01 October 2021

We’ve previously commented on Wayne Gardner Young v Royal and Sun Alliance Insurance plc [2020] CSIH 25, a case where Insurers successfully defended the avoidance of a property policy due to the policyholder’s undisclosed involvement with a series of insolvent companies. A recent judgment comes to the opposite conclusion on broadly similar facts. Whilst the distinction between the two is clear, their juxtaposition provides a helpful reminder of the fine line between an all or nothing outcome.

Ristorante Limited t/z/ Bar Massimo v Zurich Insurance plc [2021] EWHC 2538 (Ch)

The Claimant operated a restaurant in Bearsden, Glasgow. When obtaining insurance for this, the Defendant Insurers’ automated system assumed that “No owner, director, business partner or family member involved with the business… has ever been the subject of a winding-up order or company/individual voluntary arrangements with creditors, or been placed into administration, administrative receivership or liquidation”. The Claimant expressly stated this was correct; however, the three directors of the Claimant had all been involved in what was termed ‘Other Insolvency Events’ including, for example, directorships of compulsorily liquidated companies.

After a fire occurred at the restaurant, Insurers sought to avoid the policy on the basis that if the ‘Other Insolvency Events’ has been declared they would not have written the policy. The Claimant did not contest materiality or inducement and two preliminary issues were considered by the Court.

The first was, effectively, whether the assumption/question had been answered correctly. Put another way, did being a director of another corporate body that had been liquidated equate to being personally/individually the ‘subject of’ such a step? The court affirmed that answering such a question was a matter of standard, objective, interpretation of a commercial contract. It held that the assumption/question did not extend to the directors’ interest in other corporate bodies and that the Claimant had answered the question correctly. This followed a similar interpretation of the Court in R&R Developments v AXA Insurance UK plc [2010] 2 All ER (Comm) 527.

Although the Claimant had answered the assumption/question correctly, it was still under a duty of fair presentation and was obliged to bring any material facts (such as the ‘Other Insolvency Events’) to Insurers’ attention. The second question for the Court was whether, by asking specific questions about personal/individual insolvency, Insurers had waived their right to be told of connected issues outwith the scope of the question. This is a relatively common mechanism based on the rationale that Insurers will not be interested in all issues and that if they direct the Policyholder towards certain questions, the Policyholder should be entitled to rely on that. Following earlier authorities (including R&R Developments), the Court held that Insurers had, by asking only about personal/individual association with Insolvency, waived their entitlement to be told of the ‘Other Insolvency Events’.

The nature of such disputes creates stark outcomes. In this case, the Court held the Policyholder was entitled to an indemnity; however, both issues discussed above are fact sensitive and could be determined in the alternate, effectively leaving the Policyholder uninsured. For example, had the question/assumption included a phrase along the lines of ‘or any company in which a director has had an interest’ it would have caught the ‘Other Insolvency Events’ and the Policyholder would likely have made a misrepresentation (as per the Court of Appeal in Doheny v New India Assurance Co [2005] 1 All ER (Comm) 382). Similarly, if the question/assumption was formulated by the Insured (or its broker), Insurers would not have controlled or directed the Policyholder and could not be seen to have waived the point (as was the case in Gardner Young).

Whilst the pandemic has not produced the wave of insolvencies feared, its full effects remain to be seen and it is foreseeable that association with other insolvency events will be an increasingly common experience. The current authorities on the point, including this case, suggest this will remain an area where Insurers and Policyholders may have widely different expectations as to the extent such experiences will be relevant. All of this emphasises the need for care, attention and precise technical expertise (or advice) from both parties when entering into even relatively routine contracts of Insurance.

Matthew Raftery, Senior Associate: mra@bto.co.uk / 0141 221 8012