Does deliberate now mean fraudulent? Mutual Energy Ltd v Starr Underwriting Agents Ltd and the Insurance Act 2015

Mutual Energy Ltd v Starr Underwriting Agents Ltd & Anor [2016] EWHC 590 (TCC)

With the coming into force of the Insurance Act 2015 just around the corner – August 2016 – it was perhaps an appropriate time for the first case to consider the meaning of the phrase “deliberate… non-disclosure” in an insurance policy.

Utmost good faith

Unlike other commercial contracts, insurance contracts require the insured to act, pre-contract, in “utmost good faith”. This is an onerous duty which requires the insured to disclose to the insurer any material facts it is deemed to know about the risk to be insured, and to avoid making material misrepresentations about the risk. The insurer needs this protection in order to properly assess the risk and fix an appropriate premium. The insurer’s remedy, if it becomes aware of a breach by the insured of the duty of utmost good faith, is to avoid the insurance policy altogether – the insured can treat the policy as if it had never come into place and the insured’s cover is entirely removed.

The new Insurance Act defines what constitutes a “qualifying” breach of the insured’s disclosure obligations; and provides in Schedule 1 a range of potential remedies (not just avoidance of the policy) commensurate with the nature of the insured’s breach.

Commercial parties will be able to contract out of the 2015 Act; but under the Act, it will no longer be the case that every breach of the utmost good faith obligations will lead to the insurance policy being avoided altogether by the insurer.

Facts

The Claimant, MEL, owns and operates the Moyle Interconnector, which provides an undersea cable link between the electricity systems of Northern Ireland and Scotland. Full commercial operation began in April 2002. By a contract of insurance dated around 1 December 2009, five insurers (including the two Defendant insurers) agreed to provide insurance against the risk of failure of the Moyle Interconnector.

On 26 June and 24 August 2011 there were two separate cable failures which led to a loss f power flow. Loss adjusters appointed by the five insurers assessed the value of the claim as £41,022,504. Three of the insurers agreed to pay some element of the claim. The two Defendant insurers did not, and MEL commenced a claim against them for £17,630,067.

In response, the Defendants alleged deliberate non-disclosure on the part of MEL, in relation to their knowledge of previous cable failures, and this point was heard in the High Court as a preliminary issue. If the Defendants were successful, they would be able to avoid the insurance policy, and MEL’s claim under it, altogether. The relevant provision within the policy, clause 6(a), read:

“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 for the Court

The Defendants claimed that deliberate (as opposed to fraudulent) non-disclosure had occurred because MEL was aware of information and was aware that it was not being disclosed to insurers, and held the honest but mistaken belief that it need not be disclosed.

The issue between the parties was whether the reference in the insurance policy to “deliberate… non-disclosure” meant that the contract could be avoided in circumstances where MEL had honestly but mistakenly decided not to disclose a particular document or fact; or whether, as MEL claimed, 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 the non-disclosure involved an element of dishonesty.

Conclusion

In the opinion of the Court, 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. So “deliberate” non-disclosure meant that MEL must have known that what it was doing was wrong; as with “fraudulent” non-disclosure, an element of dishonesty was required.

On the facts, MEL had not behaved dishonestly and so the Court decided there had been no deliberate non-disclosure.

This is a comforting decision for insured parties; less so for insurers. The Defendant insurers had been arguing for a wide meaning of the word “deliberate”. If the Court had accepted that “deliberate” included honest mistakes, it would effectively have allowed the insurers to avoid the policy for negligent non-disclosure. As it is, the Court placed a far more restrictive interpretation on the word, to include an element of dishonesty, and so in practice an insurer claiming deliberate non-disclosure will need to establish something very close to fraud – difficult to do in the absence of very clear evidence.