PAN ATLANTIC INSURANCE COMPANY LTD v PINE TOP

INSURANCE COMPANY [1995] 1 A.C. 501

Table of Contents

Chapter Title Page Number

1 Introduction 1

2 CTI v Oceanus: The establishment and rejection of the 2

‘Decisive Influence Test’

3 Different Intepretations of Materiality: Pan Atlantic 4

3.1 Case Summary 4

3.2 Critical Analysis: Decisive Influence, a pragmatic 5

solution?

3.3 Section 18(2) according to Lord Mustill, An Alternative 9

Interpretation

4 Conclusion 11
1. Introduction

Section 17 of the Marine Insurance Act1 (MIA) 1906 provides that a marine insurance

contract is one of good faith (uberrimae fidei) and accordingly, of all circumstances which

can influence the judgement of the prudent insurer must be disclosed. These circumstances

are referred to as being material and are embodied in sections 18 to 20 of the MIA 1906.

Although this paper concerns itself with a critical analysis of the ruling in Pan Atlantic

Insurance Company Limited and Others v Pine Top Insurance2 (Pan Atlantic), it should be

mentioned that until this case, the incumbent position of the law was enshrined in the

judgement of Kerr L.J. in the 1984 marine case of CTI v Oceanus3 where it was held that a

fact was to be deemed material if it influenced a prudent insurer’s assessment of the risk.

Although the decision was made over a decade ago, in 2004, a report by Comite Maritime

International expresses the view that the Pan Atlantic decision is ‘unsound in principle as

almost useless in practice’4 arguing that the ruling departs from the traditional and practical

objectivity of materiality and as such removes the ease of being able to prove the materiality

of a circumstance. This paper agrees with the views of Staring 5 and accordingly will conduct

a critical analysis of the ruling of the House of Lords in the case (in the context of

materiality) through a textual analysis of the judges submissions, scrutinising the views of the

dissenting judges, Lord Templeman and Lord Lloyd of Berwick and comparing their

submissions with the judgment of Lord Mustill. This paper will further argue that the

submissions of the dissenting judges are practical and correlate with a purposive

interpretation of the section 18 of the MIA ; proposing that a purposive interpretation of the

1
Marine Insurance Act 1906
2
Pan Atlantic Insurance Co. Ltd v Pine Top Insurance Co. [1995] 1 A.C. 501
3
Container Transport International Inc v Oceanus Mutual Underwriting Association (Bermuda) Ltd [1984] 1
Lloyd’s Rep. 476
4
Graydon S. Staring, The CMI Looks at “Marine Insurance Law”: A Unique Conflation of Contract and “Law”
[2004] < http://works.bepress.com/graydon_staring/8> Accessed 2 January 2013 p.9
5
Ibid
MIA is important to protecting commercial efficacy and equity in marine insurance law. To

achieve this aim, a brief reference will be made to CTI ruling and the establishment of the

‘decisive influence test’, before a brief case summary of Pan Atlantic is given. Subsequently,

this paper will first consider the submissions in relation to materiality of Lord Templeman

and Lord Lloyd (who gives a lengthy but detailed opposition to Mustill) before examining the

materiality section of the judgement. This paper will then form a conclusion on whether the

literal interpretation of section 18 (2) as adopted by the House of Lord is sufficient in

satisfying the test of materiality, and whether the ruling correlates with the intention of the

act, which is to certify the duty of uberrimae fidei or whether the literal interpretation of the

act still leaves room for the concept of materiality to be modified.

2. CTI v Oceanus: The establishment and rejection of the ‘Decisive Influence Test’

In Ionides v Pender6, Lord Blackburn asserted that the test of materiality is concerned with

whether a prudent insurer might be influenced in his judgement if he knew of the non-

disclosed or misrepresented fact. Lord Blackburn’s statement is parallel with the provisions

of section 18 (2) of the MIA where there is the requirement of the prudent insurer’s

judgement to be influenced. “Influence the judgement” remains a phrase open to debate in the

topic of marine insurance as different schools of thought will present diverse contentions on

what is considered the judgement of the prudent insurer; some will argue that this entails the

cognitive process of the hypothetical insurer while others will maintain that this represents

the actual making of the contract. Kerr L.J. in the CTI (court of appeal) held that a

circumstance was material if it influenced the hypothetical underwriter’s assessment of the

risk; a holding which was controversial at the time7. The dispute in this case arose as a result

of the insurer (Oceanus) seeking to avoid liability on the ground that the assured failed to

6
Ionides v Pender [1874] L.R. 9 Q.B. 531
7
Sir Joseph Arnould and Jonathan C.B. Gilman, Arnould’s Law of Marine Insurance (2008, Sweet and Maxwell)
para. 15-58
disclose previous refusals to renew policy; thus the underwriter claimed that the non-

disclosure was a material circumstance. The Court of Appeal agreed that the undisclosed

circumstances (previous policy renewal rejections) were material to the assessment of the risk

and accordingly, rejected the ‘decisive influence test’ which had been upheld in the court of

first instance8 by Lord Lloyd of Berwick (determinative impact on covering the risk) thereby

entitling the insurers to avoid liability in accordance with s18 (1) of the MIA 1906.

Kerr LJ’s contentions are vital to this paper as he in an earlier case9, accepted the inducement

of the actual underwriter into making the contract as a requirement to prove materiality; in

other words, he had earlier accepted the mandatory objective nature of the materiality test, in

this manner embracing the decisive influence test. In giving the court of appeal ruling, Kerr

L.J. applied an ordinary dictionary meaning to the word “judgement” which is to form an

opinion10 and as such argued that the actual making of the contract was not a requirement but

that materiality was important to the assessment of the risk thus implying the test to be one of

subjectivity as opposed to his earlier contention of the test as objective. Merkin11 notes that

the ruling of Kerr L.J changes the word ‘would’ in section 18 (2), to ‘might’; a change

highlighted and criticised by Lord Lloyd in Pan Atlantic years later.

Interestingly, although his ruling implied a subjective element to the materiality test, Kerr

L.J. further buttresses his judgement by claiming materiality following this approach could

still be evinced by way of an expert insurer giving evidence in court and the court

mainitaining the discretion on the amount of weight to be placed on the expert’s opinion. This

contention is again in Pan Atlantic countered by Lord Templeman through by way of

8
Container Transport International Inc. v Oceanus Mutual Underwriting Association (Bermuda) Ltd (No.1)
[1982] 2 Lloyd's Rep. 178
9
Berger v Pollock [1973] 2 Lloyd’s Rep 442
10
Oxford Dictionaries, “judgement”. Oxford Dictionaries. [2010] Oxford University Press.
<http://oxforddictionaries.com/definition/english/judgement?q=judgement> Accessed 2 January 2013
11
Robert Merkin, Colinvaux and Merkin’s ‘Insurance Contract Law’ Vol. II (2007, Sweet and Maxwell) p.1048
questioning the possibility of evincing something which is subjective. These

counterarguments will however be analysed in detail in the next section. As stated, the ruling

in CTI was met with criticism by practitioners, academics and so forth as a consequence of its

harshness on the assured. To elaborate, as focus was to be placed on what the insurer would

want to know in assessing the risk, the scope of what could be classed as material was

broadened as a result of this ruling. Lowry12 describes the ruling of the court of appeal as

controversial because the court did not limit the duty of disclosure to facts that decisively

influence the prudent insurer and therefore an onerous duty is placed on the assured. One can

conclude that a consequence of the ruling in CTI is that an imprudent underwriter could

escape liability by asserting that a non-disclosed fact was material to his assessment of the

risk even where in reality, disclosure of this fact would have had little or no impact on the

cognitive process of the insurer. Bennett13 further contends that the ruling of the Court of

Appeal watered down the test of materiality laid down in the MIA 1906 by including

circumstances which had a tendency to influence a prudent insurer contrary to facts which

would influence the prudent insurer as required by statute.

3. Different Intepretations of Materiality: Pan Atlantic

3.1. Case Summary:

The primary concern of the case was a dispute between Pan Atlantic Insurance, who wrote a

number of ‘long tail’ liability insurance and Pine Top insurance who reinsured cover for a

1980 policy; this policy was subsequently renewed for an additional two years. The losses

disclosed to the underwriter were inadvertently erroneous14 and accordingly Pine Top sought

to rely on the materiality of the non-disclosed figures in order to avoid liability. Pine Top

further claimed that there had been misrepresentation in that although Pan Atlantic’s broker

12
John Lowry in Rob Merkin, Insurance Law: An Introduction (Routlege, 2007)
13
Howard Bennett, Case Comment: Utmost Good Faith in the House of Lords, [1995] L.Q.R. 181 page 1
14
True Losses: $468,168, Disclosed Losses: $235,768
had available the loss records, the presentation of the risk was done in such a way that his

(the underwriter) attention had been diverted away from the records. For the purposes of this

paper, focus will be placed on the materiality of the undisclosed amount of $232,400. The

case ascended to the House of Lords where Lord Mustill rejected the decisive influence test

in holding that for liability to be avoided, the words of section 18(2) were to be given their

ordinary meaning15, in other words it was not necessary that Pine Top’s underwriter made the

contract as a result of the non disclosure of the figure, rather the non-disclosure of the figure

was to be upheld as material to his assessment of the risk or assessment of the rate of

premium. This paper argues that his Lordship’s ruling effectively upholds Kerr L.J.s

judgement in CTI, in other words rejecting all together the decisive influence test.

Lord Templeman and Lord Lloyd dissented in their judgement, their opinion being that the

court maintained the discretion to give full and ordinary meaning to the wordings of s18(2)

and s20(2) and that this meaning should correlate with the doctrine of good faith. Lord

Templeman in his opinion further provided that is impossible for a prudent insurer to be

influenced by a circumstance which if disclosed would not have affected the covering of the

risk or setting of the rate of premium.

3.2. Critical Analysis: Decisive Influence, a pragmatic solution?

As has already been mentioned earlier, the dissenting judges in Pan Atlantic criticise the

ruling of Kerr L.J. in CTI; this being relevant as Pine Top’s counsel, Hamilton QC relied on

the ruling of the court of first instance16 in submitting that Pine Top should be allowed to

avoid the policy as a result of Pan Atlantic’s inadvertent omission to disclose a previous loss.

To begin with, Lord Templeman reaffirms the objective feature of the materiality test by

15
Ibid.2 p.447
16
Paul Magrath, ‘Law Report: Claim fails over non-disclosure: Pan Atlantic Co Ltd and Others v Pine Top
Insurance Co -House of Lords (Lord Templeman, Lord Goff of Chieveley, Lord Mustill, Lord Slynn of Hadley,
Lord Lloyd of Berwick) 25, July 1994 ‘ The Independent (London, 4 August 1994)
arguing that the reaction of the prudent insurer17 serves as the basis for the judgement of the

materiality of the non-disclosed fact. This contention counters the final CTI ruling as it

criticises the ruling on the grounds that the judgement of the court of appeal favours the

insurer as the underwriter can successfully argue that if disclosure had been made during his

assessment of the risk, he may have rejected the risk or set a higher rate of premium. This

paper finds this contention logical as it will be a strenuous task for an expert insurer to prove

on a balance of probabilities that a fact not disclosed would have been material in his

assessment of the risk because his evidence will be given in hindsight allowing him to take

advantage of a fact which will have made little or no difference to the making of the contract;

a move that this paper finds unfair. Furthermore, he counters Kerr L.J.s assertion that

materiality, following the CTI ruling can be evinced in court by questioning the possibility of

the concealment or misrepresentation of a fact that would have made no real difference

influencing the prudent insurer’s judgement, thereby reinforcing this paper’s stance.

Realising that he was (rightfully) contravening the incumbent position of the law at the time,

his Lordship correctly refers to the burden of proof in buttressing his submission that Kerr

L.J.’s judgement was erroneous.

To elaborate, if a determinative impact approach of materiality (decisive influence test) is

adopted, then materiality will be easy to prove, because as exemplified by Lord Templeman,

an expert insurer can be called to give evidence18 on what he would have done had the

information been disclosed to him and furthermore, the expert’s testimony can be compared

to the practices of other insurers. Hird19 agrees that if materiality is not to be assessed from

the reaction of the insurer, then it will be impossible to prove because the prudent insurer’s

claim that he would have wanted to know, and that knowledge will have had no bearing on

17
Ibid.2 p..430
18
Ibid.
19
Norman J. Hird, ‘Rationality in the House of Lords?’ [1995] Journal of Business Law p. 2
the acceptance of the risk would be made in hindsight and moreover will represent a personal

belief of the expert insurer. To comprehend these contentions, it is vital to begin with

investigating the dictionary meaning of ‘judgement’; which is to form an opinion or

conclusion20. Therefore, adopting this meaning, materiality should be construed as having an

impact on the formation of the decision to make the contract and not the making of the

contract itself; consequently, this definition when used in the context of materiality incites the

assumption that Lord Templeman was correct in his assertion that the ruling in CTI removes

the objective element of materiality which Hird notes is important to marine insurance law 21.

Hemsworth22 observes that his Lordship’s contentions can denote a disagreement with the

establishment of the inducement test. To expand on this, his Lordship’s opinions suggest a

reasonable argument that materiality should be judged on the response of the insurer to the

disclosure; in other words, what the prudent insurer would have wanted to know as this

knowledge would subsequently impact his decision. This paper adopts the view that a

determinative impact approach of materiality satisfies the purpose of the statutory provision

itself given that the undisclosed fact should be causative to the actual making of the contract

as surprisingly proposed by Lord Mustill23 in the judgement of Pan Atlantic. Lord

Templeman, adopting the decisive influence test of materiality, concludes his proposition by

offering that despite Pan Atlantic’s alteration of the numbers, the fact remains that the figures

disclosed to Pine Top’s underwriter were alarming enough and that a prudent insurer judging

from the disclosed figures would not have hesitated in rejecting the risk and accordingly, Pine

Top should be allowed to avoid the policy.

20
Supra [9]
21
Supra [8]
22
Margaret C. Hemsworth, Inducement in Insurance Law: Sins of Commission and Sins of Omission [1999]
Cambridge Law Journal p.2
23
Supra [2] Per Lord Mustill p. 714
Lord Lloyd, the first instance judge in CTI24 (who upheld the decisive influence test),

submitted that the meaning of s18 (2) was the central question of Pan Atlantic. He deviates

from Lord Templeman by concentrating on the interpretation of what would ‘influence’ the

judgement of the prudent insurer. In reaffirming the decisive influence test, he argues that

materiality should be assessed on factors that the prudent insurer will take into account, an

argument that this paper embraces, thereby reinforcing the objective feature of the materiality

test. A point of interest in Lord Lloyd’s submission is his acceptance of Steyn L.J’s rejection

of the decisive influence test in Pan Atlantic (Court of Appeal25) thereby, reaffirming the

importance of the objective element of the materiality test; the requirement that a

circumstance which diminishes the risk is not material26. Merkin27 categorises this

requirement as the ‘increased risk theory’ stipulating that this information must be

demonstrated as contemplated by the insurer to increase the risk although anew, the

requirement of this contemplation having a decisive impact on the making of the contract is

not mandatory. A conundrum is therefore posed as Lord Lloyd’s acceptance of the increased

risk theory somewhat reduces the requirement of objectivity in proving materiality although,

there is the possibility of the increased risk theory facilitating proof if an expert insurer is

called to give evidence; in other words, it is possible for a prudent insurer to use disclosed

facts in weighing the risk or setting the premium and his evidence can be weighed against

other insurers and their practices. Additionally, it can be argued that Lord Lloyd’s acceptance

of the increased risk theory reduces the harshness of the broad test of materiality28 as upheld

in CTI by reducing the scope of what is required to be disclosed in accordance with section

24
Container Transport International Inc. v Oceanus Mutual Underwriting Association (Bermuda) Ltd (No.1)
[1982] 2 Lloyd's Rep. 178
25
Pan Atlantic [1993] 1 Lloyd’s Rep. 496
26
Section 18(3) MIA
27
Supra 8
28
Jeremy Barnes, Non Disclosure: Underwriter’s right to Avoid Contract [1994] International Insurance Law
Review p.3
18 (3) thus striking a balance of fairness between the duty of the policy holder and the

insurer.

An interpretation of the wording of section 18(2) is then attempted by Lord Lloyd with focus

drawn to the meaning of “influence the judgement”. Lord Templeman’s contention is

acquiesced with as Lord Lloyd underlines the equivocal nature of the word “judgement” and

explores the different interpretations to the word but concluding (and this paper believes,

rightfully) that the commercial context of the word29 was to be applied in this case and in

doing so criticises Kerr L.J. for applying a meaning of little significance 30 in the CTI case.

This paper finds this approach rational as a market interpretation is relevant to the

commercial nature of marine insurance and accordingly, agrees with Lord Lloyd on the

ground that “judgement” in this context should denote what will occur and not a deliberation

of what could or may be decided. This paper consequently follows Lord Lloyd’s contention

that a literal interpretation of the wording of section 18 (2) reduces the harshness of the broad

scope test laid down in CTI and further mitigates the burden on the assured, obligating him to

provide determinative material thereby achieving a balance of fairness and the purpose of

section 18 (1) and (2)

3.3. Section 18(2) according to Lord Mustill, An Alternative Interpretation

In part IV of his judgement, Lord Mustill begins by rejecting Beloff QC’s (Pan Atlantic’s

counsel) argument31 that a fact is material if it caused the prudent insurer to either reject the

risk or set a higher rate of premium. In supporting this rejection, Lord Mustill goes into a

textual analysis of section 18 (2) concerning himself with the phrase ‘influence the

judgement’ and presents an alternative interpretation of the phrase, arguing that legislature

29
Ibid. 2 p.459
30
Yeo Hwee Ying, ‘Recent Developments in Materiality Test of Insurance Contracts’ [1995] Sing. J. Legal Stud.
64
31
Ibid.2 p. 440 per Lord Mustill
who passed the MIA 1906 did not emphasise on the result but the decision making process32.

Therefore, in order to comprehend the alternative interpretation of section 18(2) it is vital to

disintegrate Lord Mustill’s ruling on materiality. Firstly, his Lordship notes the absence of

any word defining the nature of the influence on the judgement on the prudent underwriter,

an observation which moves away from the contextual interpretation of section 18(2) and

offers a more literal meaning to the section which will allow for the decision making process

to surpass the actual determinative impact on the contract formation33. While this does not fit

in with the reasoning of this paper, it offers to the law of marine insurance, certainty, as

future courts following this ruling can simply give dictionary meanings to the provisions of

the statute regardless of whatever result this may lead to.

Additionally, Mustill brilliantly scrutinises the entire provision of section 18(2), something

which the proponents of the decisive influence test appear to ignore in their submissions. To

elaborate, Mustill adds that “determining whether he will take the risk” crystallises the notion

that in order to prove materiality, it is not necessary that the undisclosed fact would have

caused the insurer to cover the risk34. To an extent, this contention is correct as a plain

reading of section 18 (2) denotes a rejection of the determinant contentions as advocated by

the dissenting judges. Furthermore, an examination of Mustill’s judgement does present to

this paper, the argument of materiality from the insurer’s perspective with the aim of

satisfying the duty of good faith. His Lordship notes that the doctrine requires in section

18(1) a disclosure of every material fact as opposed to Beloff QC’s contention of the

disclosure of determinative facts. In other words, adopting this alternative interpretation will

lead to an understanding of the decisive influence test altering both the provision and

intention of section 18 of the MIA as the dissenting argument contravenes section 18(1) by

32
John Lowry and Philip Rawlings, ‘That Wicked Rule, that evil doctrine....’ Reforming the Law on Disclosure in
Insurance Contracts [2012] 75(6) MLR p.1102
33
Francis D. Rose, Marine Insurance: Law and Practice, 2 nd Edn. (2004, Informa Law) p.75
34
Ibid.2 p.436, 440
providing a broker with the opportunity to select the facts he deems causative to the covering

of the risk, and this to some extent, breaches the uberrimae fidei doctrine.

4. Conclusion

A critical textual analysis of the submissions of the three Lords considered in this paper

demonstrates a need for a firm test of materiality. This paper remains steadfast in supporting

the decisive influence test as advocated by the dissenting judges as it provides a balance of

fairness and reduces the onerous duty on the broker/assured when procuring cover. Although

the judgment in this case is seen to have changed the interpretation of the materiality test,

writers like Boxer35 have argued that the test remains insurer friendly (reminiscent of the

controversy surrounding the CTI ruling) with incompetent underwriters still able to escape

liability36 if the Pan Atlantic interpretation of materiality is adopted.

This paper maintains that although the ruling in Pan Atlantic in the context of materiality is

correct in following the literal interpretation of section 18(2), in practice, it remains unfair

and has done anything but remedy the problem posed in the aftermath of the CTI ruling. The

onerous duty placed on the assured as a result of a literal interpretation of statute fails

economic efficiency as it is unlikely that the assured will be familiar with all facts that are

likely to influence the decision making process of the insurer. The only remedy provided here

by status is the option of inquiry37 but this paper maintains the view that the literal

interpretation of section 18 (2) as advocated by Lord Mustill remains inadequate and

arguably does little to guarantee that the doctrine of good faith is preserved. Rather, it

empowers the insurer to avoid liability on the grounds that a non disclosed fact which would

35
C. Boxer, Pine Top Emerges Above Atlantic [1994] 138 Sol Jo 936
36
See Marc Rich and Co AG v Portman [1996] 1 Lloyd’s Rep 430 : where Longmore J held that an underwriter
who was obviously incompetent was able to escape liability even though the undisclosed facts where not
relevant to his underwriting the risk
37
Ibid.1 S18 (3)
not have impacted his decision was material, a contention that this paper maintains as very

absurd.
BIBLIOGRAPHY

Books

Arnould, J. and Gilman, C.B.J ‘Arnould’s Law of Marine Insurance’ (2008, Sweet and

Maxwell)

Merkin, R. ‘Colinvaux and Merkin’s ‘Insurance Contract Law’ Volume II (2007, Sweet and

Maxwell)

Merkin, R. ‘Insurance Law: An Introduction’ (Routlege, 2007)

Rose, F.D. ‘Marine Insurance: Law and Practice’ 2nd Edition (2004, Informa Law)

Cases

Berger v Pollock [1973] 2 Lloyd’s Rep 442

Container Transport International Inc v Oceanus Mutual Underwriting Association

(Bermuda) Ltd [1984] 1 Lloyd’s Rep. 476

Container Transport International Inc. v Oceanus Mutual Underwriting Association

(Bermuda) Ltd (No.1) [1982] 2 Lloyd's Rep. 178

Ionides v Pender [1874] L.R. 9 Q.B. 531

Marc Rich and Co AG v Portman [1996] 1 Lloyd’s Rep 430

Pan Atlantic Insurance Co. Ltd v Pine Top Insurance Co. [1995] 1 A.C. 501

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Barnes, J. ‘Non Disclosure: Underwriter’s right to Avoid Contract’ [1994] International

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Boxer, C. ‘Pine Top Emerges Above Atlantic’ [1994] 138 Solicitors Journal 936

Hemsworth, M.C. ‘Inducement in Insurance Law: Sins of Commission and Sins of Omission’

[1999] Cambridge Law Journal

Hird, N.J. ‘Rationality in the House of Lords?’ [1995] Journal of Business Law

Lowry, J. and Rawlings, J. ‘That Wicked Rule, that evil doctrine....’ Reforming the Law on

Disclosure in Insurance Contracts [2012] 75(6) Modern Law Review

Ying, Y.H. ‘Recent Developments in Materiality Test of Insurance Contracts’ [1995]

Singapore Journal of Legal Studies 64

News Articles

Magrath, P. ‘Law Report: Claim fails over non-disclosure: Pan Atlantic Co Ltd and Others v

Pine Top Insurance Co -House of Lords (Lord Templeman, Lord Goff of Chieveley, Lord

Mustill, Lord Slynn of Hadley, Lord Lloyd of Berwick) 25, July 1994 ‘ The Independent

(London, 4 August 1994)

Statute

Marine Insurance Act 1906

Websites

Graydon S. S, “The CMI Looks at “Marine Insurance Law”: A Unique Conflation of

Contract and “Law” [2004] < http://works.bepress.com/graydon_staring/8>

Oxford Dictionaries. [2010] Oxford University Press. <http://oxforddictionaries.com/definit