The truth of non-disclosure

Last year's case of Norwich Union Insurance v M Meisels & another concerns a claim for property damage. In the county court case Norwich Union initially denied liability for fraud. It subsequently alleged non-disclosure, misrepresentation and breach of warranty. The insurer lost and appealed to the High Court on the non-disclosure issues.

The claimant had completed two proposal forms in the name of the claimant's company, Simon Tov Properties Ltd (STLP). The first form was the property owner's insurance application form which asked whether the claimant had any involvement as a director in a company which had become insolvent or been wound up. The claimant had answered 'no'.

The second form was the Let Plan policy proposal that did not ask about bankruptcy or insolvency. The claim was made under the Let Plan Policy.

Insurers alleged the following material non-disclosures:

1. Irregularities in STLP's tax affairs which resulted in an Inland Revenue assessment and penalties.

2. The claimant was a director of four companies that went into creditors' voluntary liquidation and 16 others that were wound up for not filing accounts.

3. One of the properties listed in the schedule to the policy which, although owned by the claimant, was listed under an alias.

The allegation regarding the Inland Revenue assessment raised difficult questions.

Unfounded allegation
Where an allegation of criminality or dishonesty is made, but not resolved at the time of placement, the fact that the insured knows the allegation is unfounded does not mean it is not material.

In such circumstances, materiality and inducement will be decided taking into account the likelihood that, if there had been full disclosure, the insured would also have disclosed any evidence (exculpatory material) he had to prove his innocence – Brotherton v Aseguradora Colseguros SA (2003).

In reality, this may not help the insureds, unless the exculpatory material proved beyond doubt the allegation was false.

Under present law, the only way the requirement for disclosure can be limited is if underwriters give evidence that they would not have been influenced by the information, or if a 'robust' judge rejects the underwriter's evidence.

Insurers here argued that, where there was an allegation of dishonesty or other criminal conduct, which was on its face material and discloseable, the insured was obliged to disclose it unless the insured had exculpatory material that proved beyond doubt that the allegation was false.

The claimant, however, maintained it was wrong to treat allegations of criminal conduct which did not involve dishonesty (as was the case here) in the same way as allegations of dishonesty.

The claimant pointed also to Lord Justice Waller's comments in North Star Shipping v Sphere Drake Insurance (2006), where he hoped an expert witness would not suggest that "old allegations of dishonesty or allegations of not very serious dishonesty" were material.

The county court judge agreed with the insured and that decision was upheld on appeal.

This was a moral hazard issue. The insurer's concern here was the risk that an insured in financial difficulties might commit arson to make a fraudulent claim. It was difficult to see why a demonstrably incorrect tax demand was material to that concern.

The test for materiality is objective. This left room for some proportionality, having regard to the nature of the risk and the moral hazard being considered. Some things may be too old or insufficiently serious to require disclosure.

Here, the county court judge found that the claimant had cogent and coherent evidence that neutralised the tax assessment. The High Court judge considered that the county court judge was entitled to this finding of fact and that there was nothing material that the claimant ought to have disclosed.

Insofar as the companies were concerned, the evidence before the county court was that it was the claimant's business practice to set up a company for a particular transaction, then let the company lapse. There was no dishonesty involved. The fact that some companies had been struck off for failure to file accounts did not demonstrate that they were under financial pressures.

The High Court agreed with the county court judge that, in the absence of a suggestion of dishonesty, there could not have been a duty on the claimant to disclose in the Let Plan policy proposal form that he had given an incorrect answer to a question in the property owner's insurance application form.

As regards the companies in creditors' voluntary winding-up, the county court judge accepted the claimant's evidence that he knew nothing about these. The moral hazard here related to financial integrity, management of the business and any potential for fraud. This was a family-run business. Though its practices might be open to criticism, there was no suggestion of financial or other impropriety.

On appeal, documents were produced showing the claimant's signature on the liquidation forms. Insurers argued that these were things of which he, as a director, ought to have been aware. The High Court judge thought insurer's arguments appeared "formidable", but noted that the claimant had not been cross-examined on these documents. Since the county court judge found the claimant to be a truthful witness, he was bound to make the finding of fact that he did.

Money laundering
The insurer's concern on the alias was that second names could be used for money-laundering or other purposes. The claimant explained, however, that the property in question was a synagogue and he had chosen to use an alias so that he would not be approached in his capacity as landlord when he was attending the premises for his own purposes. The county court judge accepted this explanation, concluding that the information was not material. The High Court judge was not prepared to interfere with that finding.

Finally, the county court judge went on to deal with inducement. Insurers had failed to prove inducement. The Let Plan policy proposal had not asked about bankruptcy or insolvency; the insurers had been anxious to accommodate the insured's bank; and, although the judge did not doubt the sincerity of the insurer's witnesses, he thought the allegations had been influenced by the original allegations of fraud. The High Court judge considered these findings might be described as a judge acting "robustly", but was not prepared to interfere.

It is likely that on certain points, the scope of the decision is limited to the particular facts of the case.

On a more general note, the judgment suggests that, in considering the discloseability of unresolved allegations of criminality, the court will look at various factors in addition to any exculpatory material, including the nature of the risk, the moral hazard concerned, the age and seriousness of the allegation and whether any dishonesty was involved. IT

Ling Ong is a partner at DLA Piper