Guide to decisions
3 December 2001
12 November 2013
11 November 2013
Routes to financial redress against banks, investment advisers, insurers, mortgage advisers and product providers
29 May 2014
23 September 2013
17 October 2013
HIH Casualty and General Insurance Ltd & ors v Chase Manhattan Bank & ors (QBD Commercial Court, Aikens J, 31 July 2000) (Court of Appeal, Rix LJ, 31 July 2001)
Freedom to contract
Non-disclosure: A properly drafted clause might negate the insured's duty of utmost good faith and waive retrospectively any duty to disclose material facts. Mr Justice Aikens concluded that, once the duty to disclose had been excluded, it added nothing to describe the non-disclosure as fraudulent.
Remedies: The parties could agree to exclude remedies for 'innocent' or 'negligent' misrepresentation or non-disclosure. Preventing avoidance (or rescission) posed no problem. It was common ground that no clause could prevent avoidance for fraudulent misrepresentation for which an insured was personally responsible. Argument centred on whether it was theoretically possible to exclude liability for the fraud of an agent. Lord Justice Rix found the authorities inconclusive, but decided that public policy did not demand that the parties' autonomy be disregarded. He suggested that it might be different if the principal was implicated in the agent's fraud, or if the exclusion was itself part of some fraudulent scheme.
Principles of construction
All agreed that the clearest possible wording was required to exclude liability for the fraud of an agent. More difficult was negligence. The insurers relied on the Canada Steamship line of authorities, which dealt with the construction of exclusion clauses and specifically whether they extended to negligence. Both Judge Aikens and the Court of Appeal found that the three 'rules' discussed in those authorities were not applicable to clauses in contracts of insurance. Given the unitary and absolute duty of utmost good faith, which made irrelevant the distinction between innocent and negligent breach, it was not to be assumed that the parties had any such distinction in mind.
Duty to disclose: Judge Rix analysed the duty to disclose of an insured's agent to insure as being derived from the duty of his principal. If the insured has no duty to disclose anything at all, the agent has no duty either.
It was confirmed at both levels that damages are not available for breach of the duty of utmost good faith. A claim could be made in deceit if a statement was made fraudulently. Both Judge Aikens and the Court of Appeal considered that there was no duty not to make a negligent misstatement implicit in the relationship of insurer and insured (absent special circumstances).
Judge Aikens ruled that non-disclosure by the broker could not make it liable to the insurers. There was no common law duty to 'speak up'. The question of whether the broker might be liable in respect of positive statements made negligently was left for another day.
The guidance of what can be excluded/limited in contracts of insurance and the manner in which these principles are applied will be useful for insurance practitioners grappling with the meaning of increasingly common 'anti-avoidance' provision. Judge Rix's analysis of the source of the agent to insure's separate duty to disclose throws further light on this difficult area.
Judge Rix's discussion of the Canada Steamship line of authorities and his concerns about the application of such rules to commercial contracts may be useful in arguments about exclusion clauses generally.
HIH Casualty and General Insurance Ltd v New Hampshire Insurance Co & ors (QBD Commercial Court, David Steel J, 4 December 2000) (Court of Appeal, Rix LJ, 2 May 2001).
Judge Rix considered whether the delivery of the policy wording superseded the slip. He concluded that there was no rule making a slip inadmissible, even if it was unlikely to assist when it had been agreed that it would be superseded by the policy wording. Whether it had been so agreed was a question of construction, although he accepted that this was the general presumption in the insurance field.
The next question was whether the term that the producers would make six films was a warranty, the breach of which would bring cover to an end. Judge Rix decided that the absence of the words 'warranty' or 'it is warranted' was not conclusive. More important was whether the term went to the root of the transaction and bore materially on the risk, and whether damages would be an adequate remedy for breach.
By identifying the distinction between breaches of warranty and the defences specifically mentioned in the anti-avoidance provision, both judges arrived at the conclusion that the anti-avoidance provision was not a defence to breach of warranty. On the other hand, it did prevent avoidance for non-disclosure/misrepresentation, even if negligent. Judge Rix indicated that the Canada Steamship line of authorities did not assist in the context of the unitary duty of utmost good faith, but held that this particular clause would pass that test in any event.
Judge Rix considered that the anti-avoidance provision might be incorporated into the reinsurance contract by the general words of incorporation. If so, the anti-avoidance provision was not to be read as if 'reinsurer' was to be substituted for 'insurer' etc, as suggested at first instance. He left open the question of whether it would be incorporated notwithstanding that the particular reinsurer was unaware of it, which he considered linked to issues about presentation of the reinsured risk.
If incorporated into the reinsurance contract, the anti-avoidance provision prevented the reinsurers from complaining about the insurer/reinsured's inability to avoid for misleading presentation of the underlying risk. It would also bind reinsurers to pay when the insured's misleading presentation was repeated during the placement of the reinsurance. However, it would not prevent reinsurers from complaining about shortcomings in the presentation at reinsurance level, of which the original presentation by the insured was free.
Parties seeking to combat recent judicial enthusiasm for the use of preliminary issues may find ammunition in Judge Rix's complaint about being set "an unusually academic examination paper".
Otherwise, these are decisions for insurance practitioners rather than the wider profession. Judge Rix's learned (if technically obiter) examination of the law concerning the relationship between slip and subsequent policy wording will inform any future debate in that sphere, as will his discussion of the nature, and remedies for breach, of warranties. Similarly, the assumption (both at first instance and on appeal) that insurance and reinsurance were intended to be 'back to back', and the consequences which flow from that assumption, may be relevant to other reinsurance disputes.
Sean O'Sullivan is a barrister at 4 Pump Court