Guilty as charged? Berkshire Assets (West London) Ltd v AXA Insurance UK PLC

In one of the first cases to be decided under the Insurance Act 2015 (“the Act”), the High Court was asked to consider whether an insured breached its duty of fair presentation under the Act by failing to disclose criminal charges against one of its directors.

Background

In 2018, Berkshire Assets (West London) Limited (“Berkshire”), purchased a Construction All Risks and Business Interruption Policy (“the Policy”) underwritten by AXA Insurance UK Plc (“AXA”) for a property development project in Brentford.

The quote contained a number of provisions, including the following:

“The proposer for insurance, its partners or directors or any other person who plays a significant role in managing or organising the business activities, have not, either personally or in any business capacity, been convicted of a criminal offence or charged (but not yet tried) with a criminal offence.”

The policy renewed in 2019. Unbeknown to the director who was tasked with handling its insurances, one of its other directors, Mr Sherwood (and various other companies and individuals), had criminal charges filed against him by the Malaysian public prosecutor in August 2019 in connection with a $4.3bn fraud.

In January 2020, an escape of water resulted in substantial damage to the development. Berkshire thereafter made a claim under the Policy.

After investigating the claim, AXA avoided the Policy on the basis that Berkshire failed to disclose the charges against Mr Sherwood at renewal, and, had it done so, said that cover would not have been provided.

Berkshire argued that Mr Sherwood was not personally involved in the planning, approval or execution of the transactions which gave rise to the charges. To the contrary, the charges related solely to his capacity as a director of an investment banking company.

Issues for the Court

There were two issues for the Court to consider:

1. Were the charges against Mr Sherwood material, for the purposes of the duty of fair presentation?
2. If they were, and had they been disclosed, would AXA have agreed to insure Berkshire?

Materiality

The Court considered the definition of a material circumstance under section 7(3) of the Act. This provides that a circumstance is material if it would influence the judgment of a prudent insurer in determining whether to take the risk, and if so, on what terms.

The Court agreed with AXA that the principles relevant to material circumstances were already well established, and there was no reason to suggest that the Act had changed those principles.

There was, however, a debate about whether the charges against Mr Sherwood amounted to a moral hazard which Berkshire was required to disclose.

The Court considered there to be no settled definition of ‘moral hazard’, as each case will necessarily depend on its own facts. It was therefore preferable, in this instance, to rely on the statutory definition of material circumstance when considering the facts of the case before it.

In considering materiality, the Court found that being charged with a criminal offence will often constitute a material circumstance (March Cabaret Club v. London Assurance [1975] 1 Lloyd’s Rep. 169). Also, the time such facts are to be considered is at the time of the renewal, and not with the benefit of hindsight (Brotherton v. Aseguradora Colseguros (No. 2) [2003] EWCA Civ 705, 1 Lloyd’s Rep. IR 746). Therefore, the fact that the charges were dismissed was ultimately irrelevant.

The fact that the charges did not relate to deceit or dishonesty was equally irrelevant, as AXA could not be expected to resolve the issue of whether or not they involved allegations of deceit or dishonesty at renewal. Facts raising doubt as to the risk were, without more, sufficient to be material, and the Court therefore found they should have been disclosed.

Inducement

It was common ground between the parties that AXA’s branch office had no authority to write the risk under an internal practice note that had been disclosed. The Court found that there was no reason to suppose that the regional or London offices would have considered the matter any differently if the charges against Mr Sherwood had been disclosed, nor was there a reason that the conclusions of the underwriting team would have been any different.

Comment

The case is a salutary reminder for policyholders and brokers that questions around criminal conduct and charges, whether proven or otherwise, are likely to be material. A thorough investigation into all directors’ backgrounds is advisable at each renewal, and when in doubt, it is better to err on the side of caution.

Authors:

Alex Rosenfield, Senior Associate

Anthony McGeough, Associate