Doheny v. New India Assurance

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DMC/INS/05/01
Doheny and others v New India Assurance Co Ltd and Others
English Court of Appeal: Potter and Longmore LJJ., and Sir Christopher Staughton: [2004] EWCA Civ 1705: 15 December 2004
Digby Jess, instructed by Harrisons, Manchester, for the Claimants
David Turner, instructed by Davies Lavery, for New India
INSURANCE: PROPOSAL FORM: DECLARATION: "BANKRUPTCY": INTERPRETATION: "CONTRA PROFERENTEM RULE": WARRANTY: DUTY OF DISCLOSURE: WAIVER OF DISCLOSURE : MARINE INSURANCE ACT 1906, S.18(3)(c)
Summary
The Court of Appeal found that the word "bankruptcy" in a proposal form included the insolvency of companies in which the proposers had an interest. The insured had, therefore, breached a warranty and no question of waiver of the duty of disclosure arose. All three appeal court judges, however, confirmed the principle that it is possible for an insurer to waive its right to material information by the questions it asks in a proposal form.

DMC Category Rating: Confirmed

This case note is based on an Article in the January 2005 Edition of the ‘Bulletin’, published by the Marine and Insurance teams at the international firm of lawyers, DLA Piper Rudnick Gray Cary, which is an International Contributor to this website.

Background
Mr and Mrs Doheny were the owners of commercial premises in Lancashire and directors of the third claimant, Nupak Ltd, a meat business carried on at the premises. The property and the business were insured by New India Assurance Co Ltd. During the policy period there was a fire on the premises. Insurers refused to pay, alleging that the Dohenys were in breach of a warranty contained in a declaration to the proposal form and in breach of their duty of utmost good faith in failing to disclose material facts.

The Declaration
In December 1999, Mrs Doheny signed two proposal forms, one covering her and her husband against damage to the property and the other relating to the business of Nupak Ltd. In each, there was a section headed "DECLARATION", which required the proposers to make a number of statements to the best of their knowledge and belief, including, at point 5, that:

"5. No director/partner in the business, or any Company in which any director/partner have had an interest, has been declared bankrupt, been the subject of bankruptcy proceedings or made any arrangement with creditors".

The Declaration section ended with a paragraph stating;

"I/we agree that the information provided in connection with this Proposal…is true and I/we have not withheld any material facts. I/we understand that non-disclosure or misrepresentation of a material fact will entitle Insurers to avoid any insurance granted. (A material fact is one likely to influence acceptance or assessment of this Proposal by Insurers).

I/we…agree that should a contract of insurance be concluded this Proposal and statements within shall form the basis of such contract".

This last statement (that the proposal would form the basis of the contract of insurance) meant that the declaration became a warranty under the policy. Insurers alleged this warranty had been breached because, contrary to point 5 of the declaration, Mrs Doheny had been a director and shareholder of a company that went into liquidation in 1993 and both Mr and Mrs Doheny had been directors and shareholders of a company that was wound up by the Inland Revenue in 1991 and of a third company that had ceased trading in 1983/4 after auditors reported severe liquidity problems.

The Dispute at First Instance
The Dohenys argued that "bankruptcy" in the declaration only referred to the insolvency of individuals, not companies. If there was any ambiguity in the meaning of point 5, the contra proferentem rule applied, which meant that it had to be construed against insurers since the proposal form was the insurers' document. In addition, by requiring five specific statements to be made, insurers had waived their right to disclosures about the insolvency of other companies with which the Dohenys had a connection. Insurers denied any waiver and argued that point 5 of the declaration required the Dohenys to confirm that they (the directors of Nupak) had not been declared bankrupt and that no companies in which they had an interest had been wound up or otherwise become insolvent.

At first instance, the judge agreed with the Dohenys on the bankruptcy point, finding that reasonable people, having all the relevant background knowledge, would have  understood the declaration only to refer to personal bankruptcy. In other words, the Dohenys were being asked to disclose the personal bankruptcy of any director of Nupak Ltd (i.e.themselves) and the personal bankruptcy of any director in any business in which they had an interest. The judge, however, went on to find that insurers, by requiring the Dohenys to make specific declarations regarding personal insolvency, had not waived any right to disclosure of material facts in respect of insolvent companies. The obligation to disclose material facts and the consequences of failing to do so had been made abundantly clear in the last paragraph to the declaration. The insolvency of companies in which the Dohenys (as directors of the proposing business) had an interest was material and should have been disclosed. Mr and Mrs Doheny appealed on the issue of waiver, and insurers cross-appealed on the bankruptcy point.

Court of Appeal Judgment
Bankruptcy
The Court of Appeal unanimously agreed with insurers about the use of the word "bankruptcy". Although, technically speaking, only an individual can be declared bankrupt, in common parlance people do talk of companies becoming bankrupt. It was difficult to see why insurers would be interested in the personal bankruptcy of co-directors in other companies, whereas it was self-evident that they would be interested in the insolvency of companies with which the Dohenys were associated. The court's role is to give effect to the parties' intention and it was clear that what the parties intended was that any insolvency on the part of the directors of the proposing company or any company in which they had previously held an interest should be declared.

Lord Justice Longmore recognised that there was some force in the insureds' argument that the proposal form was insurers' document and so, if there was any ambiguity, it should be construed against them. Insurers should take care to express requirements in proposal forms with clarity and legal accuracy "but the function of the court is not so much to punish insurers guilty of unclear and inaccurate wording as to find out … what the parties intended to say."

Reasonable insureds would have concluded that insurers were interested in the solvency, not only of themselves, but also of any corporate vehicle used by them.

The decision meant there had been a breach of the declaration, which had been agreed to be the basis of the contract. This breach of warranty released insurers from any liability as at the date of the breach.

Questions and Waiver
The waiver point only arose if the Court of Appeal was wrong and the declaration referred only to the insolvency of individuals, not companies. The standard view, as expressed in MacGillivray's InsuranceLaw (10th ed. para 17-19), is that it is possible for an insurer to limit the duty of disclosure by the questions it asks in a proposal form. If the questions are on a particular subject and the answers to them are warranted, it may be inferred that the insurer has waived its right to related information. For instance, if the form asks for details of accidents within the last three years, the insurer is taken to have waived details of accidents beyond that time. The test is whether a reasonable man would be justified in thinking that the insurer had limited its right to receive material information. Whether or not there is such a waiver depends on the construction of the proposal form (Hair v The Prudential Assurance Co Ltd [1983] 2 Lloyd's Rep 667).

Insurers, however, submitted that the decision in Hair v Prudential Assurance should be overruled, or at least confined to consumer insurance. Section 18(3)(c) of the Marine Insurance Act 1906 provides that "in the absence of inquiry" certain circumstances need not be disclosed, including "any circumstance as to which information is waived by the insurer". But it has been held that an insured can only rely on waiver in a clear case (CTI v Oceanus [1984] 1Lloyd's Rep 476) and, as was found recently in WISE Underwriting Agency Ltd v Grupo Nacional Provincial [2004] EWCA Civ 962, an insurer's failure to ask a question did not waive its right to disclosure of other material facts unless it was put fairly on enquiry that those facts might exist. In light of these cases, insurers argued that there was no place for a separate doctrine of waiver based on an implication that, because an insurer asked certain questions, it was not concerned to have answers to other, related matters.

Lord Justice Longmore disagreed with this analysis. Section 18(3)(c) of the Act only applies "in the absence of inquiry". Yet a proposal form is, itself, a focused and detailed inquiry. There was no reason to qualify the principle set out in MacGillivray nor to confine the decision in Hair v Prudential to consumer insurance. It was not desirable to create a situation where a proposal form or declaration would be interpreted differently according to the status of the proposer. In this particular case, his very tentative view was that, if, on its true construction, the declaration only related to the insolvency of individuals, insurers had made it plain that they were not interested in insolvencies of companies in which the insured had an interest. On the same hypothetical basis, Sir Christopher Staughton agreed that there was some force in the insured's argument that there had been a waiver.

If the declaration had not included the words "or any Company in which any director/partner have had an interest", Lord Justice Potter, too, might have found that a reasonable person reading the form would have been justified in thinking that insurers had consented to the omission of information about the insolvency of companies in which the proposer had an interest. But, in his view, the wording that followed (which emphasized the need to disclose all material facts) focused the mind of the proposer on the obligation of disclosure in a way that precluded any suggestion of a general waiver of all matters not covered by the particular questions asked. If, for instance, in addition to having been a director of an insolvent company, the proposer had been criticised by the court during the winding up proceedings, or made the subject of a disqualification order, the insurer could not properly be regarded as having waived its right to this information.

These musings, however, had no effect on the outcome, since on the Court of Appeal's construction of the declaration, there had been a breach of warranty.

 

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