Say hello, waive goodbye – waiver in insurance disputes
Waiver involves a party abandoning some or all of its rights under a contract. The concept is broad, and arguments about its application arise frequently in insurance disputes, in relation to both the creation and operation of a policy.
This article will outline situations where waiver arguments most commonly occur.
Waiver of disclosure
Under the Insurance Act 2015 (“the Act”), an insured must make a fair presentation of the risk. This requires disclosure of every material circumstances which the insured knows or ought to know, and in a manner which would be reasonably clear and accessible.
An insurer’s failure to ask questions has always risked being treated as a waiver of the insured’s duty of disclosure. That situation is now codified in s3(4)(b) of the Act, which confirms that it is only necessary for an insured to disclose “sufficient information to put a prudent insurer on notice that it needs to make enquiries for the purpose of revealing those material circumstances.” The insurer therefore has a duty to make enquiries when it requires further information – it cannot simply sit on the disclosure provided and ask questions only once a claim is made.
Absent enquiry by the insurer, the Act provides that an insured does not need to disclose a circumstance if, amongst other things, it is something about which the insurer waives information. This can happen expressly, or impliedly.
Express waiver
Numerous forms of agreement can be reached between an insurer and an insured whereby the latter’s duty of fair presentation is restricted. This may be by way of agreement which restricts materiality to knowledge held by specific individuals. Alternatively, they may agree that specific types of information need not be disclosed.
Implied waiver – asking limited questions in a proposal
An insurer may, in some circumstances, be taken to have waived the scope of disclosure by asking a limited question in a proposal. By way of example; suppose an insurer asks a proposer, “have you been made insolvent during the last 5 years?” which the proposer correctly answers “no”. Then, following the making of a claim, the insurer refuses to pay on the basis that the insured failed to disclose that it entered into administration 8 years ago. On those facts, there is an unanswerable argument of waiver. The insurer could easily have asked the proposer about insolvencies occurring more than 5 years prior, and by not doing so indicated that it had no interest in those insolvencies. These types of argument are fact-sensitive, and will depend on the proper construction of the proposal as a whole. The question to be asked, as MacGillivray says, is:
“Would a reasonable man reading the proposal form be justified in thinking that the insurer had restricted his right to receive all material information, and consented to the omission of the particular information in issue?”
If the answer to that question is “yes”, an insurer cannot subsequently use that non-disclosure as a reason to avoid paying a claim.
Waiver of the insurer’s remedy for breach of the duty of fair presentation
This type of waiver is known as waiver by election. In short, where an insurer discovers that there has been a non-disclosure entitling it to avoid the policy, it has a choice between two inconsistent rights: it can either affirm the policy (i.e. treat it as continuing), or it can avoid it. If the insurer, having knowledge of those inconsistent rights, makes an unequivocal representation that it will affirm the policy, the right to avoid will be lost.
For example; suppose an insurer, during the course of its investigations following a claim, discovers that the insured had failed to disclose that it has an unsatisfied CCJ. If the insurer expressly affirm cover, it cannot go back on that choice.
That example can be contrasted with implied affirmation i.e. where the insurer’s conduct amounts to an unequivocal communication that it has chosen to affirm the policy. Such conduct might include the actual payment of a claim under a policy, or accepting future premiums.
Waiver of the insurer’s remedy for breach of condition
Where an insured breaches a policy condition, the only form of waiver available is waiver by estoppel (Kosmar Villa Holdings PLC v Trustees Syndicate 1243 [2008] EWCA Civ 147).
As with waiver by election, waiver by estoppel rests on an unequivocal representation that a party will not rely on its rights; however, the insured must also show detrimental reliance i.e. that it has relied on the insurer’s representation, such that the insurer’s withdrawal of that representation would be unjust.
As an example; say there is a fire at an insured’s premises, and the insurer then discovers that the insured had breached a condition precedent regarding the storage of combustible materials. Ordinarily, no liability would attach to the insurer for the claim, as the condition precedent was breached. However, in this case the insurer chooses to act in a manner only consistent with it having waived the insured’s breach, by asking the insured to provide information about the repair costs. If the insured can show that it relied on the insurer’s representation to its detriment (e.g. by starting to repair the premises), the insurer will be estopped from relying on the breach.
Estoppel by silence?
Recent case law has raised the potential for the court to find, in some circumstances, that an insurer’s silence or acquiescence may give rise to an estoppel.
The case in question, Ted Baker v AXA Insurance UK plc [2017] EWCA Civ 4097, concerned a claim by the clothing retail company, Ted Baker, following a theft. AXA refused to pay the claim because, amongst other reasons, Ted Baker had breached a condition precedent in the policy requiring it to produce certain information.
Ted Baker argued that AXA was estopped from relying on its breach, because AXA had known that Ted Baker believed, albeit mistakenly, that the obligation to produce the information had been “parked”. Although Ted Baker’s claim failed on other grounds, the Court of Appeal agreed that Ted Baker was entitled to expect AXA, acting honestly and responsibly, to speak up if it regarded the information as outstanding, and if it realised that Ted Baker had wrongly believed otherwise.
Summary
Waiver arguments arise in a number of different guises in insurance disputes, and are likely to be hotly contested. Although the availability of any waiver argument will be fact-specific, relevant considerations include the conduct and knowledge of the insurer, and whether the insurer had reserved its rights.
If an insured is able to establish that the insurer has waived its rights, the law will hold the insurer to its choice, and any alternative choice will be lost.
Unoccupied Buildings conditions – a trap for the unwary
Properties become unoccupied in a number of different scenarios. In a residential context, this might be because the home is not the policyholder’s main residence, or because the policyholder is going on an extended holiday. Similarly, for buy-to-let landlords, a property may become unoccupied for lengthy periods between tenancies.
This short article will explore the requirements that insurers impose where a property is left unoccupied, and how those requirements have been interpreted by the courts.
Home insurance
Standard home insurance policies exclude claims where properties are left unoccupied for extended periods. The rationale is simple: an unoccupied home represents a greater risk as it is more likely to attract thieves, vandals or squatters. Equally, there is a greater chance of structural damage in an unoccupied home because no one is available to deal with, say, a burst pipe or a fire. For those reasons, home insurance policies usually require policyholders to tell their insurers if the property is/becomes unoccupied.
“Unoccupied” is typically defined as: “not being lived in.” The case law suggests that this means actual use as a dwelling. So, in Simmonds v Cockell [1920] 1K.B. 843, a warranty requiring a property to always be occupied did not mean that there would always be someone present, but rather that it would be used as a dwelling house.
Most policies say that the cover will cease if the property is not being lived in “for more than [30] consecutive days” (although the precise number of days will vary from policy to policy). As long as the property is regularly being occupied, temporary unoccupancy will not invalidate the cover. Therefore, in the case of Winicofsky v Army & Navy General Assurance [1919], a condition requiring premises to remain “occupied” was not breached where the policyholder sought temporary refuge in a shelter during an air raid.
Once an insurer is told that a property is unoccupied, it will, if the change is accepted, be entitled to vary the premium and terms, and may raise a small administration charge for the variation. If the change is not accepted, the policyholder will need to arrange specialist unoccupied property insurance.
Commercial insurance
In commercial insurance, unoccupied buildings conditions take on a different character. Commercial policies usually impose a number of obligations, some of which may be quite onerous, which must be complied with if cover is to remain in force despite the property becoming unoccupied.
For example, landlords may be required to ensure that an unoccupied property, or a part of it, is inspected once a week (often with a requirement that a record of the inspection is kept), secured against illegal entry, kept free of combustible material, and disconnected from any mains services. The consequence of a failure to comply with the condition depends on whether it is expressed as a condition precedent to the insurer’s liability. If it is, the condition must be complied with absolutely, and any breach will entitle the insurer to deny liability for the claim. If it is not, the position will turn on whether the insurer has suffered prejudice.
A common scenario is that a property becomes unoccupied without the policyholder’s knowledge. This might occur in a landlord’s policy, where, say, a tenant vacates the property without giving notice. Commercial policies usually cater to that scenario by including “non-invalidation clauses”. These are terms which provide that cover will not be invalidated in the event of any act, omission or alteration which is either unknown to the policyholder or beyond its control. To gain the benefit of those clauses, the policyholder will be required to notify its insurer immediately of the act, omission or alteration.
Application of Section 11 of the Insurance Act
Section 11 of the Insurance Act is intended to prevent an insurer from disputing a claim for non-compliance with a term which is unconnected to the actual loss. The Law Commission has said that a causation test is not required; rather, the test is simply whether there is a possibility that the non-compliance could have increased the risk of loss.
Since Section 11 is capable of applying to Unoccupied Buildings conditions, how might it apply in this context?
Let us suppose that a landlord owns a property which has two floors, and the upper floor is unoccupied. A fire then starts on the ground floor, which spreads to the upper floor. Insurers then discover that the landlord breached the Unoccupied Buildings condition by failing to keep the building free of combustible materials, and refuse to pay the claim. There are not yet any authorities on the meaning and application of Section 11.
On an orthodox interpretation of section 11, it would not be open to the policyholder to argue the upper floor would have caught fire in any event, even if the condition had been complied with. However, on a non-orthodox interpretation, section 11 should arguably come to the policyholder’s rescue: the fire started on the ground floor, which was occupied, and compliance with the condition would not have made a difference to the loss.
Conclusion
Almost all property owners, whether acting as private homeowners or in a commercial context, will need to consider the implications of unoccupied buildings conditions at some point.
We would recommend that policyholders check the fine print of their policies in order to understand (a) when they need to notify their insurers if a property becomes unoccupied; and (b) the steps which need to be taken in order to comply with Unoccupied Buildings conditions. A failure to do so may be the difference between an insurer paying, or refusing to pay, a claim.
Alex Rosenfield is a Senior Associate at Fenchurch Law
Consumer Insurance - A reminder of your rights and why you should not “avoid” fighting back
Consumer insurance accounts for a large percentage of insurance purchased in the United Kingdom. It is therefore unsurprising that many insurance disputes involve consumers, and the implications for an individual who has a claim declined can be catastrophic.
A recurring issue is an insurer avoiding a policy for an alleged non-disclosure or misrepresentation. Our experience is that, in a worryingly large number of cases, insurers appear to rely on a consumer’s lack of knowledge and resources to properly challenge the avoidance. In other words, Insurers raise with a consumer what appears to be an unanswerable case and present a declinature/avoidance as a fait acompli. However, in reality, the matter is very rarely as clear cut as the Insurer seeks to present.
The Financial Ombudsman Service (which is available to all consumers) has recently increased the size of the awards it can make from £150,000 to £350,000. It is, therefore, now even more important for consumers to be familiar with their obligations and rights in relation to their insurance policies given the wider scope of cost-free redress.
The Law
The Consumer Insurance (Disclosure and Representation) Act 2012 (CIDRA) came into force on 6 April 2013, and applies to all insurance policies which began or were renewed after that date. CIDRA applies to all types of insurance where the policyholder is acting in a personal (as opposed to commercial) capacity.
CIDRA governs the duties of consumers prior to inception of an insurance policy. It was introduced to address the vulnerability of consumers based on outdated law which imposed an unfair disclosure burden on them.
While CIDRA has been in force for a number of years, the more recent Insurance Act 2015 (“the Insurance Act”) has increased awareness both within and outside of the insurance market of the obligations of policyholders before entering into an insurance policy. As a result, CIDRA and the Insurance Act are often confused (by both policyholders and insurers). While there are similarities between them, particularly in relation to the remedies available to an insurer for non-disclosure disclosure, it is important for consumers to have an understanding of CIDRA because it is even more favourable to them than the Insurance Act.
CIDRA: Duty of Disclosure
Prior to CIDRA, if a consumer had either given incorrect information or failed to disclose something important to an insurer when applying for insurance, the insurer could “avoid” the policy (effectively cancelling the policy and treating it as if it had never existed). A heavy burden rested on the consumer (who had a duty of “utmost good faith” towards the Insurer) to disclose to an insurer all material facts. This duty was particularly onerous for unadvised individuals who purchased insurance directly from an insurer or through, for example, price comparison websites without the assistance of a broker.
CIDRA replaced this onerous burden with a new “duty to take reasonable care not to make a misrepresentation”. The effect was that a consumer was no longer obliged to volunteer information to an insurer, but rather to take care not to answer any of the insurer’s questions incorrectly.
The bottom line for individuals who have had a claim declined is that it is not enough for an insurer to establish that an incorrect answer was given to it when the policy was simplywritten - under CIDRA, that is only the first hurdle the insurer needs to overcome.
The insurer must also prove that the consumer failed to take “reasonable care” when making the misrepresentation and that, if the correct information had been given, the insurer would either not have written the policy on any terms at all, or would have written it on different terms or with a different premium. A misrepresentation which would have caused the insurer to act differently is referred to in CIDRA as a “qualifying misrepresentation”.
Alternatively, In order to avoid the policy and retain the premium, the insurer will need to show that the consumer acted deliberately or dishonestly in making a misrepresentation.
If the insurer cannot show that, but can show that there was a qualifying misrepresentation, the insurer will be entitled to a proportionate remedy. If it can show that it would not have written the policy at all, it can avoid the policy but must return the premium. If it would have written the policy on different terms, the policy may be amended to reflect those terms. If it would have charged a higher premium, the insurer is entitled to proportionately reduce the amount it pays on a claim by reference to any such hypothetical premium.
The bottom line for consumers
The overarching point for consumers to remember is that the burden is on the insurer to prove:
1. The consumer failed to take “reasonable care” not to make a misrepresentation;
2. If he/she did, that the misrepresentation is a “qualifying misrepresentation”; and
3. That the Insurer is entitled to the appropriate remedy.
Given the heavy burden on the insurer under CIDRA, consumers faced with the avoidance of their policies should not avoid fighting back, particularly now that the Financial Ombudsman Service has a much wider remit to consider larger disputes. In fighting back, and availing themselves of the Ombudsman’s enlarged jurisdiction, consumers may find that an insurer’s confidence in its position is, when properly scrutinised, rather misplaced.
Daniel Robin is an associate at Fenchurch Law
Insurance Act 2015: Some Insurers Crying Foul
When the Insurance Act 2015 came into force in August 2016, it was hailed as the biggest reform of this area of law in over a century. The old law had been criticised by the Law Commission as “out of date” and “no longer reflecting the realities of today’s commercial practices”.
The Act addressed those criticisms head-on. It repealed the archaic “duty of utmost good faith” and created a new, fairer, “duty of fair presentation” designed to clarify precisely what is required from policyholders during the disclosure process, and to increase the burden on Insurers to ask the right questions about the risk they wish to write.
Likewise, the Act softened many of the harsh remedies available to Insurers under the pre-Act regime. Where policyholders innocently omitted to disclose a material piece of information (for a wide variety of unfortunate, but quite understandable, reasons), the old law afforded Insurers the draconian remedy of avoiding the policy in its entirety, even if they would have still written the risk in one way or another.
The Act, on the other hand, asks the very sensible question brokers and coverage lawyers have been asking for decades, which is: “What would you have done had you known?”. If the Insurer would have written the risk in any event, the Act’s new system of proportionate remedies provides a more measured redress mechanism to alter policy terms or the premium retrospectively to reflect what ought to have happened in the absence of the Insured’s oversight.
Uncertainty for Brokers and Policyholders
On the face of it, therefore, the Act generally works in favour of policyholders. However, as with all change (even one for the better), the move from a complex, but established, body of law to a more rational, but nonetheless new and untested, set of rules has created much uncertainty for brokers and their clients over the past six months.
In particular, many brokers now ask themselves and their advisors: “Does the Act really put my clients into a better position than they were in under the old law, and, if not, can I use the prevailing market conditions to improve their position in some way?”
The answer, of course, is that it in many cases the Act puts Insureds in a worse position than under the old law, leaving brokers with the challenge of finding an appropriate solution to protect their clients’ interests.
The best (and most controversial) example of this is the use of “Innocent Non-Disclosure” clauses on certain lines of business. Pre-Act, clauses such as the following were largely uncontroversial and commonplace protections against the risk of avoidance:
“Insurers shall not avoid this Policy as a result of any non-disclosure or misrepresentation by the Insured save in respect of a fraudulent non-disclosure or misrepresentation”.
In other words, under the old law Insurers were prepared (for a variety of reasons, not least their eagerness to write business) to agree that nothing short of a fraudulent non-disclosure or fraudulent misrepresentation would give them opportunity to remove that client’s cover in its entirety.
Under the Act’s new proportionate remedies regime, even an innocent breach of the duty of fair presentation might, for example, entitle Insurers to retrospectively increase an Insured’s premium significantly, or to exclude the type of loss that has unearthed the innocent non-disclosure. In the absence of an Innocent Non-Disclosure clause (tweaked to reflect the new order of things), an Insured therefore has far less protection on certain lines than they might have secured in previous years.
Tension between Brokers and Insurers
It is unsurprising, therefore, that many brokers have continued to insist on the inclusion of Innocent Non-Disclosure clauses (as well as a variety of other protections) to ensure that their clients remain protected against non-disclosure remedies under the Insurance Act, much as they were protected under the old law. The reality is that Insurers today continue to compete fiercely, and many are therefore prepared to maintain these same protections afforded to Insureds that were available when the old law applied.
Many Insurers, however, have cried foul-play, arguing that these clauses should no longer be necessary in the post-Act world. Some go further and argue that taking advantage of soft market conditions to include them is in some way “unfair” to Insurers, given the Insurance Act was designed to “level the playing field”.
Such arguments are unlikely to hold water with brokers. One of the principal reasons the Law Commission recommended changing the law was to ensure that the rights generally afforded to Insurers on all lines of business reflected the realities of today’s market practice. Changing the inherent dynamics of the market was never on the agenda. If soft market conditions mean that Insurers, in competing for business, remain prepared to offer greater certainty and protection to Insureds, then brokers are duty bound to try and secure those things for their clients.
Conclusion
Under the pre-Act regime, the balance of power lay firmly with Insurers. At worst, policyholders might have found themselves without cover for either perfectly innocent non-disclosures or for breaches of terms wholly irrelevant to a particular loss. Market conditions pre-Act gave brokers the ability to protect their clients from those harsh remedies.
While those remedies no longer exist, brokers will continue to use those same market conditions to find ways to eliminate some of the uncertainty the Act has created. Some Insurers will see that as the insurance market working as it should. Others will say that gaining such protections flies in the face of the spirit of the Act.
To those latter Insurers, I can only assure them their own brokers are very probably striving to achieve precisely the same protections for those Insurers’ own exposures. Every cloud?
James Morris is a senior associate at Fenchurch Law.
