Recent case confirms "inducement" requirement in material non-disclosure cases

This article was first published in Law Talk on 29 March 2014

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A recent case confirms the centrality of inducement where material non-disclosure is an issue in a non-marine insurance context.In Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501, the House of Lords as it then was, redefined English law (for non-marine cases) so that any material non-disclosure would only lead to avoidance if it induced the insurer into entering into the contract. If inducement is not proved as a fact then the insurer may not rely on the non-disclosure to avoid the contract. Pan Atlantic was considered in a number of New Zealand cases, but not directly applied until Jaggar v Lyttleton Marina Holdings Ltd [2006] 2 NZLR 87.That the non-disclosure induced the underwriter into entering into the contract is another way of saying the non-disclosure caused the underwriter to write the risk in the way that he or she did. It does not need to be shown that the risk would have been declined, but only that the insurer would have taken it into account.What this means, in practical terms, depends on the risk in question. For consumer level insurance, the relevant underwriting practices will in effect be codified in a computer programme, with little or no discretion on the part of the operative considering a proposal. Whether the test is satisfied in this context can be ascertained very quickly. This may explain why non-disclosure cases with insurance at this level are now fairly rare.For higher level commercial insurance, and certainly for reinsurance, an actual underwriter will actively apply his or her mind to whether to accept the risk and if so on what terms. The inducement requirement requires evidence from this person as to whether they would have taken the fact into account had they known the correct position. There will be therefore direct scrutiny of their decision-making process.This kind of evidence was considered in New Zealand Local Authority Protection Programme Disaster Fund v New India Assurance Company Ltd [2013] NZHC 1327.LAPP is a charitable trust that maintains a disaster fund for the benefit of local authorities for loss and damage to certain infrastructural assets in the event of catastrophes such as earthquakes. The trust was established by a trust deed executed in 1993. A replacement trust deed which made some changes to the terms of the trust was entered into in 2007. The inducement topic concerned the changes to the trust deed.Following the Canterbury earthquakes, LAPP sought summary judgment on of a sum of money from New India (a following reinsurer to a lead reinsurer) under the relevant insurance contract. It was incumbent on LAPP under the High Court Rules to satisfy the Court that New India had no reasonably arguable defence.New India contended that material changes occurred when the plaintiff adopted the 2007 trust deed in place of the earlier 1993 deed without LAPP knowing. It argued that the provisions of the later deed removed or reduced restrictions on the amounts which insurers such as the defendant might have to pay out pursuant to reinsurance contracts. Therefore the terms of the 2007 deed ought to have been disclosed to the defendant. The failure to do so, it was argued, was a material non-disclosure which permitted the defendant to avoid the policy.The New India witness deposed that he would have been concerned about the change in the deed because the terms of the 2010 policies meant that all loss settlements made by LAPP were unconditionally binding on New India provided that those settlements were within the terms of LAPP’s trust deed and the insurance contract. He stated that he would have wanted to satisfy himself that any change to the trust deed did not impact upon, or affect the trustees’ obligations under the deed.The Court stated that it was reasonably arguable on the basis of the witness’s evidence that if he been told that there had been a change in the trust deed, he would have called for a copy of the original deed. This led to an inference that he may then have gone on to carry out a comparison of the two deeds, reached the view that the terms of the 2007 deed were comparatively disadvantageous, and either declined insurance or offered on different terms.The Court stated that it was sceptical about whether the witness  would have followed up in this way had he been advised that the trust deed had been changed. In simple terms, the witness appear to have said that at the relevant time he was content to leave such matters to the lead insurer. The Court stated that it understood his evidence to say that he was prepared to trust another insurer’s judgement on that issue because the particular structure adopted under the old arrangements had given him a satisfactory level of comfort. The Court then stated at paragraph 43:

If that is so, then when the subscription basis for insurance ended, taking with it the protection or assurance that Mr Balasubramanian took from it, one might have expected to see some evidence of him actively attempting to make his own judgement about what was in the trust deed. He could not have done that without calling for a copy of the current trust deed.

 Nonetheless, this particular issue was not capable of being resolved in a summary judgment context. The Court went on to find, in any event, that the the changes to the trust deed were not material. It granted the plaintiff’s summary judgment application.Inducement as a topic is sensibly the first port of call where material non-disclosure is considered to be an issue. From an insurer’s perspective, this should involve an interview with the underwriter, who will need to demonstrate how the company’s underwriting practices and procedures would have affected his or her judgment about the risk had the relevant facts been disclosed. Strictly speaking, the underwriter’s subjective opinion about the materiality of the fact is not relevant to this inquiry. From the insured’s perspective, it should look to focus on this issue as soon as possible. There will be cases where insurers, potentially for reasons of commercial sensitivity, do not wish to disclose their underwriting practices and may prefer to concede the point.

The Law of Liability Insurance: heavy but worthwhile reading

This book review was first published in Law Talk on 6 December 2013A contract of liability insurance is a promise to the insured to provide cover by way of indemnity to the insured against the insured’s own loss because of his or her liability to a third party. If you keep double-clicking this basic proposition, you end up with a textbook, specifically the new, third, edition of The Law of Liability Insurance, a two volume work that apparently weighs more than some bicycles. It is a “must have” for any practitioner serious about practising in the area of liability insurance. Despite ostensibly being a specialist text, it also provides a useful general resource on the principles of insurance law.The Law of Liability Insurance, or “Derrington” as it is more affectionately known, is the trusted handbook for any New Zealand practitioner delving into the subject of liability insurance. Emphasis is properly placed on the word “delve” when used in connection with the recently published third edition, because the act of physically diving into the work, or crouching behind it to avoid a colleague, is not completely beyond the realms of imagination. If size truly does make one great, then it should be noted that its 3437 pages trump McElroys’ copy of the authorised King James Version of the Holy Bible (both testaments, 1400 pages) and Leo Tolstoy’s epic novel of Napoleonic Russia, War and Peace (New American Library version, 1440 pages) put together. Asked to guess the weight of the two volumes*, a colleague volunteered “more than my bicycle” (a fancy carbon frame number, granted) and another, perhaps less familiar than others with weights and measures, volunteered “thirty kilograms” before quickly changing it to “ten.” One wonders whether it will become the liability insurance equivalent of Marcel Proust’s In Search of Lost Time; a book many people claim to have read, but few have actually finished. A feat your correspondent did not quite achieve, while attempting to acquit himself of the task of reviewing it as best he could in the time available. All of this is intended to raise a serious point about how information is best presented, and how technology can lend a hand. More about this later.The Law of Liability Insurance, first published in 1990 and then again in 2005, was officially launched as a third edition in Brisbane on 20 November this year. The publishing information states that the recommended retail price for the hard copy book alone is AU$395, which if you think about in terms of a per word basis may make it one of the best value legal works ever produced. Firms wishing to save money should note that it is not possible to purchase only one of the two volumes by offering half of the price, if only for the functional reason that the index only exists in volume two.The authors remind us that until about 1880, with the exception of marine insurance, liability insurance was considered to be against public policy and therefore legally of no effect. It was believed to remove the perceived deterrent to being negligent created by the possibility of loss through liability to a claimant. Thinking about this topic evolved. Ever since, the growth of liability insurance seems to have tracked the growth of the law of common law negligence. The authors note that after a rash of poisoning from cockroach poison in England, poison insurance for piemakers gained currency in the 1890s. Cover of this general kind gained increasing popularity “when snails were alleged to have a propensity to find their way into stone bottles of ginger beer, for which the manufacturer would be liable to any ultimate customer who might become shocked on this discovery.”The Law of Liability Insurance is an Australian text produced by two Australian authors. It therefore has, without any embarrassment, a dominant Australian flavour, constructed within a framework of historic and modern English cases. The Australian focus is evident in the regular section heading Statutory Intervention which usually leads with the Australian Insurance Contracts Act 1984. This approach should not cause any difficulty for the New Zealand practitioner, who, fresh from reading the newly minted Trans-Tasman Proceedings Act 2010, will appreciate that a “blended” understanding towards many of the legal principles is helpful and in any event inescapable. Anyone familiar with CCH’s Australia and New Zealand Insurance Law series will appreciate this. The authors deliver a text that will no doubt happily sit on the shelves of Australian, New Zealand and indeed English law firms as a comprehensive survey of the legal principles in this area.The authors also promise, and deliver, material from America, regarding which they say with characteristic flourish: “it is a crop too rich to be ignored, even though it be necessary to sort the grain out from the weeds. The abundant use of American authorities complements and enhances the usual suspects of English, Australian and New Zealand cases. An example is the reference in the United States to the principle that “the proper focus regarding issues of coverage under insurance contracts is the reasonable expectation of the insured.” This is an approach which has been disavowed in English cases: see Smith Tak Offshore Services v Youell & Ors [1992] 1 Lloyd’s Law Reports 154.A further example is that in the United States a breach of duty of good faith must involve a conscious and deliberate act that unfairly frustrates the agreed common purpose and disappoints the reasonable expectations of the other party by denying the benefits of the contract. We are reminded that under American law the performance of all contracts is attended by obligations of utmost good faith in the discharge of all duties and the exercise of all rights.Defining what constitutes a lack of good faith, and specifically when the duty exists, remains an open-ended topic, so thinking from other jurisdictions is certainly helpful. A tangent to this is Paul Michalik’s thought-provoking observation elsewhere that “the insurer’s side of the duty of good faith has no known content”**. So, a recharacterisation of the duty as having a higher threshold for breach is germaine when you consider that it may be a duty which rests solely on the shoulders of the insured and not the insurer.The Law of Liability Insurance is not just about liability insurance. It contains a detailed and useful survey of basic insurance principles in chapters two, three and four: The Contract of Insurance, Construction (i.e., interpretation) and Utmost Good Faith and Disclosure which finishes on page 686. If you make it this far and read no further, you will have achieved a very good grounding in a lot of the basics. In this section, we are reminded of the nature of insurance.  It is a contract where the insurer contracts to indemnify the insured upon determinable contingencies. It is a loss distribution mechanism where the parties wager against the occurrence of a particular event (including a claim). The insurer insurers risks, not certainties. It is a commercial contract, but “with its own special baggage that often defies the application of pedestrian commercial law principles.”Chapter three, Construction, begins with the dry understatement with regard to policy wordings: “not uncommonly their composition is less than ideal.” It goes on to canvas many topics, including forms of analytical reasoning in interpretation. It also contains a useful and detailed alphabetical list of particular expressions including “and”, a word without which a lot of litigation may have never occurred, and other potentially vexing phrases such as “arising from or out of”, “attributable to” and “in connection with.” The chapter also includes thoughtful observations such as that a dictionary does not necessarily provide a definitive meaning for a word, but rather a lexicon of potential meanings which will vary according to context.A text book of three and half thousand pages raises the question of whether it is useful for it to have a “physical” form at all. On initial publication, the publisher made available to firms a garden-variety pdf of the text, which, due to its length, was just as unmanageable, because it took an age for anything to happen. It has since been subject to the rigours of conventional e-publishing, and will be available to firms as an e-book (or “Practitioner’s Book Online, “PBO”) within the publisher’s conventional on-line offering early next year. The PBO made available for this review was as ergonomic as any other and also presented a welcome respite to clinging to the physical volumes on the number 274 bus down Mt Eden Road.More generally, the publisher, along with others no doubt, is looking at forms of “e-lending.” This is an intriguing idea, according to which a firm would have a licence to the e-book, and “lend” virtual copies of the book out to staff in accordance with its licence, who may each record their own individual annotations, which are then stored in the cloud. So, it seems that the future is – almost – here. In five years time all legal reading and research will be conducted from tablets, which, one should think, may be carried out comfortably on the bus- and even on a bicycle, with an appropriate level of care, and with suitable insurance in place. 

 * Weight: approximately 4.9 kilograms, both volumes, measured unscientifically on the uncalibrated family bathroom scales.

** Insurance Law- a Practical Guide, NZLS seminar paper, 2012.Here's a pdf: Law of Liability Insurance- heavy but worthwhile reading

Concerning causes in insurance law

This article was first published in Law Talk on 1 November 2013pdf :- Concerning causes in insurance lawInsurance law has its own way of thinking about causation. Anyone instructed in respect of an insurance coverage dispute would be well-advised to gain awareness of this perspective.Mention of an insurance company relying on an exclusion of liability to decline a claim sometimes meets a knowing nod and a sigh from members of the general public. Anyone who believes they had a valid insurance claim, in circumstances where in fact they do not, deserves sympathy. However, it pays to understand that this expectation may be based on a misconception about how insurance policies work, and the specific effect of the language used, particularly with reference to exclusion clauses. The “missing link” in people’s understanding is sometimes the requirements of causation, as it is reflected in the language of the policy. This is a needy concept that deserves more care and attention than it generally receives.Insurance companies are in the business of earning premium and paying claims. How this fits together in a way that works commercially is a matter of underwriting. This should enable the company to pay all eligible claims and at the same time make a profit by investing the difference between all of the premium collected from customers less the amounts it must pay in claims. A properly conducted underwriting analysis should set the premium at a level which makes into account the probability of a particularly event occurring giving rise to an eligible claim, and also taking into account other factors. The relevant probabilities are a matter of actuarial analysis.This analysis is reflected in the language used in an insurance policy. Some risks will be met, others will not. In respect of risks which are excluded, it is not necessarily the case that there needs be a direct causal link between that risk and the loss or damage the customer seeks to cover. That is a product of the language used in the agreement. This language will usually be selected deliberately to reflect that, from an actuarial perspective, it is difficult or perhaps impossible for an insurer to gauge the likelihood of the risk occurring. It is not generally reflective of a desire by an insurance company to shirk its responsibilities.The lesson to be learnt is that wording of the policy is absolutely central to a properly conducted analysis. A view of the world that an insurer has deep pockets and a customer is being hard done by where a claim is excluded will not greatly assist the client. As set out below, in an insurance context, causation is dominantly a matter of contractual analysis. A judge will generally not be moved to depart from this analysis without good reason.When does one thing can be said to have caused another is a question of almost universal application in civil litigation practice. At law school we are raised on a steady diet of common law tort, where the purpose of the inquiry is to identify who is - and who is not- at fault. This attribution of responsibility is the key area of interest. This sometimes leads to a subtle blending of causation and duty/ breach of duty concepts. Further, the characterisation of causation may sometimes be motivated by considerations of fairness and public policy.On the other hand, an insurance coverage dispute by its nature is concerned with an insurance contract where the key terms are contained in an insurance policy. The Court will therefore ordinarily limit its inquiry to what the policy says about causation.These different approaches may produce different outcomes. Consider the case of Miss Jay Jay [1987] 1 Lloyd’s Rep 32. If a yacht has been negligently designed or built, and then breaks up while at sea, in calm waters, the tort lawyer is interested in whether a breach of duty by either the designer or the manufacturer, or both, can be said to have caused the damage. In Miss Jay Jay the Court was required to address causation in the context with insurance against perils of the sea. Once the Court had located a proximate cause – the incursion of seawater (being the relevant peril), the inquiry ended.To what extent the Court was required to keep searching depending on the provisions of the policy. So, where there are a range of potential causes “if one of these causes is insured against under the policy, and one of the others is expressly excluded from the policy, the insured will be entitled to recover” (an extract from Halsbury, quoted with approval in Miss Jay Jay at 36 and 40). It followed that “where there were no relevant exclusions or warranties in the policy the fact that there may have been another proximate cause did not call for specific mention since proof of a peril which was within the policy was enough to entitled the plaintiffs to judgment” (Miss Jay Jay, page 37). On this view of things, any negligence by the designer or manufacturer does not make any difference to the policy analysis.So far so good. But in fact “causation” is not always a term that is expressly identified in a policy, rather, it is a concept implicit in the words used and the approach towards interpreting them.In the past, occurrence based insurance policy would helpful listed out the “perils” to which the policy would respond if one of those perils caused accidental damage: fire, tsunami, a plague of locusts and so on. Such a policy may have also contained a list of exclusions. So, the inquiry included a consideration of whether something was “in” (ie there was a listed peril which was the proximate cause of the damage) or “out” (excluded). Nowadays, an occurrence based insurance policy is more likely to be formulated on an “all risks” basis for accidental loss or damage. That is to say something should be covered, other things equal, unless the loss or damage is caused by something that is excluded. The causation focus is therefore more on exclusions.The causation focus also tends to be more on exclusions with regards to liability policies. Liability policies ordinarily respond to claims made during the policy period (and are subject to other terms and conditions outside the scope of this brief paper). Other things equal, either there is a claim to which the policy responds or there is not. Any causation issues are more likely to focus on whether the claim is excluded.All of the above is most usefully demonstrated by example, with reference to the recent case of IAG v Jackson [2013] NZCA 302. According to the judgment, a Christchurch couple, the Marchands, engaged an insurance broker, Mr Jackson, to arrange insurance cover for their home and contents, motor vehicles and a medical practice. Mr Jackson placed business interruption cover for the medical practice, but he arranged none of the other insurance. This was initially an oversight. On several occasions he assured the Marchands he had placed cover with NZI whereas he had not. The Marchands’ home was badly damaged in the 4 September 2010 Canterbury earthquake. Mr Jackson then attempted to arrange cover with NZI by submitting an application form which he dated 30 August 2010.The Marchands sued Mr Jackson for their uninsured loss. Mr Jackson joined IAG, his professional indemnity insurer. IAG applied for defendant’s summary judgment relying, amongst other grounds, on an exclusion for dishonesty. The Marchands succeeded at trial against Mr Jackson. IAG did not participate. An Associate Judge declined IAG’s application for summary judgment, concluding that dishonesty would need to be decided on the facts at trial. IAG appealed against that ruling resulting in the present judgment.The IAG policy contained an exclusion which provided that Mr Jackson was “…not insured for civil liability in connection with any dishonest, fraudulent, criminal or malicious acts or omissions by you…”.The Court of Appeal was required to decide what “dishonest” meant in this setting and what the connection needed to be shown between the insured’s dishonest conduct and his civil liability.On the evidence, the Court concluded that Mr Jackson had no case to answer to IAG’s allegation that he acted dishonestly.The next question was whether Mr Jackson’s dishonest acts or omissions were “in connection with” his civil liability to the Marchands. The question arose because it was apparently common ground that Mr Jackson did not act dishonestly when he first incurred a liability to the Marchands by failing to act on their instructions to secure cover for their home, contents and vehicles. The relevant dishonesty occurred later.The Court stated that IAG was required to establish a nexus or relationship between dishonest conduct and civil liability. It noted that the dishonest act “did not need to be the direct or proximate cause of the civil liability, and it need not precede the liability in time” (para 29). However: ‘“in connection with” does demand some causal or consequential relationship between the two things in this setting” (para 29).The Court considered whether IAG has discharged that burden. It had been agreed that Mr Jackson had acted honestly when he first failed to place cover. He incurred a liability for breach of this retainer at that time. However, the trial judge held that had Mr Jackson not hidden the truth from the Marchands, they would have secured cover before the earthquake. That being so, the required nexus was established. The exclusion therefore applied. The Court therefore permitted the appeal (the procedure aspects warranting separate consideration).POST SCRIPT (added 30 December 2013): nzinsurancelaw is aware that Mr Jackson has requested leave to appeal in the Supreme Court.