Background
In July 1996, a car driven by Mrs Kaur was involved in an accident with a motorcycle. The motorcycle rider 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 owned 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 the Provident policy, but Provident avoided the policy for non-disclosure. Mrs Kaur made a claim under her own policy with Drake, who eventually paid up. Drake then claimed against Provident for a contribution on the grounds 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.

When Dr Singh first took out the Provident cover in 1995, he named Mrs Kaur as an additional driver and disclosed the fact that she had been involved in an accident in 1994. The proposal form, completed electronically by the broker, indicated that Mrs Kaur had been at fault in that accident. Dr Singh signed a hard copy of the form, which was then submitted to the insurer.

In December 1995, Dr Singh committed a speeding offence, for which he received a fixed penalty and an endorsement on his licence. But he failed to disclose this when he renewed his policy with Provident in February 1996. Provident only got to know about it when he sent in a copy of his driving licence after the accident in July 1996. It then avoided the contract for non-disclosure.

Because of the way Provident underwrote motoring risks, neither incident, on its own, would have affected the premium charged. The insurer operated a streamlined system, whereby demerit points were awarded for accident and motoring offences. The "normal" premium would only be increased if the total number of points exceeded 16. In this case, Mrs Kaur’s 1994 accident scored 15 points and so Dr Singh was charged a normal premium. Had his driving offence been disclosed, however, it would have added a further 10 points, increasing the premium by 25%.

Only accidents categorised as "fault" or "partial fault" attracted points for this purpose. A "no fault" accident was ignored. Unfortunately, Mrs Kaur’s 1994 accident had been wrongly described on the proposal form as a fault accident. Had Provident been correctly informed, the accident would not have added any points to the total. If Dr Singh had then disclosed his speeding offence, he would only have been allocated 10 points and charged the normal premium.

If Drake was to succeed in its claim for a contribution, it had to show that Provident had a liability under its policy to meet the claim - in other words, that it had not been entitled to avoid.

A speeding conviction is a material fact but, for an insurer to be entitled to avoid, it must also show that the non-disclosure induced it to accept a risk it would otherwise have declined, or which it would have accepted only on less favourable terms (Pan Atlantic Insurance Co Limited -v- Pinetop Insurance Co Limited [1995] 1 AC 501).

Drake argued that the non-disclosure had not induced a contract on more favourable terms. Had the information about the 1994 accident been correct, Provident would have charged Dr Singh the normal premium, whether or not it had known of his speeding offence. Even if Provident had been entitled to avoid, it would be a breach of its duty of utmost good faith to continue with the avoidance, now that the information had been shown to be wrong.

This last point relied on the judgment of Mr Justice Colman in Strive Shipping Corporation -v- Hellenic Mutual War Risk Association (The Grecia Express) [2002] 2 Lloyd’s Rep 88. That case concerned the insured's duty to disclose the existence of suspicious circumstances relevant to moral hazard. The judge held that, although the insured is under a duty to disclose allegations of dishonesty or criminal conduct (since these are material), if he succeeds at trial in establishing that the allegations were unfounded, it would be a breach of the insurer's duty of utmost good faith to persist in avoiding the contract.

This decision has caused some concern in the insurance world, since it appears to introduce an unwelcome element of hindsight into the question whether or not an insurer is entitled to avoid a policy.

Judgment
Despite Drake’s arguments, Mr Justice Moore-Bick found that Provident had been entitled to avoid the contract. An insurer can only assess a risk on the basis of the information provided, and Provident had been informed that there had been a fault accident in 1994. Dr Singh’s subsequent failure to disclose his speeding offence, therefore, had caused Provident to renew the policy on more favourable terms than it would otherwise have done because it charged him a normal rather than an increased premium.

As for the Strive Shipping argument, the judge was not persuaded that the court had power to declare that a right to avoid has been lost retrospectively. Avoidance takes immediate effect. If the right to avoid has arisen, and if it has been exercised in good faith on sufficient grounds, that avoidance cannot subsequently be invalidated by receipt of further information so that the insurer has to reinstate the contract.

Drake also argued that Provident had waived its right to avoid because it had accepted further premiums by direct debit after it had informed Dr Singh of its avoidance of the policy in August 1996. All premiums paid after July 1996 were eventually refunded in December 1997.

The judge, however, did not think this was sufficient to constitute a waiver. Once an insurer has avoided the policy, the only way in which it can lose its right to treat the policy as rescinded is by agreeing to reinstate it in such a way as would prevent it from relying on its earlier decision. But throughout the correspondence, Provident had never given any indication that it was entering into any agreement to reinstate the original cover or handle the accident claim. The avoidance, therefore, held, and Drake’s claim for a contribution failed.