DMC Category Rating: Developed

This case note is based on an Article in the August 2004 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.

Background
Perfumeria Ultra imported luxury goods from Miami to the tourist resort of Cancun in Mexico. It obtained cargo cover from a Mexican insurer, Grupo Nacional Provincial ("GNP"), which, in turn, obtained facultative reinsurance from a group of Lloyd's syndicates led by WISE.

The slip prepared by the Mexican brokers for presentation to GNP was in Spanish and included a condition that specifically referred to Rolex watches, providing that each watch would come in its own case and each package would hold approximately 48 watches.

The slip prepared by the same brokers for presentation to London reinsurers (via London placing brokers) was in English and had clearly been translated by someone not entirely familiar with the English language. In the Spanish version of the slip, the word "relojes" was used to mean either watches or clocks. In the English version, "relojes" had been translated throughout as clocks, and the packaging condition concerning Rolex watches was omitted.

The translated slip described the interest as "all real and personal property of any kind and description, including property but not limited to property of other in care, custody or control of the insured or for which the insured has assumed responsibility. All the shipments done by the insured consistent in but not limited to cosmetics, perfumery, gifts, jewellery, lladró [a kind of porcelain] accessories and in general on any type of supplies related to the Insured's activity and which it has an insurable interest".

The slip also set out the maximum and minimum value of various items - including "clocks: less expensive piece: US$40. Most expensive piece US$18,000 and average costs US$1,500". Three trips were made each month. The maximum value of a transport in high season was stated to be US$1.5 million and the average, US$500,000. There was also reference to a 60-day cancellation clause.

The reinsurance contract was made on about 28 December 2000 on the basis of the translated slip. It described the "voyage" as "principally but not limited to sendings to/from/within Americas, Central/South and United States of America", and the "Interest" as "all goods and/or merchandise and/or cargo of every description…". But it included a long list of excluded items, many of them put there at the underwriter's request. This included livestock, bloodstock, jeweller's/furrier's block [namely, items usually insured under a jeweller’s or furrier’s block policy], cigarettes, fresh flowers, fish catch, mobile phones, computers and computer parts and stock and/or goods at retail premises.

On the night of 3/4 April 2001, a quantity of goods was stolen from a container parked outside the insured's warehouse premises. The loss suffered was in the region of US$800,000, of which some US$700,000 related to Rolex watches.

On hearing of the theft, reinsurers' claims handler wrote a note on the file querying whether watches were within the scope of the policy, although a surveyor was appointed without prejudice to reinsurers' position. On 20 April 2001, the underwriter met GNP's London placing broker to discuss the claim. According to the broker, at that meeting the underwriter gave an oral notice of cancellation under the reinsurance contract. On the same day, the broker reported to his principals by email: "Owing to this very recent loss of US$800,000 approx we have received 60 days notice effective today to cancel this cover".

A further meeting took place at some point between 20 April and 21 May, at which the placing broker showed the underwriter a copy of the email and the underwriter photocopied it for his file. On 21 May, the broker emailed his principals again in response to a query they had raised about improved security: "Unfortunately with the claim of this size outstanding and this underwriter only being on the account for 5 months he will not withdraw his notice under any circumstances unless of course there is a full recovery".

On 28 June 2001, reinsurers wrote to the placing broker alleging that there had been a non-disclosure of a material fact, namely that the underlying insured was transporting high-value watches. In August 2001, they issued these proceedings for a declaration of non-liability.

GNP denied any non-disclosure. Their submissions were as follows. A reasonable underwriter ought to have known that watches, including high-value branded watches, would be a typical part of this type of trade. Even if there had been non-disclosure, reinsurers' right to rely on it had been waived. The fact that the slip was obviously translated by a non-English speaker, the improbably high value of the "clocks" being imported, and the unlikelihood of there being a significant market for clocks in a high-class tourist resort like Cancun were enough to put the underwriter on enquiry. The possibility of a mistranslation was obvious. Because he did not ask any further questions, the underwriter had waived reinsurers' right to rely on the alleged non-disclosure and avoid the contract. In any event, reinsurers had subsequently affirmed the existence of the contract by issuing the 60-day notice of cancellation.

The underwriter, however, categorically denied that he had ever given any such notice. He never had written, and never would write, this type of cover for watches. The placing broker's evidence was that notice was given, although he acknowledged during his oral evidence that it was possible he might have been mistaken.

At first instance, the judge found that there had been a material non-disclosure of the fact that the shipments would include Rolex watches. In the normal case, an underwriter on the London market dealing with a London broker should be able to accept at face value a description of the goods to be insured. It was not for the underwriter to guess that the subject of the insurance was something other than what it was stated to be and there was not enough here to put the underwriter on enquiry. The fact that Rolex watches were being transported was material to the risk because watches, particularly well-known brands, are an attractive target for thieves. The judge was satisfied that the non-disclosure had induced the underwriter to enter the contract, since he would not have accepted the risk at all if he had known watches were involved. On the affirmation point, the judge accepted the underwriter's evidence that he had not given notice of cancellation. Consequently, reinsurers could avoid.

There was no appeal on the question of materiality, but GNP challenged the judge's findings on issues of waiver, affirmation and inducement.

Implied waiver
Section 18 of the Marine Insurance Act 1906 provides that the insured must disclose to the insurer every material circumstance known to the insured. S.18(3) sets out examples where disclosure is not necessary. These include circumstances known, or presumed to be known, to the insurer and any circumstance "as to which information is waived by the insurer".

Clearly, there is an underlying tension between this doctrine of waiver and the insured's positive duty to disclose all material facts. The insured's presentation to the insurer must be fair or he will have breached his duty of good faith. But to what extent can an assessment of the fairness of the presentation take into account any implied waiver by the insurer? If the presentation is not fair in the first place, how can waiver be implied without negating the insured's duty to make proper disclosure?

The parties in this action agreed that the law in this area was as summarised in MacGillivray on Insurance Law, 10th Edition (2003) reflecting the majority decision of the Court of Appeal in CTI v Oceanus Mutual Underwriting Association (Bermuda) Limited [1984] 1 Lloyd's Rep 476:

"The assured must perform his duty of disclosure properly by making a fair presentation of the risk proposed for insurance. If the insurers thereby receive information from the assured or his agent which, taken into conjunction with other facts known to them or which they are presumed to know, would naturally prompt a reasonably careful insurer to make further inquiries, then, if they omit to make the appropriate check or inquiry, assuming it can be made simply, they will be held to have waived disclosure of the material fact which that inquiry would necessarily have revealed. Waiver is not established by showing merely that the insurers were aware of the possibility of the existence of other material facts; they must be put fairly on inquiry about them".

Judgment on Issue of Implied Waiver
In this case, Longmore LJ and Gibson LJ took the view that, since it was no longer in dispute that the carriage of high-value, brand name watches was a material fact and that fact was not disclosed, this was a potentially unfair presentation of the risk. But would the facts that were disclosed naturally prompt a reasonably careful insurer to ask if watches were included in the shipments?

Both concluded they would not. An insurer or reinsurer is entitled to assume that the presentation of the risk to him is a fair presentation and to take at face value what is said on the slip. The cargo cover was in very wide terms ("property of any kind"). Further details were given in the information section but no mention was made of watches. That information was more likely to put a (re)insurer off inquiry rather than on inquiry. In CTI, Parker LJ commented that "If the assured seeks to rely on waiver he must in my view show a clear case". This was certainly not a clear case and GNP's waiver argument failed.

Lord Justice Rix, dissenting, stressed the mutual nature of the duty of utmost good faith. The effect of section 18(3)(c) of the Marine Insurance Act was that the fairness or otherwise of the presentation could not be judged in isolation. The underwriter's reaction and the issue of possible waiver had to be taken into account, although an obviously unfair presentation would leave the insured's case for waiver in difficulty. In his view, the question was not whether an "unfair" presentation had been waived but whether, taking both sides of the matter into consideration, the presentation was unfair or, alternatively, it would be unfair of the insurer to seek to avoid on a ground on which he was put on inquiry and should have satisfied himself.

In this case, he concluded there had been a waiver. GNP made a detailed presentation, which, but for an error in translation of a single word, gave rise to no issue of non-disclosure. A reasonably careful insurer would have been fairly put on inquiry, given what he knew from the presentation and from his general knowledge.

Affirmation
If reinsurers had not waived disclosure about the watches, had they nevertheless affirmed the contract? Even when there has been a breach of the duty of utmost good faith, insurers can affirm the continuing existence of the contract, provided they make an informed, unequivocal choice to do so and communicate that choice to the insured. Giving a notice of cancellation pursuant to a cancellation clause can amount to affirmation, as long as it is done at a time when the insurers know of their right to avoid for non-disclosure (Mint Security Limited v Blair [1982] 1 Lloyd's Rep 188, Iron Trades Mutual Insurance Co Limited v Companhia de Seguros Imperio [1991] 1 Re LR 213).

Whether or not a notice was given in this case was hotly disputed. At first instance, the judge accepted the underwriter's evidence that he never gave such notice to the placing broker and the broker in cross-examination accepted he might have misunderstood what the underwriter had said. The judge concluded there had been no affirmation.

Judgment on Issue of Affirmation
Rix LJ and Gibson LJ, however, disagreed. The judge had failed to take into account the placing broker's email of 20 April or the fact that a copy of it ended up on the underwriter's file.

The circumstances of the case were not straightforward. As soon as he was aware of the claim, the underwriter had in mind that there had been some non-disclosure. He was also adamant that he had not given any notice to cancel. But there must have been some discussion about cancellation to have prompted the broker's email. At their next meeting, the broker showed him the email and he took a copy of it for his file, indicating that he accepted that had given the notice. Certainly, he said nothing to correct the broker's understanding that a notice had been given and no satisfactory explanation was given for his silence.

In these circumstances, Rix LJ and Gibson LJ concluded that, on the balance of probabilities, a notice of cancellation had been given. Although such notice is normally given in writing, in this case it was evidenced in writing by the email and acknowledged by the underwriter because he put a copy of it on his file. Consequently, reinsurers had affirmed the contract and were not entitled to avoid.

Lord Justice Longmore, however, dissented. The trial judge had had the advantage of seeing the witnesses in the witness box and deciding what weight to give their evidence. When the underwriter and the broker met on the 20 April, it was too soon after the loss for reinsurers to have adopted any definitive position or to make an unequivocal and informed choice to avoid or to affirm the contract. He felt there was too much uncertainty in the evidence to enable a court to be satisfied that the contract had been affirmed.

Judgment of Issue of Inducement
In view of the majority decision on affirmation, the question whether the material non-disclosure had induced the underwriter to enter into the contract was no longer relevant . Nevertheless, all three Appeal Court judges were satisfied that there had been the necessary inducement. The underwriter's evidence was that, if he had been informed that watches were going to be shipped, he would not have agreed to take on the risk. The judge had accepted this, having seen the witness give evidence, and there was no reason to overturn his finding of fact.