UK Acorn Finance Ltd v Markel (UK) Ltd

Insurance – Professional indemnity – Avoidance – Defendant insurer purporting to avoid claim on professional indemnity policies for misrepresentation and non-disclosure – Claimant seeking to recover indemnity in respect of default judgments – Whether claimant entitled to rely on unintentional non-disclosure clause in policy – Claim allowed The claimant was a bridging finance lender mainly to agricultural businesses. CLS was a limited company whose business was property valuation. CLS held professional indemnity policies underwritten by the defendant. The claimant obtained judgments against CLS in respect of 11 agricultural property valuations undertaken between June 2010 and March 2012. In each case the claimant alleged that CLS had negligently overvalued the properties concerned. The defendant purported to avoid the policies and default judgments were entered thereafter in each of the claims against CLS. The defendant maintained that it was entitled to avoid the policies as a result of misrepresentations (which it was alleged took effect as warranties) and non-disclosures contained in or evidenced by risk profile documents generated by the defendant prior to the renewal of each of the policies and approved on behalf of CLS. The policies were each subject to an unintentional non-disclosure (UND) clause. It was common ground that the effect of that provision was that the defendant had a right to avoid the policies only if the misrepresentations relied on by the defendant were not innocent and free from any fraudulent conduct or intent to deceive. The defendant asserted that it had not waived its right to avoid the policies because CLS could not satisfy it that the alleged misrepresentations and non-disclosures were innocent or free from fraudulent conduct or intent to deceive. The claimant brought proceedings under section 1(1) and (4) of the Third Party (Rights Against Insurers) Act 1930 seeking to recover an indemnity in respect of the default judgments. Held: The claim was allowed. (1) Where a contract provided for a decision to be made by one of the parties, it was not for the court to make that decision for it. However, where the decision would affect the rights and obligations of both parties there was a clear conflict of interest and the courts would seek to ensure that the power was not abused. They would do that by implying a term that the power had to be exercised in good faith and rationally or reasonably, in the sense in which that term was used when reviewing the decisions of public authorities, and not in an arbitrary, capricious or irrational manner: Braganza v BP Shipping Ltd [2015] UKSC 17; [2015] 1 WLR 1661 applied. (2) A UND clause was a classic example of a clause to which the Braganza principles should be applied. The effect of including a reference to the “right to avoid” in a UND clause was that a breach of warranty should be treated as having the same effect as a misrepresentation or non-disclosure but without the need to prove materiality or reliance. In the present case, subject to the unintentional non-disclosure clause, the misrepresentations were breaches of warranty that entitled the defendant to avoid the policies as of right and without further inquiry as to the impact of the misrepresentations on the underwriting of the extensions. The relevant words of a contract were construed in their documentary, factual and commercial context, assessed in the light of the natural and ordinary meaning of the provision being construed, any other relevant provisions of the contract being construed, the overall purpose of the provision being construed and the contract in which it was contained, the facts and circumstances known or assumed by the parties at the time that the document was executed and commercial common sense, disregarding subjective evidence of any party’s intentions. (3) In the present case, the language in the UND clause made clear that the burden was placed on CLS to establish that any misrepresentation of non-disclosure was innocent and free from any fraudulent conduct or intent to deceive and clearly stated that the decision maker was the defendant. It followed that it was wrong as a matter of principle to conclude that the court could substitute its judgment for that of the defendant. Thus, unless the unqualified terms of the agreement were qualified by implication, the parties were bound by the decision of the defendant. Neither party could be treated sensibly as having intended to permit the defendant to make decisions that were arbitrary, capricious or irrational. Thus it was necessary to imply a term in order to eliminate the possibility of such decision-making since it was only by implying such a term that the UND clause could be given business efficacy or because the necessity for the implication of such a term was so obvious that it went without saying. Such an implied term would give effect to the deemed intention of both parties. (4) The implied term imported a requirement that the defendant would not take into account matters that it ought not to take into account and take into account only matters that it ought to take into account; and a requirement that it would not come to a conclusion that no reasonable decision maker could ever have reached. In a case such as the present, where contractually the onus had been placed on the insured to prove the misrepresentation or non-disclosure, the decision-maker had to bear in mind that it was inherently more probable that a misrepresentation had been made innocently or negligently rather than dishonestly in arriving at an evaluative conclusion based on the whole of the material that the decision-maker ought to take into account. (5) On the evidence, in particular the defendant’s approach to assessing fraud, there was significant force in the submission that in arriving at a conclusion the defendant failed to approach the dishonesty issue with an open mind or bearing in mind that it was more probable that a misrepresentation has been made innocently or negligently rather than dishonestly. The errors made permeated the whole of the decision making exercise, which on analysis consisted of little more than a reference to the falsity of the representations coupled with the fact that at the time they were made, CLS was carrying out commercial valuation work for lenders other than clearing banks and building societies. The decision was not one that the defendant could safely have arrived at. Adam Kramer and Sophia Dzwig (instructed by Rosling King LLP) appeared for the claimant; Michael Pooles QC and Jack Steer (instructed by DWF Law LLP) appeared for the defendant. Eileen O’Grady, barrister Click here to read a transcript of UK Acorn Finance Ltd v Markel (UK) Ltd