A Parliamentary Bill is due later this year to start the process of reforming New Zealand’s duty of disclosure law, as well as many other insurance law reforms. However, given the Covid-19 pandemic, we expect this may not appear now until next year. Even if Parliament enacts it sometime later next year, it will inevitably allow a lead-in period of at least 12 months. This means the law may not change until 2022 or 2023 at the earliest.
In the meantime, the current duty of disclosure law applies.
A recent decision of the English High Court (Niramax Group Limited v Zurich Insurance Plc [2020] EWHC 535) clarifies some interesting issues about avoiding a policy for material non-disclosure under New Zealand’s current law. England’s former duty of disclosure law applied to the case. That former law is essentially the same as New Zealand’s current duty of disclosure law.
In any event, the decision deals with interesting issues about the insurer proving inducement. This requirement will likely remain as part of the reformed duty of disclosure law in New Zealand.
Brief factual background
Niramax recycled waste. It had a number of sites for its operations. The main site was at Thomlinson Road, Hartlepool (Thomlinson Site). It also had a site at a nearby town called Washington (Washington Site).
Niramax held a mobile plant policy (Plant Policy) with Zurich. It insured its buildings separately with other insurers (Building Policy).
In 2015, Niramax placed an order for a new specialist plant for recycling waste (New Plant). It sought cover under the Plant Policy. Zurich agreed to extend cover under the Plant Policy to the New Plant from September 2015 until expiry of the current policy year, although there were issues about this discussed below.
On 4 December 2015, before expiry of the Plant Policy, a fire broke out in the engine compartment of a machine at the Thomlinson Site. Niramax extinguished the fire promptly. However, staff failed to notice that embers from the fire had drifted to a neighbouring building housing the New Plant, destroying it.
Niramax claimed under the Plant Policy for the destroyed New Plant. The claim was for approximately £4.5 million. Zurich elected to avoid the Plant Policy for material non-disclosure.
Building policy
Zurich’s primary justification for avoidance of the Plant Policy was that Niramax had materially non-disclosed facts in relation to both the Plant Policy and the Building Policy before Zurich insured the New Plant.
For the 2014/2015 year, Niramax obtained cover for its buildings with Millennium Insurance (Millennium). Millennium accepted the cover subject to a satisfactory survey of the buildings. As a result of the survey, Millennium required Niramax to undertake a number of risk-mitigation measures. One of the measures required Niramax to install a fire-suppression system in relation to machines at the Thomlinson Site within 30 days. Niramax failed to do so.
After several reminders, Millennium decided to impose special terms on the cover by increasing the excess and requiring Niramax to self-insure 30% of any loss. Despite this, Niramax still did not install the fire-suppression system by the end of the current Building Policy period.
Niramax sought renewal of the Building Policy with Millennium, but Millennium would only do so on the basis that it didn’t cover the Washington Site. In the light of this, Niramax decided to renew the cover for its buildings with another insurer, Aspen. In Aspen’s proposal, Niramax denied that its buildings had ever been the subject of special terms. This was plainly incorrect.
Plant policy
Zurich increased its premium for the Plant Policy for the 2014/2015 by 20%. This amount was still below what it should have been because of a miscalculation by Zurich.
When Niramax sought cover for its New Plant under its existing Plant Policy with Zurich, Zurich initially refused because the policy was for mobile plant and the New Plant was static plant. However, after persistence by Niramax’s broker, Zurich relented and agreed to add it to the current Plant Policy subject to special conditions and only until expiry of the current policy period.
Zurich’s defences
Zurich’s defence to Niramax’s claim for the destroyed New Plant under the Plant Policy was to avoid Niramax’s Plant Policy for the following reasons:
1. Niramax’s failure to disclose to Zurich the following when Zurich extended cover under the Plant Policy for the New Plant:
a. The existence of the risk-mitigation measures that Millennium imposed on Niramax under the Building Policy for the 2014/2015 year, and
b. The existence of the special terms under the Building Policy imposed by Millennium subsequently, when Niramax failed to implement one of them.
This was Zurich’s primary defence.
2. Niramax’s failure to disclose to Zurich that Niramax had failed to disclose to Aspen Millenium’s refusal to insure the Washington Site at the last Building Policy renewal, and Niramax’s failure to disclose to Zurich its incorrect denial in Aspen’s proposal for the Building Policy that Niramax had special terms imposed on it.
3. In combination, Niramax’s failure to disclose all the following:
a. A failure to disclose to Zurich Niramax’s broker’s false assertion that a Lloyd’s broker had said the Niramax risk had ‘surveyed very well’, and
b. A failure by Niramax to disclose to Zurich a fire at its premises in 2012, and
c. A failure by Niramax to disclose to Zurich that Niramax was convicted of illegally stockpiling tyres in 2005/2006, and
d. A failure by Niramax to disclose to Zurich that a former director was convicted and fined £250 in 2009, and
e. A failure by Niramax to disclose to Zurich material facts on earlier renewals with Zurich.
The duty of disclosure law
The Court reminded itself of the duty of disclosure law:
1. Zurich faced the onus of proving the material non-disclosure.
2. A fact is material if it would influence the judgement of a prudent insurer in fixing the premium or determining whether to take on the risk. In this regard:
a. The Court must take an objective approach to assessing the materiality, based on the Judge’s independent appraisal of the alleged material facts in the light of the relevant facts.
b. Expert evidence is ‘helpful and important to ensure that the court’s findings are grounded in commercial reality’.
c. However, ultimately it is for the Court to decide whether it is rational to take any particular matter into account.
3. Zurich had to show that any non-disclosure it relied upon induced it to underwrite the policy that was in fact underwritten, on a ‘but for’ basis, i.e. Zurich must show that but for the relevant non-disclosure it would not have entered into the contract on those terms. The Court said:
a. The burden of proof is ‘not a heavy one’.
b. However, the Court must exercise caution as avoidance is a draconian remedy and genuine evidence of inducement could be inaccurate due to hindsight and self-interest, and the difficulty of examining hypotheticals.
Zurich’s primary defence – non-disclosure of risk mitigation and special terms for the Building Policy
In relation to materiality, both parties’ experts broadly agreed that Niramax’s non-disclosure of its failure to implement one of the risk-mitigation measures, and the subsequent imposition of special terms by Millennium were material. Those facts demonstrated Niramax’s attitude towards risk management and demonstrated ‘poor housekeeping’.
In relation to inducement, the position was more difficult. It raised three key issues:
1. The identity of the ultimate decision maker within Zurich. The Court found that within Zurich, the decision would have moved up the chain of underwriting to a Mr Penny. This meant that ‘what Mr Penny would have done’ became the crucial issue.
2. The effect of any extra information if Niramax had provided fuller disclosure to Zurich. Niramax argued that fuller disclosure would have resulted in Niramax providing other more positive information to Zurich, which the Court should take into account. However, the Court was not satisfied that hypotheticals like this were helpful.
3. The nature of the underwriting process. Niramax argued that fuller disclosure would not have had any impact on Zurich’s position in the real world. Zurich treated its Plant Policy in a ‘commoditised and streamlined’ way. There was no proposal and Zurich calculated premiums based on sums insured, trade and claims experience.
The Court rejected this and found that Zurich would not have followed its usual process for ‘vanilla’ risks once presented with fuller disclosure; it would likely have undertaken a more detailed analysis.
This left the ultimate question to be answered – what would Mr Penny have done?
The Court found, ‘it is more likely than not that if he had been aware of the facts in question, Mr Penny would have reluctantly offered renewal terms in December 2014 but would have refused the extension to cover the [New Plant] in September 2015.’
The Court found Mr Penny:
a) Viewed recycling risks as undesirable, particularly due to fire losses.
b) Had, in mid-2013 instructed his underwriting team to stop covering fixed plant waste risks on engineering contractor’s plant policies.
c) Had subsequently imposed a 10% rate increase on those risks.
d) Had effectively stopped by late 2014 writing new policies for waste risks.
e) Would have still written Niramax’s policy in December 2014, though with a higher premium to reflect the correct multiplier.
f) Would not have agreed to extend the policy in 2015 to include the New Plant.
Mr Penny said that adding the New Plant after coaxing by the broker was a marginal decision by him without the fuller disclosure. He said that will the fuller disclosure his decision would have changed, ‘from a very reluctant write to a polite but firm refusal’.
The Court accepted that the non-disclosure did induce Mr Penny to insure a risk that he would not otherwise have underwritten. Zurich was successful.
Zurich’s other defences
In the light of this, the Court did not need to consider the second defence listed above.
In relation to the third defence, the Court’s view are summarised as follows in the same order:
a) There was no evidence that Niramax was aware of the misrepresentation allegedly made by the broker, and the representation itself was a piece of ‘broker’s puffery’ that was not material.
b) Materiality was in doubt about the 2012 fire. It was small and it occurred on a site not owned by Niramax. Mr Penny was not fazed by it.
c) The fine was unlikely to be material due to the lapse of time and the fact that it related to a different location.
d) The former director’s fine was not material. He was not a director at the time of the fire.
e) The non-disclosure at previous renewals also failed. There was no evidence that Niramax knew it had previously failed to disclose material facts.
This case provides a good example of how a Court approaches its task of assessing whether a material non-disclosure has occurred.
In addition, it demonstrates several practical issues that insurers face to prove inducement. In particular:
1. Before making the decision to avoid, the insurer should identify the person in the organisation who was the ultimate decision maker.
2. This person should feel sufficiently confident about his or her decision to be prepared to give evidence under oath in Court about it potentially, and to be cross-examined about it.
3. However, even the best potential witness does not guarantee success; the employee’s evidence goes to whether the insurer grounded its decision in commercial reality. The Court makes the final decision.
The requirement on insurers to prove inducement is likely to remain part of the duty of disclosure law after it is reformed.
