Can an Insurer avoid for: (a) under-valuation of property; (b) under-declaration of estimated income?

1. Can an Insurer avoid for: (a) under-valuation of property; (b) under-declaration of estimated income? Roger Doulton M.A (Oxon), MCIArb, F.R.S.A. Partner - Barlow Lyde & Gilbert LLP

2. To begin at (or very nearly at!) the beginning …. ‘Subject to the provisions of this section, the Assured must disclose to the Insurer, before the contract is concluded, every material circumstance which is known to the Assured, and the Assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the Assured fails to make such disclosure, the Insurer may avoid the contract.’ Section 18(1) Marine Insurance Act 1906

3. Representation of fact ‘A representation as to a matter of fact is true, if substantially correct, that is to say if the difference between what is represented and what is actually correct would not be considered material by a prudent Insurer.’ Section 20(4) Marine Insurance Act 1906

4. Expectation or belief ‘A representation as to a matter of expectation or belief is true if made in good faith.’ Section 20(5) Marine Insurance Act 1906

5. What is the status of a valuation or estimate? Absent dishonesty, and within the insurance context, a valuation or estimate is treated by the Courts as a representation of expectation or belief.

6. In another context… ‘It is material to observe that it is often fallaciously assumed that a statement of opinion cannot involve the statement of a fact. In a case where the facts are equally well known to both parties, what one of them says to the other is frequently nothing but an expression of opinion. The statement of such an opinion is in a sense a statement of fact, about the condition of the man’s own mind, but only of an irrelevant fact, for it is of no consequence what the opinion is. But if the facts are not equally known to both sides, then a statement of opinion by one who knows the facts best involves very often a statement of a material fact, for he impliedly states that he knows facts which justify his opinion.’ Per Bowen LJ Smith -v- Land & Home Property Corporation [1884]

7. In another context… ‘I am therefore entirely of the same opinion as the Judge, that this is a case in which the representation was not merely confined to the fact that the vendor entertained the belief but also, inescapably, there goes with it the further representation that he, being competently advised, had reasonable grounds for supporting that belief.’ Per Lord Evershed Brown -v- Raphael [1958]

8. In another context… ‘I agree that it is not a guarantee that the tenant will go on paying his rent but it is to my mind a guarantee of a different sort, and amounts at least to an assertion that nothing occurred in the relations between the landlord and the tenant which can be considered to make the tenant an unsatisfactory one. That is a statement of a specific fact again.’ Per Bowen LJ Smith -v- Land & Home Property Corporation [1884]

9. So you might think … …. that, within the context of insurance (non-disclosure and/or misrepresentation) a valuation or estimate carries with it an implied representation that it had been reasonably arrived at. And that… …as a result an insurer could avoid for misrepresentation if this were not the case BUT …

10. You would be WRONG!

11. The rot sets in ‘What then was meant by the appellant’s representation that, as at January 1991, he believed that the full contents value was £16,000? The Judge below considered 3 possible meanings: (i) That £16,000 was in fact the full value; (ii) That the appellant honestly believed that £16,000 was the full value and had reasonable grounds for his belief; (iii) That he honestly believed that £16,000 was the full value’ Per Simon Brown LJ Economides -v- Commercial Union [1997]

12. And continued …. ‘Can one in an insurance context, consistently with section 20(5) of the 1906 Act, find in a representation of belief an implied representation that there are reasonable grounds for that belief? In my Judgement not.’ Per Simon Brown LJ Economides -v- Commercial Union [1997] ‘I find it impossible to see how, consistently with section 20(5), an objective test of reasonableness can be imported by way of an implied representation.’ Per Gibson LG Economides -v- Commercial Union [1997]

13. And continued… ‘He accepts, as he inevitably must, that the appellant had to have some basis for his statement of belief in this valuation; he could not simply make a blind guess: one cannot believe to be true that which one has not the least idea about. But, he submits, and this is at the heart of the argument, the basis of belief does not have to be an objectively reasonable one… he was under a duty of honesty not a duty of care.’ Per Simon Brown LJ Economides -v- Commercial Union [1997]

14. And continued… ‘Again in Highlands Insurance Co -v- Continental Insurance Co [1987] the relevant representation was made by a professional underwriter. With such cases can be contrasted a case such as the present where the statement is made by a layman with no relevant skills. Like Simon Brown LJ I regard section 20(5) of the Marine Insurance Act 1906 as providing the conclusive answer on the point. On its face it applies to all representations as to matters of expectation or belief… I find it impossible to see how, consistently with section 20(5), an objective test of reasonableness can be imported by way of implied representation.’ Per Gibson LJ Economides -v- Commercial Union [1997]

15. Are there any limits to the scope of this outcome? ‘Thus, if it can be proved that the person who expresses the opinion did not hold it, or could not, as a reasonable man having his knowledge of the fact, honestly have held it, the statement may be regarded as a statement of fact’ … [ a misrepresentation as to his state of mind].’ Chitty on Contracts Approved by Longmore J in Credit Lyonnais -v- E.C.G.D [1996] Approved by Simon Brown LJ in Economides -v- Commercial Union [1997] ‘With such cases can be contrasted a case such as the present where the statement is made by a layman with no relevant skills.’ Per Gibson L J Economides -v- Commercial Union [1997]

16. So what about non-disclosure of the failure to take proper [business like] steps when providing a valuation or estimate? ‘The Recorder found that the Plaintiff wilfully shut his eyes to the reality of the situation. If there was such Nelsonian blindness on the Plaintiff’s part, then that would be equivalent to actual knowledge and would not be constructive knowledge. But that would be tantamount to dishonesty on the part of the Plaintiff… the Recorder does not go so far… the Recorder simply says that the Plaintiff failed to make enquiries. Mr Kinsler does not suggest that this was a finding of wilful or reckless failure to make enquiries. It is a finding of constructive knowledge. But here again the answer lies in the 1906 Act. As section 18(1) has been interpreted, in my view correctly, there is no need for a private individual to disclosure what he doesn’t actually know.’ Per Gibson LJ Economides -v- Commercial Union [1997]

17. By Contrast… • A commercial Insured must disclose that which ‘in the ordinary course of business’ it ought to know. Two questions arise:- • Might this extend to a duty to disclose that the valuation or estimate had not been obtained/given with appropriate skill and care or thought/absent professional advice? • Within the context of misrepresentation could it be argued that there was an implied representation that the valuation or estimate was based on reasonable grounds?

18. Misrepresentation ‘Reinsurers submit that the question for the Court to determine is whether, considering ‘by whom and in what circumstance the representation and question was made’ the representation is properly characterised as a representation only of ‘expectation or belief’ (as Combined contends), or of or as including ‘an assertion of a specific fact’ (as Reinsurers contend). If the former, it will be sufficient if the representation was made in good faith. If the latter, there must have been some reasonable justification for the belief.’ Per Cresswell J Rendall -v- Combined [2005]

19. Misrepresentation ‘Reinsurers contend that the representation to Mr Boyd that ‘estimated travel data … estimated days of travel for Class 1 is 160,000’ in the fax dated 10 February 2000 is properly characterised as a representation which includes an implicit assertion that the figure put forward to Mr Boyd had been arrived at by reference to Aon’s historical information and experience…’ Per Cresswell J Rendell -v- Combined [2005]

20. Misrepresentation ‘Combined submits that, as a matter of construction, the words ‘estimated days of travel for Class 1 is 160,000’ in the fax dated 10 February 2000 clearly meant that Combined …. estimated … (i.e. expected) that the total number of days of travel … would be likely to undertake during the (future) annual period of insurance was 160,000. Not only is this how the words would have been understood by any reasonable reinsuring underwriter… but it was also how Mr Boyd in fact understood them.’ Per Cresswell J Rendell -v- Combined [2005]

21. Misrepresentation ‘I do not consider that the words in question on analysis constituted an assertion of a specific fact. In particular, I do not find in the words in question an assertion of a specific fact that the estimate ‘had been based on Aon’s historical information and experience of the business travel undertaken…’. It should be remembered that (as the experts agreed), in the absence of historical data, travel days can be, and often are, estimated based on other information such as knowledge of the industry, the Insured’s business and employee occupations. An estimate of future travel can be arrived at in a number of different ways.’ Per Cresswell J Rendell -v- Combined [2005]

22. And non-disclosure? ‘I accept Combined’s submission that the presentation was fair because Reinsurers were specifically told that the days of travel were estimated. This carried with it no implication about how the estimate had been arrived at. It could have been based on hard data or on Judgements or assumptions or any mixture of these.’ Per Cresswell J Rendell -v- Combined [2005]

23. What if Insurers have built in a remedy for under-valuation/inaccurate estimating? ‘It has therefore become the also invariable practice for Insurers to declare that the policy is ‘subject to average’ or ‘subject to the under-mentioned condition of average’ which means that, if the sum insured does not represent the value of the property insured at the time of the loss or damage, the Insured is to be his own insurer for the proportion of the insurance and must therefore bear a part of the loss accordingly. Ordinarily, therefore, it appears, under-insurance, so far from being regarded as material non-disclosure justifying the avoidance of the policy, results instead in averaging, or indeed in full recovery without penalty. Why then should the position be so very different in the present case, not least given that the policy itself expressly envisages at least some degree of under-insurance… And that leads me to the second point. Just how substantial must be the extent of under-insurance… before it is said, assuming allows that the Assured had knowledge of these facts, that the policy can be avoided on grounds for non-disclosure? I raise [these points] because, in other circumstances, it seems to me that they are likely to have considerable importance and accordingly should not be lost sight off.’ Per Simon Brown LJ Economides -v- Commercial Union [1997]

24. To conclude • In an insurance context it is impossible – consistently with section 20(5) of the Marine Insurance Act 1906 – to find in a representation of expectation or belief, an implied representation that there are reasonable grounds for that belief. Per Simon Brown L J - Economides • Once statute deems an honest representation as to a matter of expectation or belief to be true, there is no scope for enquiry as to whether there were objectively reasonable grounds for that belief. Per Peter Gibson L J - Economides • What may at first blush appear to be a representation merely of expectation or belief can, on analysis, be seen in certain cases to be an assertion of a specific fact. In this event the case is governed by subsections (3) and (4) of the Marine Insurance Act 1906 rather than subsection (5). Per Simon Brown L J - Economides • It is important to keep in mind by whom and in what circumstances the representation in question was made. Per Peter Gibson L J - Economides • There must be some basis for a representation of expectation or belief before it can be said to be made in good faith. Per Simon Brown L J - Economides

25. The Insured’s obligation ‘In my judgment, if insurers wish to place upon their assured an obligation to carry out specific enquiries or otherwise take steps to provide objective justification for their valuations, they must spell out these requirements in the proposal form.’ Per Simon Brown L J Economides -v- Commercial Union [1997]

26. And the solution? • Some appropriate questions in the proposal form • A warranty that valuations and/or estimates have been arrived at in a business like manner? • Revised average clauses? Combined with a clause specifically preserving the right to avoid?* • A warranty that valuations and/or estimates are accurate plus or minus a specified percentage?* * Both of these would ideally require a mechanism for assessing the appropriate valuation or estimate