ABN Amro Bank v RSA and Others (Court of Appeal, 2021)

One of the less attractive features of insurance from the policyholder’s point of view is that, when it comes to making a claim, insurers can raise the defence of misrepresentation of the risk or breach of a ‘warranty’.

However, it is possible, when buying insurance, to gain greater protection against claims being declined, by inserting a so-called non-avoidance clause (‘NAC’) into the terms and conditions of cover.  When the insurance market is soft (i.e. hungry for business), this may not be expensive to obtain.

Duties on the purchaser of insurance –  To explain, the law used to be that an insurance was a contract of utmost good faith, which insurers could avoid (i.e. rescind the contract) on the grounds of non-disclosure or misrepresentation of any matter material to the underwriter’s evaluation of the risk.  Meanwhile, a breach of a warranty either suspended or actually terminated cover.

Consumer insurance – In recent years, certain protections have been introduced by statute.  Thus, individuals who buy insurance for purposes mainly unrelated to their business now have the benefit of the Consumer Insurance (Disclosure and Representations) Act 2012.  Put very broadly, in the area of providing information to the insurer this Act modifies the law such that the consumer’s duty is to take reasonable care not to make a misrepresentation (for example, when completing a proposal form) before the contract is entered into or varied.

Non-consumer insurance – Other types of insured, i.e. those taking out commercial non-consumer policies, have the benefit of the Insurance Act 2015 (which covers consumer insurance as well).  For both types of insureds, the  characterisation of utmost good faith has been removed.  However, and again put very broadly, here the pre-contractual duty to provide information is re-cast as a duty of fair presentation, requiring the insured to disclose every material circumstance which the insured knows or ought to know; failing that, the insurer must be provided with sufficient information to put a prudent insurer on notice that it needs to make further enquiry for the purpose of revealing those material circumstances. 

Although the legislation is intended to ensure a better balance of interests between policyholders and insurers, the provisions in the 2015 Act specifying what an insured is taken to know, or ought to know in the sense of what should have been revealed by a reasonable search of information available to the insured, could provide insurers with a basis for declining a claim.  It may not be easy for an insured to be confident that a reasonable search of available information has been made, as such a search could involve having to seek information from employees or third parties and an evaluation of what circumstances are material in the context of the proposed insurance.

Under both statutory regimes, new remedies are available to the insurer in the event of the insured’s breach of duty, such as a lower level of indemnity or amended terms of cover.

Non-avoidance clauses (‘NAC’s) – Given these potential difficulties, various forms of clause have been developed for policyholders to insert into the insurance, to the effect that insurers will not seek to avoid, or seek damages, for non-disclosure or misrepresentation or to rely on breach of warranty, this being subject to a proviso permitting insurers to use their remedies in the case of deliberate or fraudulent misrepresentation or non-disclosure. 

Such clauses are effective in accordance with their terms.  However, they are in the nature of exclusion clauses.  Accordingly they will be construed strictly against those they protect. 

In particular, in order to be effective under judicial scrutiny, the drafting of such clauses needs to match the statutory regime now operating. For example, it may be prudent to provide specifically in a NAC that insurers will not decline cover on the grounds of (a non-fraudulent) failure to undertake a reasonable search of available information.  Also, to provide that insurers’ waiver includes all of the various alternative remedies now available to them and not just avoidance.

Cases on non-avoidance clauses

The caselaw is building up to clarify the meaning and effect of NACs.  For example,

• A NAC which at best contained the insurer’s general agreement not to raise ‘defences’ (but not referring specifically to breach of warranty) was insufficient, given the terms of the NAC as a whole, to prevent insurers from relying on breach of a warranty (HIH v New Hampshire (2001, Ct of Appeal).

• The proviso to the NAC, whereby the insurer was not bound by the NAC in the event of the insured’s  own deliberate or fraudulent non-disclosure could, in the context of the policy as a whole, only be relied upon by the insurer in the case of a deliberate decision not to disclose a matter which the insured knew should be disclosed: the term ‘deliberate’ did not permit the insurer to rely on the proviso in the case of a merely honest mistake by the insured (Mutual Energy v Starr (2016, TCC).

• A broker informed two following underwriters that the renewal of an insurance was ‘as expiry’.  In fact, because these underwriters had not been shown or agreed an endorsement adding certain additional clauses during the previous year of the cover, the renewal was not as expiring insofar as these two underwriters were concerned.  When a claim was made under the additional clauses, the two underwriters argued that the insured was estopped from relying on the clauses because the broker had acquiesced in the underwriters’ understanding that the cover was as expiring.  However, the court held that the brokers had simply made a misrepresentation as to the terms of the renewal.  The two underwriters could not rely on this as a defence to a claim because the NAC in the policy was not confined to the remedy of avoidance but also  prevented them from seeking to ‘reject a claim’ for loss on the grounds of misrepresentation, which words covered an argument based on estoppel by representation (ABN Amro v RSA and Others (2021 Ct of Appeal).

Lovetts’ comment

This note is intended to provide guidance of a practical nature but should not be taken as containing legal advice or any recommendation as to any course of action. 

However, Wendy Miles, Chris Earl and William Sturge will be pleased to provide such advice should you require assistance in drafting any specific policy wording.