avoidance disputes. It ultimately ruled in favour of the insurer. In doing so it emphasised that, despite various exceptions within the Act, the duty of fair presentation “remains primarily on the insured” and that the Courts will be reluctant to hold that disclosure of material circumstances is not required, either because the insurer is already aware of the circumstances in question or has been provided with sufficient information to put it on notice of the need to make further enquiries which would reveal those circumstances.

The Court also emphasised that this duty requires disclosure of any circumstances which a prudent underwriter would want to know about when assessing a risk, regardless of whether it has actually led to a claim.

The facts

The Claimant Cometsambre SA (“Cometsambre”) is a Belgian scrap metal trader. In 2008, it obtained Charterers’ Liability insurance in respect of its potential liability as a charterer of vessels carrying cargoes of scrap metal (the “Policy”). It renewed the Policy on materially identical terms until 2022.

After initially carrying out its business for a number of years without incident, five fires occurred in Cometsambre’s scrap metal in a 20-month period between 2020 and 2021 (the “Previous Fires”). Cometsambre did not disclose the Previous Fires to its insurer, Lloyd’s syndicate HIG 5321 (“Lloyds”), either when they occurred, or during the 2022 Policy renewal.

In June 2022, a further fire occurred onboard a vessel chartered by Cometsambre. The owners of the vessel commenced a charterparty claim against Cometsambre for losses arising from the fire, and Cometsambre sought indemnity under the Policy in respect of the charterparty claim and its legal costs.

Lloyds discovered the Previous Fires during its assessment of Cometsambre’s claim. It declined the claim and sought to avoid the Policy on the basis that Cometsambre had breached its duty of fair presentation by not disclosing the Previous Fires during the 2022 renewal. Cometsambre initiated proceedings against Lloyds seeking a declaration that Lloyds was liable to indemnify it in respect of the claim and its legal costs associated with the fire and charterparty claim.

Key issues

In deciding the proceedings, the Court was required to determine the following key issues:

• Whether the Previous Fires were material and ought to have been disclosed.
• Whether Lloyds received sufficient information to put it on notice about the risk of fires, or whether it knew, or should have known about, or waived disclosure of, the Previous Fires.
• Assuming there had been a material non-disclosure, whether that non-disclosure induced Lloyds to renew the Policy in 2022 (or, in other words, whether Lloyds would have declined to renew the Policy had the Previous Fires been disclosed to it).

The Decision

Materiality

Cometsambre argued that the Previous Fires were not material as they did not result in claims by the owners of the relevant vessels. It also argued that some of the Previous Fires were not material as they had occurred on the quayside, rather than on a vessel.

Section 3(4)(a) of the Act requires a (non-consumer) policyholder to disclose every material circumstance which it knows, or ought to know.

As set out in Delos Shipholding SA v Allianz Global, a circumstance is material if a prudent underwriter would want to take it into account when deciding whether to place a risk. Such a circumstance does not have to have a decisive effect on the judgment of a hypothetical prudent underwriter, or even to be regarded as increasing the risk, in order to be material.

The Court rejected these arguments. It held that a prudent underwriter would want to know about the Previous Fires when assessing the risk even though they had not resulted in claims, for two main reasons. Firstly, the Previous Fires were capable of causing substantial liabilities. Secondly, the Previous Fires represented a pattern of similar incidents, following a prolonged period without such incidents, and, therefore, indicated that the risk profile may have changed. The Court, therefore, held that a prudent underwriter would wish to take such information into account when assessing both the extent of the fire risk, and whether the nature of that risk had changed.It also held that the fact that certain of these fires had occurred on the quayside was irrelevant for these purposes. These fires still indicated that the scrap was likely to combust and such combustion could just as easily occur on a vessel, potentially giving rise to substantial claims.

Lloyd’s knowledge of fire risk

Cometsambre advanced a number of related arguments regarding Lloyd’s knowledge of the risk of fire. Specifically, it argued that it had given Lloyds sufficient information to put it on notice to make further enquiries about the risk of fire, that Lloyds was presumed to know fires frequently occur in scrap metal, and that Lloyds had waived its right to be informed about fires.

As set out below, the Court ultimately rejected all these arguments. In doing so, it made clear that, despite the exceptions within the Act, the duty of fair presentation remains primarily on the insured.

Whether Cometsambre gave Lloyds sufficient information to put it on notice

Cometsambre argued that it is commonly understood that fires in scrap metal ‘occur with some frequency and are an appreciable risk’. It, therefore, argued that, by informing Lloyds that it would be shipping scrap metal, it had provided sufficient information to put it on notice of the need to make further inquiries regarding fires.

Under s 3(4)(b) of the Act, an insured does not need to disclose material circumstances where it has disclosed “sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances.”

The Court rejected this argument, describing it as “an attempt improperly to reverse the burden of ensuring a fair presentation of the risk”. In reaching this conclusion, the Court noted that Cometsambre had not provided any information which would have put Lloyds on notice that the incidence of fires had materially increased. In particular, it had not disclosed that there had been five fires within a 20-month period following five years without any such incidents.

Whether Lloyds was presumed to know of the relevant circumstances

Cometsambre argued that the fact that Lloyds would have been aware of the risk of fires in scrap metal meant that Lloyds would have been aware of the relevant circumstances.

Under s 3(5)(d) of the Act, an insured is not required to disclose a circumstance if the insurer is presumed to know it. Further, under s 5(3), an insurer is assumed to know things which are common knowledge, or which an insurer offering that class of insurance would be expected to know in the ordinary course of business.

The Court rejected this argument. In doing so, it reviewed a significant volume of evidence before concluding that, in all the circumstances, a prudent underwriter would have expected a low risk of fire. It held that there was no evidence that Lloyds was aware of the fact that fires had occurred on vessels chartered by Cometsambre, much less five fires within 20 months.

Whether Lloyds waived its right to disclosure of information about the Previous Fires

Cometsambre argued that Lloyds had waived its right to disclosure of information about the Previous Fires. It argued that it had done so as it had merely required Cometsambre to fill in a questionnaire about its claims history at the inception of the Policy, and had not asked it any further questions about fires, despite being aware that it was transporting scrap metal.  

As the Court noted, the relevant test is whether a reasonable reader of the relevant communications would have understood that the underwriters had only limited concerns which did not extend to the undisclosed information.

The Court rejected Cometsambre’s argument. In doing so, it noted that the questionnaire which Cometsambre had filled out had been provided by its own broker and did not necessarily show that Lloyds was not interested in additional information. It also relied on evidence from Lloyd’s expert and held that the absence of a renewal questionnaire could not reasonably be understood to be a waiver of disclosure of material circumstances. More generally, it held that the communications could not reasonably be understood to mean that Lloyds was not interested in the incidents of fires on vessels chartered by Cometsambre.

Inducement

In the alternative, Cometsambre argued that any breach of the duty of fair presentation had not induced Lloyds to renew the policy. In other words, it argued that Lloyds would have renewed the policy even if it had been aware of the Previous Fires. In doing so, it placed considerable emphasis on the fact that Lloyds had renewed cover for another charterer transporting scrap metal, BST, despite being aware of previous fires on vessels which it had chartered.

Under s 8(1) of the Act, an insurer only has a remedy against an insured for a breach of the duty of fair presentation if it shows that, but for the breach, it would not have entered into the contract of insurance at all, or it would only have done so on different terms.

The Court accepted the evidence of the Lloyds underwriter that he would not have renewed the Policy, on any terms, had he been aware of the Previous Fires. The Court accepted the underwriter’s evidence that it was not commercially viable to offer cover given that the Previous Fires showed that there was a real (as opposed to very low) risk of a fire on board a vessel. It also accepted the underwriter’s evidence that the value of such a claim would significantly exceed the relatively small premium being paid by Cometsambre. Further, it accepted the fact that the Previous Fires occurred in a 20-month period, following five years without incident, showed that there had likely been a fundamental change in the risk profile.

Further, the Court accepted that the position in relation to Cometsambre was materially different from BST, given that BST had experienced two fires, only one of which was considered to have been the result of scrap metal. It also accepted the fact that the premium paid by BST was approximately six times the premium paid by Cometsambre, making it economic for insurers to bear a greater level of risk.

In addition, the Court noted that while inducement is primarily a matter of factual evidence, it considered that the underwriter’s evidence was reinforced by Lloyd’s expert’s evidence that a prudent underwriter would not have written the risk had he or she been aware of the Previous Fires.

Judgment

The Court concluded that Lloyds had avoided the Policy and was not liable to pay Cometsambre’s claim.

Comment

This insurance case provides useful guidance to insurers and policyholders regarding who bears the duty of fair presentation and the content of that duty. It shows the English Court will be reluctant to hold that (non-consumer) insureds are not required to disclose material circumstances and accordingly will not be quick to find that an insurer is already aware of those circumstances, or has been provided with sufficient information to put them on notice of the need to make enquiries regarding those circumstances. Accordingly, the case illustrates that, despite the exceptions within the Act, which are inherently fact specific, the general position is that the duty of fair presentation “remains primarily on the insured”.

It is also a useful reminder that the duty requires (non-consumer) insureds to disclose any circumstance which a prudent underwriter would want to know when assessing the risk, regardless of whether it has previously led to a claim.

For more information about the content of this article, please contact Anna Brownrigg.