Background
In July 1996, a car driven by Mrs Kaur was involved in an accident with a motorcycle. The motorcyclist was seriously injured and claimed compensation. The car belonged to Mrs Kaur's husband, Dr Singh, who was insured by Provident Insurance. Mrs Kaur was a named driver under that policy, but she also had a car of her own, insured by Drake Insurance. That policy indemnified her against liability to third parties when driving another vehicle with permission of the owner.

Dr Singh claimed under his Provident policy, but Provident avoided the policy for non-disclosure. Mrs Kaur made a claim under her own policy with Drake, who paid the claim in full.

These proceedings, brought by Drake against Provident, were for a contribution. Drake claimed that Provident had no right to avoid the policy, and that, since both companies were liable to indemnify Mrs Kaur, this was a case of double insurance of the same risk and it was entitled to claim a 50% contribution from Provident. Provident, however, said that there was no double insurance (because its avoidance was valid) but that, in any event, a "rateable proportion" clause in the Drake policy limited Drake's liability to half of the loss in cases of double insurance. By paying the loss in full, Drake had paid as a volunteer and could not recover.

In July 1995, Mrs Kaur's 1994 accident was settled in full in her favour. In December 1995, Dr Singh committed a speeding offence, for which he received a fixed penalty and an endorsement on his licence. When his Provident policy came up for renewal in February 1996, however, he failed to disclose this conviction or to mention that Mrs Kaur's 1994 accident had been settled.

Provident operated a fully automated underwriting system that calculated premium according to the number of points allocated for convictions and accidents. Under this system, a speeding conviction carried 10 points and a fault accident, 15 points. Below 17 points, the proposer was charged a normal premium. If the total was between 17 and 29 points, the premium would rise by 25%. Above 60, the risk would be refused.

The 1994 accident was still recorded on Provident's system as a fault accident (earning 15 points). If Dr Singh had disclosed his speeding offence, his total number of points would have been 25 and he would have had to pay an extra 25% in premium. But had Provident also been told that the 1994 claim had been settled and was a no fault accident, Dr Singh's non-disclosure would have made no difference to the premium as his points score would have only been 10.

Following the accident in July 1996, Provident asked to see Dr Singh's driving licence as part of its standard claims procedure. This showed the endorsement he received for the speeding offence. On 2 August, Provident wrote to Dr Singh to avoid the policy for non-disclosure of the conviction. Dr Singh and his solicitors challenged the decision, but the status of the 1994 accident was not raised until March 1997, when Dr Singh mentioned in a letter the fact that it was a no fault accident. This was not followed up immediately. Consequently, full details of the settlement of the 1994 accident were not provided to Provident until June 1999. Nevertheless, Provident had this information before Drake had settled the 1996 claim or issued these contribution proceedings.

In the meantime, Mrs Kaur contacted Drake. Drake initially considered forcing the issue by avoiding its own policy. This would have left Mrs Kaur uninsured, but would have brought Provident back into the picture, since under the Motor Insurers Bureau agreement and by arrangements within the industry, total liability would have fallen on Provident as the insurer that had issued the certificate of insurance for the car involved.

Drake however, decided this course would be unethical. Instead, it provided Mrs Kaur with a full indemnity, although it made it clear in correspondence with Provident that it did so under protest and without prejudice. The third party claim was eventually settled in May 2000 for £1.2 million plus costs.

The next issue was whether, in the administrative muddle that followed the letter of 2 August, Provident had waived any right of avoidance. Had it even reinstated the policy?

If Provident had not been entitled to avoid, what was the effect of the arbitration award on Drake's claim for a contribution?

If there was double insurance, did the rateable proportion clause in Drake's policy mean that it had paid anything over 50% of the claim as a volunteer and so could not now claim from Provident?

Judgment at first instance
At first instance, the judge held that Provident had been entitled to avoid. The speeding conviction was a material fact and he found that Dr Singh's failure to disclose it had induced Provident to renew the policy on more favourable terms than would otherwise have been the case.

In his view, there was no evidence to suggest that, had Dr Singh disclosed the conviction, the status of the 1994 accident would have been resolved. Materiality and inducement had to be assessed as at the time of renewal on the facts as they appeared to the insurer. Moreover, the decision to avoid, once communicated to the insured, was effective immediately. As long as the right had been exercised in good faith on sufficient grounds, the court did not have jurisdiction to declare that the right had been lost retrospectively in light of subsequent information.

Judgment on Appeal
There was no dispute that the speeding conviction was a material fact. The majority of the Court of Appeal, however, found that the judge had been wrong on the question of inducement.

An insurer seeking to avoid for non-disclosure must show he was actually induced by the non-disclosure to enter into the policy on those terms (Pan Atlantic Insurance Co Limited v Pine Top Insurance Co Limited [1995] AC 5001). Provident, therefore, had to show that, if the conviction had been declared, it would have charged a higher premium. But it had to accept that it would not have charged a higher premium if the 1994 accident had been correctly classified as a no fault accident.

Rix LJ took the view that, if the conviction had been mentioned, it was very likely that the status of the accident would have been raised and discussed. Had the conviction been disclosed, a higher premium would have been charged. It would have been the broker's duty to discuss the reason for the raised premium with the insured and this would have highlighted the status of the 1994 accident. Disclosure of the material fact would, therefore, have led to the no fault status of the 1994 accident being confirmed and the same premium being charged. Clarke LJ agreed. Provident had failed to show that it was the non-disclosure that had induced the contract to be made on normal premium terms. Pill LJ, however, agreed with the trial judge that it was wrong to speculate on what might have happened had the conviction been disclosed.

There was no obligation on Dr Singh to disclose something that diminished the risk, however much it was in his best interests to do so (Section 18(3)(a)) Marine Insurance Act 1906). Yet the particular circumstances of this case meant that the fact of the settlement of the 1994 accident claim, if disclosed, would have rendered the non-disclosure of the conviction of no significance. Why should the insured be penalised because the 1994 accident was treated as a fault accident when it was not?

As a general principle, a party seeking to terminate a contract has to make good his ground for doing so. If the termination was justified at that time, it takes effect from that date. But if, at trial, the terminating party can no longer justify the termination, the court can find that the contract was not validly terminated but repudiated and award damages as appropriate. If this was the case with contracts generally, Rix LJ could not see why it should not apply to insurance contracts as well. Particularly where, as in this case, all the true facts were in existence at the time of the contract.

He distinguished the situation from that in Brotherton v Aseguradora Colseguros SA [2003] EWCA Civ 705, where the reinsurers sought to avoid for non-disclosure of allegations of impropriety against the president of a Colombian Bank and the insurers claimed the right to prove at trial that the allegations were untrue. In that case, the Court of Appeal rejected any suggestion that the right to avoid could be affected by hindsight. But in Brotherton, the insurers still had to prove the allegations were unfounded. In this case, the no fault status of the 1994 accident could have been proved without difficulty at renewal.

Clarke LJ was inclined to take the same approach, but with some reservations. Lord Justice Pill agreed that there was no duty on Dr Singh to disclose a factor diminishing the risk, but he was not persuaded that an insured who fails to disclose such a factor can subsequently defeat an avoidance by revealing it. Basing the right to avoid on the true state of affairs, rather than on the known facts, devalued the principle that the terms of the contract are those agreed by the parties. In his view, undisclosed matters could not be relied on to demonstrate that the effect of the contract was not what it appeared to be.

But did Provident breach its duty by failing to ask for further information on the status of the 1994 accident before it sought to avoid? The details given in the proposal form might have suggested it was likely to be a no fault accident. Rix LJ, however, did not think this was enough to put Provident on notice of the fact and there is no general principle that an insurer seeking to avoid must first give the insured an opportunity to address the grounds of avoidance. Lord Justice Clarke agreed. There had been no breach of Provident's duty of good faith.

Pill LJ, however, reached a different conclusion. Provident had quite a lot of information about the 1994 accident at the time of renewal. It knew that the insured vehicle had been struck in the rear and there was nothing to suggest that the usual principle that the other driver was at fault would not apply. Under its system, the fault classification was routinely used until confirmation that the claim was settled had been received. While this was not enough to establish knowledge or "blind eye" knowledge, it gave rise to more than a speculative suspicion that the earlier accident might affect the premium. In his view, Provident's failure to make any enquiry of the insured before taking the drastic step of avoiding the policy was a breach of its duty of good faith.

The Court of Appeal agreed with the judge that there was insufficient evidence to establish that the policy had been reinstated, but it went on to find that Provident's actions were so equivocal as to render the avoidance ineffective.

An avoidance is a unilateral act that has to be clearly communicated to the insured to be effective. If one only looked at the letter of 2 August 1996, the position seemed to be clear-cut. But the letter had to be put in the context of the continuing relationship between Provident and Dr Singh. The avoidance was vigorously disputed in correspondence, yet Provident continued to take money for premium and issued a certificate for the replacement car, all of which suggested the policy was continuing. From the insured's point of view, there had been no clear and unequivocal communication. Even if Provident had been entitled to avoid, there had been no effective avoidance.

The Court of Appeal was able to side-step these difficult issues because, although the arbitration award bound Mrs Kaur as regards her claim against Provident, it did not bind Drake. Consequently, the court could decide whether or not there was double insurance irrespective of the arbitration award. It had found that Provident was not entitled to avoid and, therefore, there was double insurance.

Provident, however, argued that, even if the award could be ignored, a rateable proportion clause in the Drake policy meant that Drake was only liable for a proportion of the claim. This provided "If at any time any claim arises under this Policy there is any other existing insurance covering the same loss, damage or liability the Company shall not be liable to pay or contribute more than its rateable proportion of such claim". Provident's case was that, insofar as Drake indemnified Mrs Kaur for more than 50% of the claim, it did so as a volunteer.

At first instance the judge agreed, finding that he was bound by the Court of Appeal's decision in Legal & General Assurance Society Limited v Drake Insurance Co Limited [1992] QB 887, in which Drake had put forward the same volunteer argument against Legal & General as Provident was now using against Drake.

In that case, the driver had been insured by Drake and Legal & General. Legal & General settled the third party claim and sought a 50% contribution from Drake. But Drake said there was no double insurance as it had repudiated liability under its policy on the grounds of late notification. The Court of Appeal, however, held that there was double insurance, since, at the date of the accident, both insurers had been potentially liable.

Drake then argued that, because of a rateable proportion clause in the Legal & General policy, anything that Legal & General had paid over their share they had paid as a volunteer and so could not recover. Legal & General argued that it was compelled to pay the whole of the claim under the Road Traffic Acts, which provide that a third party who has obtained judgment against the insurer can enforce the judgment against the insurer, notwithstanding any rateable proportion clause. But under the same Acts, the paying insurer is entitled to recover anything over its share from the insured. The Court of Appeal held that, because Legal & General had chosen not to recover from the insured, it had paid as a volunteer.

None of the three appeal judges in this case found it a very attractive proposition that, because of a theoretical right to recover from the insured under the Road Traffic Acts, an insurer providing a full indemnity in these circumstances would be found to have done so as a volunteer.

As for the rateable proportion clause, Lord Justice Rix thought Drake v Legal & General went too far. A rateable proportion clause, of itself, does not exclude a right to contribution (Eagle Star Insurance Co v Provincial Insurance Ltd [1994] 1 AC 130). It is a matter of contract between insured and insurer. Each insurer has not ceased to insure for the same loss just because it cannot be forced by contract to pay more than its rateable proportion or because the clause effectively requires the insured to involve both his insurers to obtain a full indemnity.

In any event, Drake had not paid as a volunteer because the arbitration award upheld Provident's right to avoid its own policy and was binding as between Mrs Kaur and Provident. Consequently, there was no other policy Mrs Kaur could call upon. If Drake had not decided to back Mrs Kaur, or had tried to restrict the amount payable, Mrs Kaur would have succeeded on a 100% basis against Drake in court.

But the crucial point for all three appeal judges, and the one that distinguished this case from Drake v Legal & General, was that Drake had paid under protest and without prejudice. Once Drake had decided that it would be contrary to business ethics and the good name of the industry to refuse Mrs Kaur cover, it made its views clear to Provident at all times. Consequently, Drake had not paid as a volunteer and could recover 50% of the amount it had paid on the claim from Provident.

Comment
This case is particularly interesting because, even though two of the three judges found that Provident had not breached its duty of utmost good faith, comments made by all three demonstrate an increasing change of emphasis from the duty of utmost good faith the insured owes to the insurer to the duty the insurer owes the insured, as well as a new willingness to take into account the nature of the cover in deciding the extent of that duty. In the words of Lord Justice Rix:

"More recently there appears to have been a new realisation that in certain respects English insurance law has developed too stringently or at any rate insufficiently flexibly; and leading cases of the last few years have shown the courts to be willing to find means to introduce safeguards and flexibilities which had not been appreciated before…The existence of widespread insurance contracts of a consumer nature presents new problems. It may be necessary to give wider effect to the doctrine of good faith and recognise that its impact may demand that ultimately regard must be had to a concept of proportionality implicit in fair dealings