Is an Insured responsible for an Insurer’s badly worded question on a proposal form?
Ristorante Ltd t/a Bar Massimo v Zurich Insurance Plc  EWHC 2538 (Ch)
This case is an example of where an insurer alleged that the insured had not complied with the duty of fair presentation introduced by the Insurance Act 2015 and used the insured’s failure to disclose the past involvement of its directors in insolvent companies as a reason to refuse to pay out following a fire. However, the insurer was not successful because of the way in which the question that gave rise to the alleged non-disclosure was worded.
Ristorante Ltd t/a Bar Massimo (“R”) carried on business as a bar and restaurant from a property in Glasgow. In January 2018, the property was damaged by fire and a claim was made under a policy of insurance issued by Zurich Insurance plc (“Z”). Z purported to avoid the policy from inception, alleging that an answer given by R to a question in an online proposal form was incorrect and that this amounted to a material misrepresentation and/or unfair presentation of the risk. R argued that there was no misrepresentation because its answer to the question specifically asked by Z was true, and Z had waived its right to certain other information owing to the limited scope of that question.
R therefore brought a claim against Z for breach of contract for its wrongful avoidance of the policy and refusal to meet R’s claim for the losses arising from the fire. Judgment was handed down on 21 September 2021.
When first applying for the policy, and again upon renewal, R (via its broker) completed online proposal forms which included the following question (the “Insolvency Question”):
“No owner, director, business partner or family member involved with the business… has ever been the subject of a winding-up order or company/individual voluntary arrangement with creditors, or been placed into administration, administrative receivership or liquidation”.
R was invited to insert either “agree” or “disagree” next to that statement when completing the form.
R (via its broker) inserted “agree” and therefore represented that the statement was true. However, R did not disclose that its shareholders/directors had previously been directors of other companies which had gone into insolvent liquidation.
At a hearing on 19 May 2021, Mr Justice Snowden considered, amongst other things, the following as preliminary issues:
- Was there an unfair presentation of the risk and/or a misrepresentation of material facts as alleged by Z?; and
- By asking the Insolvency Question in the limited terms that it did, did Z waive any entitlement to information about the insolvency of other companies for which the owners/directors of R had been directors/shareholders?
R accepted that the answer given to the Insolvency Question was material and induced Z to enter into the Policy, such that the only live issues concerned the proper construction of the Insolvency Question, and the question of Z's entitlement to additional information fall outside of its scope.
In considering those issues, the Court applied the usual principles of contractual interpretation, as they apply to insurance contracts, and therefore sought to ascertain the objective meaning of the language and words used. Where there was a real or genuine ambiguity as to what certain wording meant, the Court was entitled to prefer the meaning that most accorded with business common sense. However, if the ordinary meaning of the words was clear and did not give rise to commercial absurdity, the Court was not entitled to choose a different meaning which it considered would have been more commercially sensible or desirable. Further, if there was an ambiguity, the Court was entitled to favour the interpretation of the insured.
The Competing Interpretations of the Insolvency Question
R argued that the Insolvency Question had a clear and obvious meaning, there was no ambiguity, and the answer it had given was true. This was because the Insolvency Question asked about insolvency events of an “owner, director, business partner or family member” involved with R’s business. It did not ask about the insolvency events of other persons or other companies with which any of those individuals might have been connected or involved in some way. If Z had wanted to know about insolvency events of other entities, it could have included words to that effect (for example by adding the words “or any company in which any owner or director has been involved”), but it had not done so.
R argued that, Z was, in effect, seeking to insert missing wording under the guise of interpretation and that amounted to an impermissible re-writing of the Insolvency Question.
Alternatively, R contended that its interpretation of the Insolvency Question was an objectively reasonable one and should therefore be preferred by the Court. The answer it had given with reference to that interpretation was true and so there was no misrepresentation and/or unfair presentation of the risk.
Z argued that R’s interpretation was overly literal and lacked any common sense. It was clear that the question posed was primarily concerned with insolvency events that could affect companies, not individuals, and the only sensible meaning that could be given to the Insolvency Question was that it was directed at ascertaining whether other corporate entities with which R’s owners/directors had been involved had been the subject of one of the insolvency events referred to. It made business common sense for an insurer to want to know about such events in order to assess the risk and form a view about the ability of the owners/directors to exercise sound management of the business they were being asked to insure.
The Court rejected Z’s arguments and found in favour of R.
Mr Justice Snowden noted that the starting point was to consider the natural meaning of the words used in the Insolvency Question in light of the wording of the proposal as a whole. It was clear that the subject of the enquiry was the individuals identified (i.e. “owner, director, business partner or family member”) and there was no express mention of a corporate body with which any of those individuals had been involved or connected (save for R itself). Z had accepted that an interpretation which sought to apply other questions asked in the proposal form to such corporate bodies would be impossibly wide and Mr Justice Snowden found that a different meaning could not therefore be applied only to the Insolvency Question when the same wording was used throughout.
He also considered that the interpretation applied by R made business sense, because it was perfectly possible for R to have had corporate shareholders and/or directors which could, indeed, have been the subject of the insolvency events referred to, and referred to previous authority, of which Z ought to have been aware when drafting the Insurance Question, where the Court held that a similarly worded question did not extend to insolvent companies in which directors had previously had an interest.
Mr Justice Snowden went on to consider whether the particular wording of the Insolvency Question meant that Z had waived its right to be told about other insolvency events not specifically addressed by the Insolvency Question.
He found that, having identified previous liquidations as a subject on which Z required disclosure, and having specified the persons in respect of whom a previous liquidation would be disclosable, Z had limited its right of disclosure in respect of other (unspecified) persons or companies which had been placed into liquidation. The other insolvency events were all liquidations and, therefore, precisely the same type of insolvency matters that were the subject of the Insolvency Question. However, the crucial difference was that they related to a different set of persons than those identified in the Insolvency Question.
Mr Justice Snowden therefore concluded that it was a reasonable inference for R to draw that Z did not wish to know about any other liquidations (or, indeed, administrations, administrative receiverships, company voluntary arrangements, and so on), other than those specified in the Insolvency Question.
Point to Note
Z sought to rely on wording in the Statement of Facts (part of the suite of documents provided to R that was expressed to form part of the Policy) which set out the duty of fair presentation, explained R’s duty to disclose all material facts and advised that:
“if you are in any doubt about whether a fact is material, you should disclose it. Failure to do so may invalidate your cover and could mean that part or all of a claim may not be paid”.
However, Z was not saved by these generalised warnings.
This case reminds us that in the current hard market insurers are taking an increasingly forensic approach to the investigation and validation of claims. Insurers look closely at the circumstances in which policies were put in place and, where areas of concern are identified (legitimate or otherwise), there appears to be a greater willingness on the part of some insurers to adopt adverse coverage positions as against an Insured (which, perhaps, might not have been so adopted when market conditions were softer).
However, this case demonstrates that insurers can and do get it wrong. Where it is alleged that an insured made an unfair presentation of the risk due to misrepresentation or non-disclosure, it is necessary to carefully review the relevant documentation, and the circumstances/background pertaining to the relevant risk, to ascertain whether the insured did, indeed, fail to disclose a material circumstance, or whether (as in this case) insurers simply asked the wrong question.
 As set out in Wood v Capita Insurance Services  UKSC 24
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