An Honest Mistake: Insurer’s Decision to Avoid a PII Policy for Fraudulent Misrepresentation Overturned

In UK Acorn Finance Limited v Markel (UK) Limited [2020] EWHC 922 (Comm), His Honour Judge Pelling QC (sitting as a Judge of the High Court) found that an insurer could not avoid a professional indemnity policy for misrepresentation regarding the surveyor’s activities for sub-prime lenders. 

The case turned on the construction and application of an unintentional non-disclosure clause.  The decision is particularly helpful to insureds in making clear that, in an assessment of whether there has been a dishonest non-disclosure or misrepresentation, the starting point is that individuals should be assumed to behave honestly.

Whilst the case concerned a surveyor’s professional indemnity policy, the principles discussed are applicable across the board.  In particular, the minimum insurance terms for a number of other professions contain clauses with similar features to the unintentional non-disclosure clause that was at the heart of this judgment.

The Facts

The Claimant, UK Acorn Finance Limited (“Acorn”), is a bridging finance lender.  It had obtained two judgments for a total in excess of £13m against a now defunct surveyor, Colin Lilley Surveying Limited (“CLS”).  Acorn then sued the surveyor’s Professional Indemnity insurer, Markel (UK) Limited (“Markel”), pursuant to legislation allowing claims to be brought directly against the insurers of insolvent entities, resulting in the judgment discussed in this article.

Markel denied the claim and avoided the policies (effectively declaring the policies void and of no effect) on the basis of misrepresentation and non-disclosure by CLS.  The policies in issue were from 2013 and 2014, and so pre-date the current law (the duty is now one to make a fair presentation of the risk, as set out in the Insurance Act 2015, although the conclusions reached in this judgment will likely apply equally under the new law).  The alleged misrepresentation relates to CLS’s work for sub-prime lenders.  In short, CLS confirmed in submissions to Markel that it had not undertaken work for sub-prime lenders, which was incorrect.  The Court found that, as a matter of fact, there had been a misrepresentation.

The Policy Provisions

The case turned, therefore, on the operation of an unintentional non-disclosure clause (such clauses may also be referred to as innocent non-disclosure clauses or avoidance waiver clauses).  These clauses limit the rights an insurer would otherwise have under law to avoid a policy and deny a claim for non-disclosure or misrepresentation (or now for breach of the duty of fair presentation of the risk).  In the present matter, the relevant part of the clause provided as follows:

“In the event of non-disclosure or misrepresentation of information to Us, We will waive Our rights to avoid this Insuring Clause provided that…You are able to establish to Our satisfaction that such non-disclosure or misrepresentation was innocent and free from any fraudulent conduct or intent to deceive” (our emphasis).

The Court discussed how the clause created an inherent conflict.  Markel was both empowered to exercise the decision-making in the clause, and would benefit directly from the clause being operated in a particular way (i.e. if it was determined that CLS had not been able to prove to Markel’s satisfaction that the misrepresentation was innocent). 

In these circumstances, the Court implied a clause that Markel would “not exercise its decision-making powers conferred by the…Clause arbitrarily, capriciously or irrationally”.  That meant in reaching its decision, Markel could not “take into account matters that it ought not to take into account and will take into account only matters that it ought to take into account” and could also “not come to a conclusion that no reasonable decision-maker could ever have come to”.

The Court’s Decision

The Court undertook a detailed review of the claim submissions, the interactions between the Markel and CLS, and oral evidence of key individuals (including the relevant claims handler). 

HH Judge Pelling QC found persuasive Acorn’s submission that the claims handler failed to approach the dishonesty issue with an open mind, or to bear in mind that it was more probable that any misrepresentation had been made innocently or negligently rather than dishonestly.  In particular, on cross-examination, the claims handler was unable to explain how he could have concluded that CLS was seeking to hide its activities for sub-prime lenders when, in fact, it notified of a claim involving a sub-prime lender.  Acorn submitted that whilst this may be evidence of poor administration, it was clear evidence that there was no fraudulent intent.

As a result, the Court agreed that there was a breach of the standard required by the implied term, and the decision to avoid the policy could not safely be maintained.

Application to Current Professional Indemnity Policies

An unusual feature of this case was that, on the face of the relevant clause, the insurer was not only appointed judge, jury and executioner on the question of dishonesty, but also stood to benefit significantly from a “guilty” verdict.  The Court implied a term to temper the impact of a plain reading of the words.  However, the language used in the clause can clearly cause difficulties not only for policyholders in getting claims paid, but also for insurers in ensuring the proper exercise of contractual rights.  We suspect that, prior to this claim, you would not have needed many fingers to count how many claims handlers were aware that the type of clause in question is, as the judge put it “qualified by a Braganza duty”.

The policies in question are a number of years old, and the sort of clause in issue has become less common.  It is now far more likely that you will see a clause (both on minimum terms across the professions and in the open market) that permit an insurer to exercise avoidance remedies only if the dishonesty or fraud is admitted by the insured, or proven by insurers. 

That said, whilst insurers no longer have the power to determine that there has been dishonesty or fraud, plainly they will be forming a view as a claim is made and matters progress.  The issue of insurers taking a view on conduct, therefore, remains live.  The current matter should serve as a reminder to insurers that the starting point is that people are more likely to be honest (if negligent) than they are to be dishonest or fraudulent.

Concluding Thoughts

Professionals know only too well that an economic downturn leads to more complaints against them and to more claims on insurance policies.  The insurance market had already begun to harden, and the coronavirus lockdown is likely to exacerbate that situation.  Historically, an insurance market under increased pressure has looked more closely at claims.  

As your broker, we can help present, explain and pursue claims appropriately in a challenging market.  In particular, it is notable that the judge emphasised that he made no personal criticism of the claims handler, whom the judge said: “…was placed in an invidious position because as far as I can see he was not trained in how to approach decision making of this sort nor was there any guidance for him to follow in the defendant's claims handling manual as to how issues of this sort ought to be approached”.  There is little in the judgment to suggest that Markel’s claims handler received any support from anyone on what was a high value and complex claim. 

When dealing with your claims, we can ensure that they are directed to the correct person, and escalated appropriately within an insurer’s claims handling operation.  Getting the claim in front of the right person, with the necessary experience, can remove obstacles to claims payment before they arise.