Reynolds Porter Chamberlain's Edward Mann says Moore-Bick ruling will force disclosure.
In his interlocutory judgment delivered on 26th February in Brotherton -v- Colseguros, Mr Justice Moore-Bick has upheld the argument of London Reinsurers (led by Ace Global Markets) that insureds or reinsureds cannot use subsequently acquired information to justify non-disclosure of material facts known at the time of placement.
The defendants in Brotherton are Colombian insurers of the original bankers' blanket bond insurance of a Colombian bank. Before the reinsurance was placed allegations of corruption involving the bank's president and other executives had been widely reported in the Colombian media, but were not disclosed to reinsurers. Reinsurers say they should have been disclosed as relevant to 'moral hazard' and because they suggested that losses under the fidelity section of the banker's bond had occurred or might occur, and claim to have validly avoided the reinsurance for non-disclosure.
The defendants admitted they could not have proved the allegations were unfounded at placement, but argued that the Court should investigate at trial what is then known about the allegations, to support a case that the allegations were untrue, such that non-disclosure should not invalidate the reinsurance, because "untrue" allegations could not constitute material facts. In the alternative, adopting the reasoning of last year's controversial decision in The Grecia Express, they argued that it would be inequitable (i.e. unfair) to allow Reinsurers to avoid if material allegations could subsequently be shown to be untrue or unfounded.
Moore-Bick J. rejected the second argument, referring to his own very recent decision in Drake -v- Provident (unreported - 3rd February 2003), in which he had declined to follow The Grecia Express. On the first issue of whether allegations not known to be false at placement, but which could subsequently be shown to be untrue, had to be disclosed, Moore-Bick J. held that the underwriter had to be given a fair opportunity to assess the risk, which would only happen if all material circumstances of which the insured/reinsured was aware were disclosed when the contract was made. Matters coming to light subsequently could not affect the underwriter's judgement and could not therefore have any bearing on the materiality of information available at the time of placement.
Accordingly, the materiality of the reports on which Reinsurers relied had to be assessed by reference to what was known to the Reinsureds at placement; subsequent evidence that the allegations might be unfounded could neither render them immaterial nor form the basis of an argument that it would be unfair to allow Reinsurers to avoid.
This decision should be welcomed as confirming that insureds or reinsureds proposing for cover must make full disclosure, according to the contemporary state of affairs. To assess the risk an Underwriter has to be able to rely on receiving disclosure of all material facts known to the insured or reinsured. The Judge was right to reject the notion that materiality, or Underwriters' right to avoid for non-disclosure, could be conditioned by matters which could never have formed part of the placement.
