No Smoke Without Fire: Non-Disclosure, Materiality and Inducement in Cometsambre v Lloyd’s
This recent decision by the Commercial Court illustrates several key principles underpinning the duty of fair presentation under the Insurance Act 2015 (“the IA 2015”). In particular, it considers the concepts of knowledge, materiality, waiver, presumed knowledge and inducement, and demonstrates the courts' continued willingness to scrutinise the information disclosed to insurers.
Background
Cometsambre, a Belgian scrap metal trader, had maintained Charterers' Liability and Freight, Demurrage and Defence insurance since 2008 in respect of its activities as a voyage charterer transporting scrap (“the Policy”). The Policy was arranged through a coverholder, Antwerp Marine Insurance Claims Associates NV (“AMICA”), acting on behalf of Lloyd’s Insurance Company SA HIG 5321 (“Insurers”), and for more than a decade was renewed annually on substantially the same terms.
At inception, Cometsambre presented the risk as involving shipments of HMS 1 and HMS 1/2 steel scrap and shredded scrap, described as non-oily, non-radioactive and non-dangerous, with higher-risk materials excluded.
On 22 and 23 June 2022, fires occurred during the loading of scrap metal onto the vessel LOWLANDS MIMOSA at Ghent (“the Vessel”). The fires caused significant damage to the Vessel and gave rise to a substantial claim against Cometsambre. The Vessel's owners alleged, amongst other things, that Cometsambre had shipped dangerous cargo and had failed properly to describe and manage the cargo being loaded. Cometsambre consequently sought a declaration against Insurers in respect of both the charterparty claims and its associated legal expenses.
The Declinature
Following investigations, Insurers discovered that there had been a number of earlier fires involving Cometsambre's operations which had not been disclosed before the 2022 renewal (“the Previous Fires”).
Insurers contended that the Previous Fires were material circumstances which ought to have been disclosed pursuant to Cometsambre's duty of fair presentation under the IA 2015. They argued that, had they been disclosed, the Policy would not have been renewed and that they were accordingly entitled to avoid the Policy.
Cometsambre challenged that position. It contended, amongst other things, that the Previous Fires were not material, that Insurers were already on notice of the nature of the risk being insured, and that the Policy would have been renewed on the same terms even if the Previous Fires had been disclosed.
Issues Before the Court
The Court was required to determine:
- Whether for the purposes of its duty of fair presentation Cometsambre knew, or ought to have known, of one of the Previous Fires – a fire on 25 May 2020 at a quayside stockpile in Ghent (“the Quayside Fire”).
- Whether the Previous Fires were material and thus ought to have been disclosed.
- Whether Cometsambre had provided sufficient information to put Insurers on notice that further enquiries should be made.
- Whether Insurers were presumed to know that fires of this nature occur in scrap metal cargoes and therefore did not require disclosure.
- Whether Insurers had waived disclosure of any Previous Fires that had not resulted in claims.
- Whether the non-disclosure induced Insurers to renew the Policy in 2022 and, in particular, whether the risk would have been declined had the true position been disclosed.
Cometsambre's Knowledge of the Quayside Fire
Cometsambre argued that no member of its senior management had knowledge of the Quayside Fire. It pointed to the fact that the incident did not appear in its internal records and was identified only through documents later obtained from the Ghent fire department.
The Court rejected that argument. Mr Justice Butcher considered it inherently unlikely that a fire requiring attendance by the fire brigade at Cometsambre's premises would not have been reported to those responsible for its insurance arrangements. In any event, even if actual knowledge could not be established, the information would plainly have been revealed by a reasonable search, as required by section 4 of the IA 2015.
Materiality of the Previous Fires
Cometsambre argued that the Previous Fires were not material. It submitted that fires of this nature were a relatively common feature of the scrap metal trade and that none of the incidents had resulted in claims. Accordingly, they would not have influenced the judgment of a prudent insurer.
Insurers disagreed. They submitted that fires involving scrap cargoes and stockpiles were capable of giving rise to substantial liabilities and that the occurrence of multiple incidents over a relatively short period pointed to a material deterioration in the risk.
The Court accepted Insurers’ position. The incidents were material because they demonstrated a genuine risk of vessel fire and substantial liability exposure, whilst also suggesting a material change in the nature of the risk. The Judge attached particular significance to the fact that five fires had occurred within an 18-month period after many years without comparable incidents.
Were Insurers on notice to make further enquiries?
Cometsambre argued that, even if the Previous Fires had not been expressly disclosed to Insurers, it had provided sufficient information to put them on notice that further enquiries were required. It relied upon Insurers’ knowledge of the scrap metal trade, their awareness that Cometsambre shipped shredded scrap, and the fact that they had not sought updated proposal forms or information concerning incidents, fires, near misses or risk management procedures at renewal.
Insurers argued that this impermissibly reversed the burden imposed by the IA 2015. The duty of fair presentation rests primarily on the insured, and insurers are not obliged to make their own investigations unless the information provided indicates that further enquiries are necessary.
The Court accepted Insurers’ position. Mr Justice Butcher held that nothing disclosed to AMICA suggested that there had been a material increase in the incidence of fires or any other significant change in the nature of the risk. The information provided at renewal suggested that the business continued to operate broadly as it had when the risk was first presented.
Were Insurers presumed to know about the risk of fires in scrap metal cargoes?
Relying on section 3(5)(d) of the IA 2015, Cometsambre argued that Insurers were presumed to know, as specialist insurers, that fires occur with some frequency in scrap metal cargoes. It submitted that such incidents formed part of the ordinary background knowledge of any prudent underwriter operating in this market.
Insurers accepted that scrap metal cargoes carry an inherent fire risk, but argued that this was very different from their being presumed to know that Cometsambre itself had experienced a series of previous fires.
The Court agreed. Mr Justice Butcher held that, while an underwriter would appreciate that scrap metal cargoes are capable of self-heating or combustion, that did not mean that Insurers were presumed to know of the Previous Fires themselves. On the contrary, the information available to underwriters suggested that the risk, as originally presented, was relatively low.
Waiver of Disclosure
Cometsambre argued that Insurers had, through their conduct over many years, waived disclosure of fires that had not resulted in claims. In particular, it relied upon the fact that they had focused on claims history, had not required updated proposal forms and had not requested information about fires, incidents or near misses.
Insurers rejected that argument, maintaining that nothing in their conduct could reasonably be interpreted as dispensing with the insured's obligation to disclose material circumstances. They pointed out that enquiries had been made at inception to ensure that higher-risk cargoes were excluded, demonstrating a continuing interest in fire risk.
The Court agreed with Insurers. Mr Justice Butcher held that a reasonable observer would not have understood AMICA's conduct as indicating that they were uninterested in material incidents simply because they had not resulted in claims. Nor did the absence of renewal questionnaires amount to a waiver of disclosure. Considering the parties' dealings as a whole, the Court concluded that Insurers had not waived disclosure of the Previous Fires.
Inducement
Cometsambre argued that, even if the Previous Fires ought to have been disclosed, the non-disclosure did not induce Insurers to renew the Policy. It submitted that the incidents were relatively minor, had not generated claims, and would not have led to a refusal to continue cover. It also relied on evidence that AMICA had renewed insurance for another scrap metal operator notwithstanding previous fire incidents.
Insurers relied principally on the evidence of Mr Hoek, the AMICA underwriter responsible for the 2022 renewal. He stated that, had the Previous Fires been disclosed, he would not have renewed the Policy on any terms. In his view, the incidents demonstrated a significant deterioration in the risk, particularly when considered against the backdrop of many years without comparable events. He also pointed to the mismatch between the modest premium being charged and the potentially catastrophic exposure arising from vessel fire claims.
The Court accepted Insurers’ case. Mr Justice Butcher recognised the need to exercise caution when considering retrospective underwriting evidence, but nevertheless found Mr Hoek to be a careful, honest and reliable witness.
Outcome
Cometsambre's claim failed. The Court held that, had a fair presentation been made on the 2022 renewal, Insurers would have declined the risk and were therefore entitled to avoid the Policy.
Conclusion
The result in Cometsambre will come as little surprise to most insurance practitioners. A pattern of repeated fires was always likely to be regarded as information that a prudent underwriter would wish to know before deciding whether, and on what terms, to write the risk.
More generally, the decision sits comfortably alongside other post-IA 2015 authorities concerned with materiality, including Berkshire Assets (West London) Ltd v AXA Insurance UK plc. It is a further reminder that the courts will focus on whether an undisclosed circumstance would influence the judgment of a prudent insurer, rather than permitting policyholders to rely on technical or speculative arguments to excuse non-disclosure.
Perhaps the most important lesson from the case is that, notwithstanding the reforms introduced by the IA 2015, the duty of fair presentation remains first and foremost a duty owed by the insured. Whilst insurers continue to bear the burden of proving materiality, inducement and the availability of a remedy, policyholders cannot assume that those hurdles will be insurmountable where genuinely material information has not been disclosed.
Alex Rosenfield is a partner at Fenchurch Law
