Brotherton v. Colseguros
Note: this judgment has been affirmed by the Court of Appeal, in a decision dated 22 May 2003. To access the Court of Appeal judgment, click here
This robust judgment from Mr Justice Moore-Bick confirms, once again, that materiality is to be assessed at the time of the placing of the risk and not, as insurers here tried to argue, at a later date and according to whether or not the allegations (alleged to have been material) can be shown to have been unfounded.
DMC Category Rating: Confirmed
This case note is based on an Article in the April 2003 Edition of the ‘Bulletin’, published by the Marine and Insurance teams at the international firm of lawyers, DLA. DLA is an International Contributor to this website.
Reinsurers sought to avoid the reinsurance contract, claiming that the insurers had been aware of these matters when the cover was placed but had failed to disclose them. The insurers argued that the allegations (which they claimed were part of a political campaign) were unfounded and, therefore, were not material. Nearly all the investigations had been concluded in the bank president's favour, although some were still pending.
This particular hearing concerned whether the insurers were entitled to adduce evidence at trial to show the allegations were untrue (so that they could argue they were not material). The real issue, however, was whether allegations that were material at the time of inception can become immaterial if they are later shown to be unfounded.
Allegations of criminal conduct are likely to be material to the prudent insurer and so must be disclosed, even if the insured knows he is innocent and the allegation is later proved to be untrue (March Cabaret Club & Casino Limited v The London Assurance  1 Lloyd's Rep 169, The Dora  1 Lloyd's Rep 69). Rumours or allegations in circulation at the time of placement may be material. If so, they do not cease to be material on subsequently being shown to have been false (Strive Shipping Corporation -v- Hellenic Mutual War Risks Association (Grecia Express)  2 Lloyd's Rep 88). In this regard, the judge could see no reason to draw any distinction between reports relating to the likelihood of loss and allegations that related only to moral hazard.
Consequently, if the allegations made against the president of the bank were found to be material at the time of placement, the fact that they later proved to be untrue did not render them immaterial. No purpose could, therefore, be served by the insurers calling evidence to establish that the allegations made against the bank's president were unfounded.
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