The Good, the Bad & the Ugly: #21 (the Good). Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd

Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know.  An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.

Some cases are correctly decided and positive for policyholders.  We celebrate those cases as The Good.

In our view, some cases are bad for policyholders, wrongly decided and in need of being overturned.  We highlight those decisions as The Bad.

Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided.  Those cases can trip up even the most honest policyholder with the most genuine claim.  We put the hazard lights on those cases as The Ugly.

#21 (the Good): Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1984]

The House of Lords’ decision in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1994] 2 Lloyd’s Rep. 437 (“Pan Atlantic”) is significant, as it established inducement as an element of non-disclosure.

In Pan Atlantic, the House of Lords examined the law on materiality as set out in the case of Container Transport International Inc. v. Oceanus Mutual Underwriting Association (Bermuda) Ltd. [1984] 1 Lloyd’s Rep. 476 (“the C.T.I. case”).  The C.T.I. case had confirmed that a material circumstance was one that would have influenced the judgment of a notional “prudent insurer” in fixing the premium or determining whether he would take on the risk as compared with one which had affected the actual underwriter’s decision-making process.

The leading speech in Pan Atlantic was given by Lord Mustill.  As he noted, critics of the C.T.I. case had thought it was too harsh.  The decision meant that, when an insured had made a material non-disclosure or misrepresentation, the insurer would be entitled to avoid the policy, even where its underwriter would still have written the risk, albeit on different terms, or even where the underwriter was entirely unaffected by the non-disclosure.  The harshness of the C.T.I. case led critics to question whether the materiality test should be altered so that only misrepresentations or non-disclosures that would have “decisively influenced” a prudent insurer would be material.

The majority in Pan Atlantic rejected the proposed “decisive influence” test.  They examined the words in s 18(2) of the Marine Insurance Act 1906, which said:

“Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk”.

Lord Mustill said that the words “influence the judgment of a prudent insurer” “denotes an effect on the thought process of the insurer in weighing up the risk”.  The words in s 18(2) referred to the underwriter’s decision-making process rather than the final decision that was made.  As such, the “decisive influence” test was rejected.

The words of the 1906 Act have more or less been repeated in the Insurance Act 2015, which states that:

“a circumstance or representation is material if it would influence the judgment of a prudent insurer in determining whether he will take the risk and, if so, on what terms”.

(See our article “Guilty as charged? Berkshire Assets (West London) Ltd v AXA Insurance UK PLC”, which discusses materiality.)

While the materiality test was left largely undisturbed, the majority found that inducement should be introduced as an element of non-disclosure or misrepresentation.  Lord Mustill said:

“There is to be implied in the Act of 1906 a qualification that a material misrepresentation will not entitle the underwriter to avoid the policy unless the misrepresentation induced the making of the contract, using “induced” in the sense in which it is used in the general law of contract.”

The need for inducement was in line with the common law position for misrepresentation generally.  Lord Mustill noted that there was no equivalent common law for non-disclosure.  However, given that in the insurance context misrepresentation and non-disclosure are very similar concepts, the inducement test should, he said, apply also to the latter.  He then went on to say:

“A circumstance may be material even though a full and accurate disclosure of it would not in itself have had a decisive effect on the prudent underwriter’s decision whether to accept the risk and if so at what premium.  But…if the misrepresentation or non-disclosure of a material fact did not in fact induce the making of the contract (in the sense in which that expression is used in the general law of misrepresentation) the underwriter is not entitled to rely on it as a ground for avoiding the contract”.

Analysis

This case was plainly “good” for policyholders.  The introduction of the inducement test meant that it was more difficult for an insurer to avoid a policy if there had been a material non-disclosure.  As mentioned above, before introducing the inducement test, an insurer only needed to show that the non-disclosure was material.  Since Pan Atlantic, an insurer has also needed to establish that the non-disclosure either affected whether it would have written the policy at all or at least affected the terms it offered.

The inducement test espoused in Pan Atlantic has now been codified in s 8(1) of the Insurance Act 2015, which provided that:

“(1) The insurer has a remedy against the insured for a breach of the duty of fair presentation only if the insurer shows that, but for the breach, the insurer—

(a) would not have entered into the contract of insurance at all, or

(b) would have done so only on different terms.”

It had initially been suggested that inducement could be presumed where it has been proven that the non-disclosure or misrepresentation was material.  However, in Assicurazioni Generali v ARIG [2003] Lloyd’s Rep IR 13 it was held that there is no such presumption.  Therefore, when an insurer avoids a policy because of an alleged material non-disclosure or misrepresentation, that is not the end of the road.  To prove inducement, evidence from the underwriter is generally required.  Without such evidence, the insurer will face difficulties proving that the underwriter would not have written the risk.  The contents of underwriting guidelines and the underwriter’s track record are likely to be highly relevant.

Grace Williams is an Associate at Fenchurch Law