Niramax Group Limited v Zurich Insurance Plc  EWHC 535 (Comm)
A Commercial Court judge has found in favour of Zurich Insurance that, had it known about how the claimant was running its business and its attitude to risk management, insurers would not have extended the claimant’s cover on an engineering policy to include fixed plant worth £4.3million. The fixed plant was destroyed by fire less than three months later.
The claimant had insured its mobile plant with Zurich for several years when it sustained a serious fire at its main recycling plant. Initial investigations centred on an individual closely associated with the claimant who had a serious criminal conviction and which led Zurich to conclude that he was a shadow director. Zurich avoided the policy by reason of the non-disclosure of the shadow director’s conviction and other material facts of an historical nature. These principally related to the claimant’s attitude to risk management. The claimant sued.
During the course of the litigation it became apparent from the claimant’s disclosure that there were other material facts that Zurich had not known about the claimant, which caused Zurich to amend its defence. Principal of these was the fact that from February 2014, the claimant had failed to implement mandatory risk improvements imposed by its buildings insurer as a consequence of which punitive special terms were imposed in October 2014. The claimant’s excess had been increased to £250,000 and it was obliged to self-insure for 35% of the risk to the buildings, until it installed a fire suppression system and undertook other risk improvements relating to the detection and control of fire.
Ultimately at trial, Zurich did not pursue the “shadow director” defence, but relied principally upon the claimant’s failure to implement mandatory risk improvements and the imposition of the special terms. Both underwriting experts agreed these facts were material to the risk because, as Mrs Justice Cockerill concluded “it manifested an attitude to compliance.” The claimant had failed over many months to deal with something that could have been dealt with in a number of weeks and “there was no good reason why the risk requirements could not have been complied with well before [its buildings insurer] was driven to imposing special terms.”
Zurich’s policy was renewed in December 2014. The judge accepted that the special terms and the failure to comply with the risk requirements ought to have been disclosed as material facts. However, she decided, somewhat ironically that Zurich’s underwriting witnesses’ sense of fair play to long-standing insureds would not have compelled them to decline cover completely at renewal, or to cancel the policy in September 2015, as Zurich had argued. Instead she found Zurich would have imposed different terms on the contract of insurance. However, in a novel analysis, she decided that the actual terms would only have corrected previous under-charging of the premium, with the result that the different terms would not have been caused by the non-disclosure and therefore Zurich was not entitled to avoid the policy from renewal (this being a pre-Insurance Act 2015 case).
However, the position in September 2015 was completely different when the claimant was seeking to add fixed plant to the policy with a value of £4.3m. The judge was satisfied “by some margin” that Zurich would not have added the claimant’s new recycling plant by way of a mid-term adjustment to the policy had it known about the claimant's attitude to risk. That left Zurich liable for approximately 10% of the claim being other fire damaged plant already covered by the policy.
What this means for you
The case highlights a number of important considerations for insurers when taking a position to avoid a policy of insurance and faced with defending that position at trial, namely:
- The hypothetical retrospective “reconstruct” of what the underwriters would have done had they known the true facts will come under very close scrutiny. The longer an insurer has covered the insured, the more material there will be for cross examination of the insurer’s witnesses, particularly to identify what they had done in the past in relation to the risk and to undermine any evidence the witnesses may give as to what they would have done if there had been a fair presentation of the risk.
- It is very important to be clear about the referral process by which any decision would have been reached, for example, by whom the ultimate decision would have been taken and why. It will be important to identify how and why the hypothetical true risk, if presented fairly, would have been referred hypothetically to a more senior underwriter for a decision to be made.
- The hypothetical more senior underwriter will have to be prepared to be cross examined seriously on the history of the underwriting of the risk, going back to inception. If the policy was in its first year from inception the cross examination is likely to be much less searching than if it was its e.g. 10th year from inception.
- Thus, the general appetite for risk concerned and any other influencing factors, such as premium and any other financial inducements, will be questioned very closely.
The case also highlights the importance of continuing investigation of the claimant’s background, other insurances and insurance history. Although Zurich began its repudiation of liability on one footing (the shadow director defence, which it discontinued three months before trial) it succeeded in resisting 90% of the value of the claim, because of its continued investigation of and analysis of the claimant’s wider underwriting history. The judge recognised this was a different case from the way it had started, but she also recognised that the underwriting history was the case which the claimant’s entitlement to an indemnity had to be judged against.
Just as the claimant relied on Zurich’s underwriting history to challenge Zurich’s contention that it would not have renewed or would only insure on different terms, Zurich also relied on the claimant’s insurance history with other insurers. The importance of detailed and continuing investigation, even during the litigation process, cannot be underestimated.
BLM represented Zurich in this case.
Written by Mark Aitken, Partner and Rosemary Scott, Associate