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.
Has the Enterprise Act Expanded the Duty of Fair Presentation?
For more than a century after the Marine Insurance Act of 1906, the law relating to insurance contracts was a territory into which parliament did not venture, ceding it instead to the courts. By 2015, though, Parliament was launching a full-scale invasion. The Insurance Act of that year replaced the old duty of disclosure with a new “Duty of Fair Presentation” and fundamentally reformed the remedies prescribed by law both for breach of the Duty of Fair Presentation (by introducing the concept of proportionality) and for breach of warranties.
A year later the Enterprise Act 2016 introduced a brand new right to claim damages from insurers for unreasonable delay in the payment of claims. On the face of it, each of the two Acts creates its own seemingly unrelated code of rights, obligations and remedies with no obvious interplay or knock-on effect. However, the question arises as to whether circumstances particular to the insured, which make the insurer vulnerable to a damages action if it delays in paying claims, are circumstances which, in the wake of the Enterprise Act 2016, fall within the Duty of Fair Presentation created by the Insurance Act 2015.
Legal Ingredients of a Claim for Damages for Late Payment
In assessing whether the information encompassed within the Duty of Fair Presentation has been broadened by the Enterprise Act, one first has to consider what is needed to found a claim for late payment.
A number of ingredients must be present if an insured is to be entitled to damages for loss caused by breach of an insurer’s duty to pay claims within a reasonable period. Aside from showing it has a valid claim under the policy in the first place, that the insurer’s delay was unreasonable, that the loss for which compensation is sought was caused by the insurer’s delay and that it has taken steps to mitigate its loss, the insured also has to show that the loss suffered as a result of the delay was foreseeable or contemplated by the parties at the time the policy was entered into.
The classic case for late payment damages is likely to be a property loss - e.g. at industrial premises where, say, a particular item of machinery is crucial to production and, unless it is quickly replaced following an insured event, the insured will suffer significant loss of production or even be put out of business. To found a claim for late payment damages, such eventualities must have been forseeable as at the date the policy was entered into. The insured would have to show, for example, that it was or should have been in the contemplation of the insurer at the time the policy was taken out that production turned on the availability of a particular machine and that the insured would rely on insurance proceeds if that machine were damaged because it would not be able to finance replacement through any other means. This means that the prospects of establishing a claim for damages will be greatly enhanced if the insured informed the insurer of these particular vulnerabilities when the policy was taken out.
Impact on the Duty of Fair Presentation
The question then arises as to whether it is simply prudent to tell the insurer about such vulnerabilities or whether the insured has a duty to do so.
The information that must be contained within the “Fair Presentation” of the risk by the insured is defined in section 7(3) of the Insurance Act 2015 as that which would “influence the judgment of a prudent insurer in determining whether to take the risk and, if so, on what terms”.
The “risk” in question is the risk of damage from an insured peril. In our classic case it is the risk of damage to or destruction of the insured property from insured perils. On the face of it, the importance of the property to the insured’s business or the ability of the insured to raise finance for replacement of the property if damaged has no bearing on the risk of damage from an insured peril occurring (although different considerations could well apply if the insurance had business interruption cover attached to it). These particular vulnerabilities wouldn’t seem to have any bearing on the pure underwriting decision as to the susceptibility of the insured to suffer damage from an insured peril.
What these vulnerabilities do have a bearing on is the insurer’s risk of exposure to a late payment damages claim. The key point is whether the risk of exposure to such a claim is part of the “risk” contemplated by section 7(3), so that the insured has a duty to disclose such circumstances to the insurer (rather than simply being well advised to do so in order to enhance the prospects of a claim for late payment damages should such a claim become necessary).
Until the courts look at the question there is no clear answer. On the one hand section 7(3) is ostensibly dealing purely with the insured risk. This is the risk upon which the judgment of the underwriter is exercised, be that the risk of flood, fire or storm. Since the risk of exposure to late payment damages is not an insured risk and instead one to which the insurer exposes itself by its own unreasonable delay rather than by reason of some fortuity over which neither insured nor insurer has control, there is good reason for saying that section 7(3) does not extend to circumstances relevant only to the recoverability of late payment damages.
On the other hand, section 7(3) contemplates the provision by the insured of any and all information relevant to the insurer’s willingness to provide a policy at all or, if so, on what terms. It may be that an insured with particular vulnerabilities that would set up a late payment damages claim is not the sort of insured the insurer would want to write cover for at all, making such information “material”. Even if the insurer would still be prepared to write cover notwithstanding such knowledge it might be prompted to require a term in the policy excluding the application of the Enterprise Act (the Act allows an insurer to contract out when not insuring consumers) or a term that caps exposure to late payment damages or it might simply charge a higher premium.
Perhaps the most significant consideration is the provision in section 7(4) which defines as material “any particular concerns which led the insured to seek insurance cover for the risk”. In some cases the vulnerabilities of the insured that would be the basis for a claim for late payment damages may be precisely what led the insured to take out the insurance in the first place.
Conclusion
Certain brokers are recommending that their clients tell insurers about circumstances that would make them vulnerable if claim payments were delayed because it helps lay the foundation for any late payment damages claim that might become necessary. In light of the uncertainty around whether such circumstances are material to the “risk” for the purposes of section 7(3) of the Insurance Act and thus encompassed by the insured’s Duty of Fair Presentation (and since insurance policies are riddled with conditionalities as it is), insureds should err on the side of caution and include information about such vulnerabilities in their presentation of the risk.
John Curran is a partner at Fenchurch Law
