In a recent decision, the Court of Appeal has confirmed once again that an insurer needs to produce evidence of materiality and inducement in order to avoid a policy for non-disclosure.

It is well established that an insurer needs to show both materiality and inducement to allow it to avoid an insurance contract for pre-contractual misrepresentation or non-disclosure. A matter is material if it would have influenced the mind of the hypothetical "prudent insurer". Inducement is established if the actual underwriter would not have written the risk, or would have done so on different terms, if he had been aware of the true position.

This means that to show materiality, evidence from an expert underwriter will be helpful and may be determinative. To establish inducement the key question is what would the actual underwriter have done? There have been attempts - some successful - to show inducement without calling the actual underwriter to give evidence. One example which has in some cases been successful is where the insurer is one of many on a slip and the other underwriters give evidence of inducement. Further, in some cases, it will be pretty obvious that an underwriter was induced given the misrepresentation or non-disclosure in question. But the starting point has to be: what is the actual underwriter's evidence? If a statement from him is not served, there is a risk that the court will be unable to find that the insurer was induced.

In this particular case, the insurer provided legal expenses as part of a constructors' protection policy. The insured did not disclose ongoing discussions with other parties to the construction works regarding delays with those works. The insurer alleged that this was material and that it was induced. The insurer called expert evidence from an underwriter with little experience of either construction insurance or of legal expenses insurance. The Court of Appeal had little difficulty in upholding the first instance decision that the insurer had not shown materiality.

In addition, the insurer did not call any evidence from the actual underwriter. The judge at first instance concluded that the insurer had not shown that he was induced. The Court of Appeal agreed.

The court also considered a claims notification clause under which it was a condition precedent to liability that the insured has given immediate notice in writing as soon as it is aware of "any cause, event or circumstance which has given or is likely to give rise to a Construction Claim". Construction Claim was essentially defined as a "bona fide construction claim" arising under a contract provided the insured had requested payment or asserted a defence under the contract and this has been rejected in writing at least twice. The court confirmed recent authority that (1) whether the insured is aware of a cause, event or circumstance is a subjective question (was the insured actually aware of it?); but (2) whether that cause, event or circumstance is likely to give rise to a claim (or in this case a "Construction Claim") is an objective question. The court concluded that a "Construction Claim" under this policy was "likely" only if adjudication, arbitration or litigation was likely to be required to resolve the differences between the parties. There was no obligation to notify earlier than that. In this case, the dispute had not reached that stage before notification was given. It was, therefore, not notified late.

Further reading: Laker Vent Engineering Ltd v Templeton Insurance Ltd [2009] EWCA Civ 62

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

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The original publication date for this article was 16/02/2009.