Insurance — After-the-event (ATE) policy — Policy holder losing claim for damages –Claimants awarded costs against policy holder — Policy holder becoming insolvent — Defendant underwriter purportedly avoiding ATE policy on grounds that policy holder not acting in utmost good faith — Whether underwriter entitled to avoid policy — Claim dismissed
Between 1997 and 1999, a company (CPH) had negotiated with NCP car parks to purchase a site in Birmingham. However, a sale was not agreed and CHP relinquished its position with NCP in favour of the claimants in return for, it claimed, a substantial “package of remuneration”. The package included: (i) 2% of the site purchase price: (ii) an agreement by the claimants to sell the commercial element of the scheme to CPH at cost; and (iii) a commission of 0.5% of the sale price of each flat sold. The claimants bought the site in November 1999 for £3.6m. In September 2001, after securing planning permission for the scheme, the claimants sold the site to a third party for £5.057m.
CPH subsequently sued the claimants for damages for breach of agreement. At the trial, the claimants denied the existence of any remuneration package and claimed that, in order to rescue the project, they had agreed to only pay the £56,620 professional fees that CPH had incurred during negotiations with NCP.
The High Court dismissed CPH’s claim, holding that it was highly unlikely that the claimants would have agreed to pay commission on the resale value of the flats and inconceivable that they would have agreed to the arrangement claimed by CPH. The judge ordered that CPH to pay the claimants’ costs on an indemnity basis in view of the dishonest way in which evidence had been provided and because documents had been created after the events for the purpose of giving a false impression to the court.
Since CPH had been wound up as being insolvent, the claimants brought proceedings against the defendant underwriter, pursuant to section 1 of the Third Parties (Rights against Insurers) Act 1930, in respect of an after-the-event (ATE) insurance policy that the defendant had purported to avoid for material misrepresentation and non-disclosure.
The claimants argued that the defendant had failed to establish that it had been induced to enter into the ATE policy by the alleged misrepresentations or non-disclosure. Alternatively, it had waived its right to avoid the policy.
Held: The claim was dismissed.
The right to avoid had not been waived. On the facts and the evidence assessed by the judge, the defendant had not been aware of the systematic dishonesty involved and had made no representations that any such factor would not be relied upon by way of avoidance or otherwise.
Even if that conclusion were wrong, it could not be said that the defendant had been guilty of negligent underwriting having regard to the material that had been disclosed; nor could it be inferred that any additional disclosure would not have made any difference. Although many underwriters might have rejected the risk, it could not be said that they would certainly have rejected it as being too risky. The defendant’s assessment of the risk had not been so imprudent as to give rise to the conclusion that it would have had no regard to full disclosure and accurate representations.
Even assuming that CPH had had a genuine belief in the legitimacy of its claim, the claimants had failed to show that the defendant’s reaction, or lack of it, on learning of the true facts during the currency of the policy demonstrated that no inducement arose fromany misrepresentation or non-disclosure. The defendant had not affirmed the policy and there had been no indication that, on becoming aware of a ground of avoidance, it had elected not to rely on it.
The fact that the experts had agreed that the alleged misrepresentations and non-disclosures were material led inexorably to the abandonment of the claimants’ pleaded case that a special approach was required in the context of ATE insurance to the effect that the factual account of the underlying events was not material but only the risk assessment of the legal team retained. That concession had been rightly made as a matter of law: Al-Koronky v Time-Life Entertainment Group Ltd [2006] EWCA Civ 1123; [2007] 1 Costs LR 57 considered.
David Cavender QC (instructed by Nabarro LLP) appeared for the claimants; Sue Carr QC and Jonathan Hough (instructed by Davenport Lyons Solicitors) appeared for the defendant.
Eileen O’Grady, barrister