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International Insurance Law Review

1993

Editorial

If it's broke, fix it!

Christian Wells
Subject: Insurance
Keywords: Disclosure; Insurance companies; Litigation; Misrepresentation; Underwriters
*Int. I.L.R. 355 It is well known that the insurance industry has had a hard time in the courts of the
United States in recent years. However, the US courts do not enjoy a monopoly in the area of
insurer-bashing, and it has become increasingly noticeable that their UK counterparts, with occasional
exceptions, are becoming very tough with insurers. While the decisions that are referred to below
cover a wide range of points of insurance law, the courts' increasing toughness with underwriters
appears to stem from the harsh legal consequences of innocent non-disclosure or
misrepresentation, and from the increasingly technical nature of insurance.

A TOUGHENING STANCE
The current source of law is section 17 of the Marine Insurance Act 1906, but the statute is directly
descended from the decision in Carter v Boehm. 1 While that decision has served very well for over
200 years, its rudimentary nature contrasts and jars increasingly with the sophisticated insurance
market to which it is applied. It is at least arguable that the section has become too harsh in its effect
for modern times. If so, however, it would be better to tackle the problem head on and to change the
statute, rather than leave the present situation to continue. What appears to happen more and more
is that judges strive to mitigate the effects of section 17 in particular, and underwriters' strong legal
position in general, by finding exceptions or new arguments on which to base individual decisions. In
the process, they make pronouncements that increasingly view underwriters as a breed whose role in
litigation is to produce ever more contrived arguments.
An early indication of the courts' toughening approach towards underwriters was the judgment of
Steyn J in Keyser Ullman v Skandia, 2 The judge found that not only were the underwriters under a
reciprocal duty of utmost good faith towards the insured, but since the remedy of avoidance for
breach of that duty would leave the insured without insurance at a time when he most needed it, the
underwriters would be liable in damages to him as well, in circumstances where knowledge material
to the risk had come into their possession and they had not passed it on to the insured. Fortunately
for the underwriters, this aspect of the decision was, in the particular circumstances of the case,
reversed on appeal. It was, however, an indication that the court was not entirely happy with
underwriters who either sought to use the advantage given them by the Marine Insurance Act or who
adopted a technical approach to the coverage they offered.
Another indicator of this trend was the decision in Barlee Marine Corp. v Trevor Rex Mountain (the
‘Leegas’). 3 The principal issue was the effect of a ‘Leading Underwriter’ clause which provided that:
‘Any amendments, additions, deletions including new and/or managed and/or chartered notice of
assignment ratings and alterations of any description to be agreed by Leading Underwriter and to be
binding on all others hereon.’ The Leegas was struck by missiles and cannon fire in the Persian Gulf
and became a CTL (Constructive Total Loss). Before that had occurred, there had been a number of
endorsements to the policy, of which only the first two had been agreed to and initialled by the
following market as well as *Int. I.L.R. 356 the leader. Cover, in the circumstances of the claim,
depended on one of the later endorsements. Not only did the Commercial Court grant the owners
summary judgment against the underwriters, but in the process refused the underwriters leave to
adduce expert evidence as to market practitioners' opinions as to the meaning of the clause. The
judge further described the underwriters' arguments as ‘very far fetched’ and ‘fanciful’. The Court
would and did decide the issue on a non-technical construction of the relevant clause,
notwithstanding that the brokers and underwriters might have used it knowing that it had a different,
technical meaning.
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GROWING USE OF EQUITY

Of greater interest is Kenneth Roberts v Patrick Selwyn Plaisted, 4 in which the underwriters had
sought to avoid the policy on the grounds of non-disclosure. The insured owned and operated a
motel. Part of the building contained a discothèque, which was a significant part of the business. The
insurance package which the broker recommended the insured take out was aimed at hotels,
restaurants, clubs and the like. The proposal form contained a comparatively detailed set of
questions, but did not ask whether any parts of the buildings were used for purposes other than the
insured's main operation, and did not ask specifically whether they were operated as a discothèque.
The broker completed the proposal form for the insured. He answered questions directly and
correctly, but did not disclose the use of part of the building as a discothèque, even though the
insured had told him all about it. The underwriters' purported avoidance was found both at first
instance and in the Court of Appeal to be invalid on the grounds that the proposal form waived any
duty to disclose the operation of a discothèque.
What emerges strongly from the judgments in Roberts v Plaisted is the keenness with which both the
High Court and the Court of Appeal used the equitable doctrine of waiver to escape from the statutory
and common law duties of disclosure. This is an understandable impulse but one that will ultimately
lead to the unsatisfactory situation of a myriad of exceptions to an unwanted principle rather than an
improved principle which the courts are willing to uphold. Courts, it seems, have to form the view that
the insured is extremely undeserving of sympathy before finding for the insurers: see Inversiones
Manrea SA v Sphere Drake (the ‘Dora’). 5
The chronological order of cases now brings us back to the construction of policies. In Turner v Manx
Line Ltd 6 both the Commercial Court and the Court of Appeal turned their faces against a technical
construction of the phrase ‘by reason of interest in the vessel’ in clause 3 of the Institute Time
Clauses Hulls (Port Risks) wording. Moreover, it was said that it was ‘entirely appropriate’, as the
insured contended, to cover all risks run by reason of the operation of the vessel, but it was ‘entirely
inappropriate’, as the underwriters contended, to cover only the very limited strict liability imposed on
a ship-owner in that capacity, even though that was how the insured was interested in the vessel. The
underwriters' contentions were derided as ‘detailed semantic or syntactical analysis’.

PROCEDURAL HELP FOR INSUREDS

Underwriters appear to have enjoyed a small respite during 1990. However, in Bank of America
National Trust and Savings Association v John Joseph Taylor, 7 their problems continued. There had
been a *Int. I.L.R. 357 complex placing (presumably the brokers' decision on behalf of the insured) of
the hull and machinery insurance of the vessel Kyriaki in the Lloyd's and Institute of London
Underwriters markets, as well as with other London companies, and also with certain Arabian
insurers. There was no Leading Underwriter clause and the insured inevitably faced the tedious, but
common task of issuing and serving all the underwriters with proceedings. However, the Commercial
Court decided that this need no longer be a problem for the insured: it (the Court) had the power to
appoint one defendant underwriter to represent all the others in the circumstances of the case, and
further it should exercise that power. Further, the Court adopted the dictum of the Court of Appeal, in
the ‘Irish Rowan ’8 to the effect that if there were a multiplicity of contracts of insurance: ‘the result
would seem to be potentially anarchic from the practical business point of view’.
The Court of Appeal does not appear to have considered that the insured through his broker might
have sought to place a risk with a small number of companies, or alternatively to include a clause
permitting service of proceedings on certain Leading Underwriters alone, or that proceedings against
them be conclusive. And yet against this background, the underwriters were perhaps lucky, in the
Bank of America case, in that the Court permitted separate representative underwriters for each of
the Lloyd's, ILU and Arabian contingents.

THIS YEAR'S DECISIONS

Another area where underwriters have taken a lot of flak from the Commercial Court is when they
have pleaded illegality. The judgments in Bedford v IRB 9 and, more recently, Harbour v Kansa 10
(albeit on the preliminary point of arbitrability) both start with a castigation of underwriters for daring to
seek the advantages that English law holds for them in this area at present. The Court having
castigated the underwriters then goes on, typically, to produce a judgment that could hardly be more
favourable to underwriters.
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This year, there have been three decisions in the same vein. First, the retrocessionnaires were told by
the Court of Appeal in Harbour v Kansa 11 that even were they to be right in contending that the
retrocession contract was void for illegality, they would have to reach that decision through arbitration
pursuant to the arbitration clause in the contract and not through the courts as had been the position
hitherto. Their leading counsel was described as: ‘Taking his stand as the last bastion of orthodoxy’
for having argued for what was thought by most to be the status quo.
The second case this year in the same vein was Pan Atlantic Insurance Co. Ltd v Pine Top Insurance
Co. Ltd. 12 Although the Court of Appeal accepted the objective test for materiality laid down in
Container Transport International Inc. v Oceanus Mutual Underwriting Association (Bermuda) Ltd, 13 it
decided that if the underwriters were to be entitled to avoid, they would need to show that the
undisclosed material would probably tend to increase the risk. It was no longer enough that a prudent
underwriter would have wished to take the undisclosed material into account in deciding whether or
not to accept the risk and the premium to charge for it. As one of their Lordships put it: ‘it results in a
somewhat fairer and more balanced principle of materiality as between insured and insurer’.
Finally this year (at the time of writing), there is the House of Lords' decision (15 July 1993) in
Ackman v Policyholders Protection Board and Scher v Policyholders Protection Board, the cost of
which *Int. I.L.R. 358 will be borne by underwriters through the Policyholder Protection Board levy.
Again, the technical construction of the Policyholders Protection Act, which might have suggested that
only a UK policyholder could have benefited from its terms, has been thrown out by the courts, who
have held that provided the policy was written as part of the conduct of an insurance business in the
United Kingdom, then it did not matter where the policyholder was resident or even where the claim
was paid to him. Although the types of policyholder who can benefit from the provisions of the Act are
likely to be restricted by the second part of their Lordships' judgment, which was expected in October,
once again insurers collectively have fared badly in the courts.

THE COMMON THREAD

From all these cases, there is a common thread that can be seen, namely the increasing impatience
of the court with underwriters, whose position appears to be unduly favourable compared to that of
the insured. If that is the case, which is by no means certain, then the problem needs to be confronted
head on. Numerous exceptions and whittlings away of the doctrines make for bad law. If section 17
needs changing, Parliament should be asked to change it. There are other reasons too why a change
in the law relating to the duty of disclosure, and underwriters' position under the law generally,
should be considered. If London is to survive as the premier centre of insurance in Europe,
notwithstanding the present problems at Lloyd's and the insolvencies in the company market, then it
will have to offer products which, albeit at a higher price, do not involve the insured in technical
argument, in protracted litigation and in the harsh consequences of innocent non-disclosure if it is to
compete with its French, German and Italian counterparts.
The one consolation for insurers is that brokers have come in for even greater criticism in the courts.
In Roberts v Plaisted, for example, the judge commented:
Before I come to examine this contract it is clear that, if the Insurers' contention is correct, this plaintiff
is yet another victim of the insurance industry. He made the fullest disclosure to the broker; like the
majority of laymen he probably thought that that was enough and that the broker was the agent of the
Insurers by whom he was remunerated by way of commission; that mistake was one which,
unhappily, is all too common, and all too often used by Insurers to escape liability.
To this, the Court of Appeal added:
To the personnel acquainted with the insurance industry it may seem a remarkable state of the law
that someone who describes himself as a Lloyd's broker who is remunerated by the insurance
industry and who presents proposal forms and suggested policies on their behalf should not be the
safe recipient of full disclosure; but that is undoubtedly the position in law as it stands at the moment.
Clearly, if it is time to soften the consequences of innocent non-disclosure and misrepresentation, of
technical interpretations and of illegality, clarification of the brokers' position is long overdue, but that
is another subject altogether.
Int. I.L.R. 1993, 1(11), 355-358
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1. [1766] 3 Burr. 1905.

2. [1987] 1 Lloyd's Rep. 69.
3. [1987] 1 Lloyd's Rep. 471.
4. [1989] 2 Lloyds's Rep. 341.
5. [1989] 1 Lloyd's Rep. 69.
6. [1989] 2 Lloyd's Rep. 212 and [1990] 1 Lloyd's Rep. 137 (CA).
7. [1992] 1 Lloyd's Rep. 484.
8. [1990] 2 WLR 117.
9. [1984] 1 Lloyd's Rep. 210.
10. [1992] 1 Lloyd's Rep. 81.
11. [1993] 1 Lloyd's Rep. 455.
12. [1993] 1 Lloyd's Rep. 496.
13. [1984] 1 Lloyd's Rep. 476.

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