37.Part 2 of the Act, which addresses the duty of fair presentation, applies to non-consumer insurance contracts only. This is because the law in this area as it applies to consumer insurance contracts was reformed by CIDRA.
38.Section 2(2) provides that the duty of fair presentation, set out in the remainder of Part 2, applies in the event of a variation to a non-consumer insurance contract as well as upon the initial agreement of the contract. Section 2(2)(a) follows the current law by stating that the duty to make a fair presentation of the “risk” relates only to the “changes in the risk” which are “relevant to the proposed variation”.(9)
39.Section 3(1) introduces a requirement on the insured (at this stage, the person or party who would be the insured if the contract were entered into) to make to the insurer a “fair presentation of the risk” before the contract is entered into.
40.The duty of fair presentation replaces the existing duties in relation to disclosure and representations contained in sections 18, 19 and 20 of the 1906 Act.(10) However, it retains essential elements of those provisions. It is important that potential insureds provide insurers with the information they require to decide whether to insure a risk, and on what terms.
41.Like the existing duties, the duty of fair presentation attaches before the insurance contract is entered into. Since the law regards renewals as new contracts, the duty also applies when an insurance contract is renewed. This is in accordance with the current law.
42.The duty falls on “the insured”, defined in section 1. In some situations, one party may enter into a contract on behalf of others. Who is “the insured” in such cases is, and will continue to be, a determined by reference to the particular contract.
43.Section 3(3) sets out the three elements of a “fair presentation of the risk”.
44.The first element of a fair presentation is a duty of disclosure, introduced in section 3(3)(a) and further defined in section 3(4), which provides two ways to satisfy the duty of disclosure. Section 3(4)(a) effectively replicates the disclosure duty in section 18(1) of the 1906 Act. Its key features are that the insured must disclose “every material circumstance”(11) which the insured “knows or ought to know”.(12)
45.The second way to satisfy the duty of disclosure, set out in section 3(4)(b), is intended to operate where the insured has failed to satisfy the strict duty in section 3(4)(a) but has nevertheless disclosed enough information to put the insurer on notice that it needs to ask for further information from the insured before it makes the underwriting decision. This reflects the approach already taken by the courts in some cases.(13)
46.The second element of a fair presentation, in section 3(3)(b), relates to the form of presentation rather than the substance. It is intended to target, at one end of the scale, “data dumps”, where the insurer is presented with an overwhelming amount of undigested information. At the other end, it is not expected that this requirement would be satisfied by an overly brief or cryptic presentation.
47.The third element of the duty of fair presentation is the duty not to make misrepresentations. It is contained in section 3(3)(c) and is based on section 20 of the 1906 Act.
48.As in section 18(3) of the 1906 Act, section 3(5) of the Act provides exceptions to the insured’s duty of disclosure. The exceptions do not apply to the requirement to make the disclosure in a clear and accessible manner, nor to the duty not to make misrepresentations. Anything which is the subject of an exception does not have to be disclosed by the insured to the insurer, unless the insurer makes enquiries about that matter.
49.Exceptions (a) and (e) replicate the relevant provisions in the 1906 Act almost exactly. The rest of the exceptions relate to circumstances which the insurer “knows”, “ought to know” and “is presumed to know”. They replace similar provisions in the 1906 Act. Each of these categories of “knowledge” is expanded on in section 5.
50.Section 4 defines what the insured “knows” and “ought to know” for the purposes of the duty of disclosure in section 3. It is based on the insured’s duty under section 18 of the 1906 Act to disclose every material circumstance known to them, including everything which “in the ordinary course of business, ought to be known” to them.
51.Section 4(2) addresses the position of an insured who is an individual (such as a sole trader or practitioner). As well as their own knowledge, the insured will be taken to “know” anything which is known by an individual who is “responsible for the insured’s insurance”.
52.Section 4(3) sets out the individuals whose knowledge will be directly attributed to the insured where the insured is not an individual (such as a company). They are the insured’s senior management and the person or people responsible for the insured’s insurance. These categories reflect important decisions on the common law rules of attribution in the insurance context. However, the intended effect of the phrase “knows only” is that the common law on attribution of knowledge to the insured is replaced by the terms of the Act.
53.Section 4(8)(b) defines who is “responsible for the insured’s insurance”. It is expected to catch, for example, the insured’s risk manager if they have one, and any employee who assists in the collection of data or negotiates the terms of the insurance. It may also include an individual acting as the insured’s broker.
54.Section 4(8)(c) defines “senior management”. It captures those individuals who play significant roles in the making of decisions about how the insured’s activities are to be managed or organised. In a corporate context, this is likely to include members of the board of directors but may extend beyond this, depending on the structure and management arrangements of the insured.
55.Because the knowledge of the senior management and those individuals responsible for the insurance is directly imputed to the insured for the purposes of the duty of fair presentation, those categories of person are expected to be construed relatively narrowly, but are capable of being applied flexibly. The knowledge of those individuals who do not fall within the category of senior management, yet who perform management roles or otherwise possess relevant information or knowledge about the risk to be insured, may be captured by the “reasonable search” referred to in section 4(6).
56.Section 4(6) defines what an insured “ought to know” by reference to information that could reasonably be expected to be revealed by a reasonable search of available information. It largely codifies principles derived from some case law,(14) namely that insureds should seek out information about their business by undertaking a reasonable search, which may include making enquiries of their staff and agents (such as their insurance broker). Section 4(7) makes clear that relevant information subject to the reasonable search may be held by persons other than the insured itself. Taken together with section 4(6), this means that the reasonable search may extend beyond the insured itself to other persons, where such a search would be reasonable in the circumstances and where information is available the insured. The scope of the phrase “information held ... by any other person” in this context is intended to be flexible.
57.Future interpretation of sections 4(6) and 4(7) is likely to be guided by existing case law. For example, a search may not be expected to evince an admission by a servant of their own negligence.(15) In contrast, the knowledge of an “agent to know”, who has a duty to communicate the relevant information to their employer or principal, may well be included.(16)
58.Unlike section 19 of the 1906 Act (which the Act repeals), the Act does not include a separate duty on the agent to disclose information to the insurer. The agent’s knowledge or other information held by the agent may be caught under section 4 as discussed above.
59.Section 4(4) makes further provision about the knowledge of an individual acting as an agent of the insured. Where such an individual acquired confidential information through a business relationship with someone other than the insured or any other person connected with the insurance being placed, that information will not be attributed to the insured. This provision is expected to be particularly relevant to the insured’s broker who is likely to hold confidential information on behalf of many unconnected clients..
60.Section 5 defines what the insurer “knows”, “ought to know” and “is presumed to know” for the purposes of the section 3(5) exceptions to the duty of disclosure. These provisions are based on the exceptions contained in section 18(3) of the 1906 Act and the case law interpreting them.
61.Section 5(1) sets out the individuals whose knowledge will be directly attributed to the insurer, being what the insurer “knows”. This provision is intended to capture the person or people involved in making the particular underwriting decision – essentially the underwriter. The relevant individuals may be, for example, employees of the insurer or of the insurer’s agent. Again, the intended effect of the phrase “knows … only” is that the common law on attribution of information to an insurer is replaced by the terms of the Act.
62.Section 5(2) sets out two types of information which an insurer “ought to know”.
63.The first, in section 5(2)(a), is information which an employee or agent of the insurer knows and ought reasonably to have passed on to the underwriter. This is intended to include, for example, information held by the claims department or reports produced by surveyors or medical experts for the purpose of assessing the risk.
64.The second category, at section 5(2)(b), is intended to require the relevant underwriter to make a reasonable effort to search such information as is available to them within the insurer’s organisation, such as in the insurer’s electronic records.
65.Section 5(3) defines what the insurer is “presumed to know”.
66.The reference to common knowledge in section 5(3)(a) replicates the language of the 1906 Act. The reference to “common notoriety” has not been retained, because the meaning of that phrase appears to have changed since 1906. At the time the 1906 Act was drafted, “notoriety” appeared to mean the state of being “well known”, whereas now it suggests an element of infamy.
67.Section 5(3)(b) is intended to be a modernisation of the reference in section 18(3)(b) of the 1906 Act to “matters which an insurer in the ordinary course of his business, as such, ought to know”. Many underwriters work by class of business (such as property or professional indemnity insurance) rather than by industry sector (such as oil and gas). An insurer ought to have some insight into the industry for which it is providing insurance, but this insight may reasonably be limited to matters relevant to the type of insurance provided.
68.As set out above, sections 4 and 5 respectively set out the categories of individual whose knowledge will be directly attributed to the insured and insurer. These rules are intended to replace the common law in the context of the duty of fair presentation. Section 6 sets out two further rules about an individual’s knowledge.
69.Section 6(1) provides that what an individual knows includes not only what it actually knows but also “blind eye” knowledge. The courts have consistently interpreted knowledge to include cases where someone has deliberately failed to make an enquiry in case it results in the confirmation of a suspicion.(17)
70.Section 6(2) concerns the situation in which an individual (an employee or agent) perpetrates fraud against his or her principal (whether the insured or the insurer). It is intended to capture a common law exception to the general rules of attribution, known as the Hampshire Land principle, which broadly means that a company or other principal is not fixed with knowledge of a fraud practised against it by its agent or officer.(18)
71.Section 7 makes further provision about the duty of fair presentation, including definitions of some terms used in earlier provisions.
72.Section 7(1) states that a “fair presentation” does not have to be made in a single document or oral presentation. The Act is intended to recognise that the insurer may need to ask questions about the information in the initial presentation in order to draw out the information it requires to make the underwriting decision. All information which has been provided to the insurer by the time the contract is entered into will therefore form part of the presentation to be assessed.
73.Section 7(2) concerns the scope of the term “circumstance”, which is the language used in the 1906 Act. Section 7(2) repeats the terms of section 18(5) of the 1906 Act in order to make clear that the terms are used in the same way in both pieces of legislation.
74.Section 7(3) contains a definition of material circumstance and material representation, used in section 3. It is based on sections 18(2) and 20(2) of the 1906 Act. The term “prudent insurer” is also taken from the 1906 Act.
75.Section 7(4) sets out three examples of things which may constitute material circumstances. Whether circumstances falling within these examples are in fact “material” will depend on the facts of each case.
76.This section sets out the circumstances in which an insurer will be entitled to a remedy for an insured’s breach of the duty of fair presentation.
77.The insurer must show that it would have acted differently if the insured had not failed to make a fair presentation; that is, that the insurer would not have entered into the contract or variation at all, or would only have done so on different terms. This reflects the current law on inducement as developed following the decision in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd.(19)
78.A breach for which the insurer has a remedy is a “qualifying breach”.
79.Under the current law, a breach of section 18 or 20 of the 1906 Act gives the insurer a single remedy of avoidance of the contract. Under the Act, the insurer has different remedies depending on the situation. One distinction is whether or not the proposer’s breach of the duty of fair presentation was deliberate or reckless.
80.An insured will have acted deliberately if it knew that it did not make a fair presentation. An insured will have acted recklessly if it “did not care” whether or not it was in breach of the duty, but this is intended to indicate a greater degree of culpability than acting “carelessly”. “Deliberate or reckless” will include fraudulent behaviour.
81.The deliberate or reckless definition echoes that in CIDRA. However, in CIDRA a “qualifying breach” must be either deliberate/reckless or careless, since the consumer’s duty is to take reasonable care not to make a misrepresentation to the insurer. In non-consumer insurance, breaches do not have to be careless or deliberate/reckless in order to be actionable. “Innocent” breaches of the duty will also give an insurer a remedy if the insurer can show inducement. This reflects the current law for non-consumer insurance.
82.Section 8(2) provides a signpost to the details of the remedies available for breach of the duty of fair presentation, which are set out in Schedule 1.
See, for example, Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea) [2001] UKHL 1, [2003] 1 AC 469, by Lord Hobhouse at [54]. There is no requirement to disclose information relating to the rest of the original policy; see Lishman v Northern Maritime (1875) LR 10 CP 179.
Sections 18, 19 and 20 of the 1906 Act are repealed by clause 21(2) of the Act.
Defined in section 7(3).
Defined in section 4.
For example, CTI v Oceanus [1984] 1 Lloyd’s LR 476; Garnat Trading and Shipping v Baominh Insurance Corporation [2011] EWCA Civ 773.
See, for example, Aiken v Stewart Wrightson Members Agency Ltd [1995] 3 All ER 449.
See, for example, Australia & New Zealand Bank Ltd v Colonial & Eagle Wharves Ltd [1960] 2 Lloyd’s Rep 241.
See, for example, Proudfoot v Montefiore (1867) LR 2 QB 511.
See, for example, Lord Scott in Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea) [2001] UKHL 1, [2003] 1 AC 469 at [112].
From Re Hampshire Land Company [1896] 2 Ch 743. For Scotland, see L Macgregor, Agency (2013) para 13-24.
[1995] 1 AC 501.