The duty of fair presentation – a useful case study

Cometsambre is a Belgian scrap metal dealer.  In early 2008, it commenced chartering vessels to carry cargoes of scrap metal from Ghent, Belgium.

Its broker obtained Charterers’ Liability and Freight Demurrage and Defence insurance for its chartering operations via an insurance coverholder AMICA (who wrote the risk on behalf of the Lloyd’s Syndicate HIG 5321).  Cometsambre’s broker prepared a list of questions, which it completed and submitted to AMICA on Cometsambre’s behalf.  Cover was effective as of 17 March 2008.

After many years in which there were no fires at all occurring in its scrap, Cometsambre suffered five fires on vessels or in quayside scrap piles in 2020 and 2021.  When cover was renewed for the 2022 year, Cometsambre did not disclose these five fires having occurred in the previous 20 months, although AMICA did not expressly ask a question directed at this.

In June 2022, there was another fire on board the Cometsambre-chartered vessel LOWLANDS MIMOSA while it was loading Cometsambre’s scrap metal.  The vessel’s  disponent owners commenced arbitration proceedings against Cometsambre for losses arising from the fire.  Cometsambre notified AMICA of the claim, seeking an indemnity for any liability to the disponent orders plus its associated legal costs.

On 23 December 2023, AMICA declined the claim on the basis that Cometsambre had breached its duty of fair presentation by not disclosing the 2020 and 2021 fires at renewal.  On that basis, it sought to avoid the policy.

Cometsambre initiated proceedings seeking a declaration that Lloyd’s was liable to indemnify it in respect of the LOWLANDS MIMOSA claim.

Cometsambre accepted that it had not disclosed the five fires, but disagreed that that constituted a breach of its duty of fair presentation, on four bases.

(A) Fires not material

Cometsambre argued that the fires were not material, because they had not given rise to a claim and some had occurred quayside (rather than on the vessel), and so its failure to disclose these did not constitute a breach of its duty of fair presentation.

Section 3(4)(a) of the UK’s Insurance Act 2015 (UKIA) (cf. s 31(1)(a) of NZ’s Consumer of Insurance Act 2024 (COIA 24)) requires a non-consumer policyholder to disclose every material circumstance that the policyholder knows or ought to know.

A circumstance is material if it would “influence the judgment of a prudent insurer in determining whether to take the risk and, if so, on what terms”: UKIA, s 7(3); cf. COIA 24, s 32(1).  In interpreting this test, the UK High Court cited Delos Shipholding SA v Allianz Global: “Insurers did not need to show that the undisclosed circumstances would have had a decisive effect on the judgment of the hypothetical prudent underwriter, or even that he would probably have regarded them as increasing the risk. It is sufficient that he or she would have wanted to take them into account”.

The Court accepted insurers’ expert underwriting evidence that a prudent underwriter would take vessel fires into account in deciding whether to write the risk, and that quayside fires would be treated in the same way as vessel fires.  It held that a prudent underwriter would want to know about the incidence of the fires (given multiple fires had occurred in short succession after years of no fires) to help him or her assess the extent of the risk, whether it had changed, and whether that record may indicate something about Cometsambre’s cargoes/procedures.  On that basis, they were deemed a material circumstance that Cometsambre was required to disclose at its 2022 renewal.

The fact that the fires did not give rise to an insurance claim did not mean that they were not material.

(B) Gave sufficient information to put prudent insurer on notice

Cometsambre said that it gave sufficient information to put a prudent insurer on notice that it needed to make further enquires, by telling insurers that it shipped HMS scrap metal (which has an inherent fire risk), and so did not fail to make a fair presentation of the risk.

Policyholders do not need to disclose material circumstances where they have disclosed sufficient information to put a prudent insurer on notice that it needs to make further enquires for the purpose of revealing those material circumstances: UKIA, s 3(4)(b); cf. COIA 24, s 31(1)(b).

The Court confirmed that the obligation of ensuring fair presentation is primarily on the Insured.  What AMICA had been told was not sufficient to put it on notice of the need to make further enquires as to whether there had been a change in the incidence of fires as compared to previous years.

(C) Insurers presumed to have known material circumstance

Cometsambre argued that insurers were presumed to have known that fires of this nature frequently occur in scrap metal, and so did not fail to make a fair presentation of the risk.

A policyholder is not required to disclose a circumstance if the insurer is presumed to know it: UKIA, s 3(5)(d); cf. COIA 24, s 31(2)(d).

The Court considered that, in light of the information provided by Cometsambre about the quality of the scrap it was shipping, an underwriter would have considered there was a low risk (but not no risk) of fire.  It was not established by Cometsambre that insurers were presumed to have knowledge of any of the relevant fires, or still less of the incidence of those fires in quick succession after a significant period in which there were no fires at all.

(D) Insurers waived information

Finally, Cometsambre argued that it had not failed to make fair presentation of the risk because insurers had waived information as to the fires.

A policyholder is not required to disclose a circumstance if it is something as to which the insurer waives information: UKIA, s 3(5)(e); cf. COIA 24, s 31(2)(e).

The Court held that the relevant test is whether a reasonable reader or observer of the communications would have understood underwriters to have shown that they had only limited concerns which did not extend to the undisclosed information.  It said that this test was not met: AMICA’s enquires at the outset when the risk was first written in 2008 were designed to ensure that fire-risky cargo was not being covered.

Importantly, in reliance of insurers’ expert underwriting evidence, the Court held that the fact that Cometsambre was not asked to fill in an updated questionnaire at renewal could not reasonably be understood to be a waiver of disclosure of material circumstances.

In the alternative, Cometsambre argued that, to the extent that it was held to have breached its duty of fair presentation, disclosure of the fires would not have impacted the decision of AMICA to write the risk or the terms on which it would have done so.  On that basis, it argued that the non-disclosure did not induce insurers to renew the risk.

Where there is a breach of the duty of fair representation by a non-consumer, an insurer only has a remedy if it can prove that, but for the breach, it either would not have entered into the contract of insurance on any terms or would have only done so on different terms: UKIA, s 8(1); cf. COIA 24, s 48(1).

The Court held that the correct counterfactual was what insurers’ response would have been if the five fires occurring in 2020 and 2021 had been disclosed during renewal for the 2022 year.

The issue of inducement was to be judged primarily on the basis of factual, rather than expert evidence.  However, expert evidence about how a hypothetical prudent underwriter would have acted can lend support to the factual evidence.

The Court accepted the factual evidence given by AMICA’s underwriter that, had the fires been disclosed, insurers would not have renewed cover on the same (or any) terms because:

• the fact of the fire themselves would have influenced his judgment, primarily due to the potential exposure for insurers being significantly high when compared to the limited premium obtained; and
• the likely cause of the fires was due to the carrying of poor quality scrap cargo, which indicates a change in risk profile.

The Court also did not agree with Cometsambre’s contention that an underwriting decision by AMICA to renew insurance for BST, a different scrap metal exporter who had also suffered two fires (that it had disclosed), was determinative of how AMICA would have acted had Cometsambre made proper disclosure.  It accepted AMICA’s underwriter’s factual evidence on why the two risks were not analogous.

On that basis, the Court held that AMICA would not have written the risk on any terms at 2022 renewal had the fact of the fires been disclosed, and so was entitled to decline Cometsambre’s claim and avoid the policy (with all premium paid returned): UKIA, sch 1, para 4; cf. COIA 24, sch 2, cl 4(1).

Although insurers were ultimately successful, the Court was particularly cognisant of the risk of “post-claim underwriting”: underwriters will be more likely to overstate how they would have written a risk with the benefit of hindsight, given they now know that a significant claim would have eventuated.

The relevant provisions of the UKIA considered by the UK High Court are analogous to the provisions in the COIA 24 that will come into force here in New Zealand on 15 November 2027.  The Cometsambre decision therefore provides some helpful guidance on the respective responsibilities of insurers and non-consumer insureds under the new duty of fair presentation:

• Non-consumer insureds: Responsibility for making a fair presentation of the risk remains squarely with the insured. An insurer’s failure to ask specific questions at renewal targeted at that issue does not relieve the insured of its obligation to volunteer material circumstances.  If there is any uncertainty, policyholders should voluntarily disclose all facts or circumstances that may be considered material, even if the matter has not ultimately resulted in an insurance claim.  The touchstone is whether the circumstance is material.  If it is (or may be), it should be disclosed.
• Insurers: Insurers will be assured by this decision, which resisted Cometsambre’s attempts to shift the burden onto insurers. Insurers were not found to have waived disclosure of the fires by failing to issue renewal questionnaire or specifically ask questions at renewal relating to fire risks.  Despite this, insurers should always ensure that they carefully consider the questions that they are asking to avoid the suggestion that they have waived information.

The decision also provides a useful roadmap and practical guidance on how insureds and insurers should present their case to the Court in non-disclosure proceedings:

• Factual evidence is key. The Court relied primarily on the factual evidence of AMICA’s underwriter. That evidence requires a sober assessment of how that underwriter would have acted had the disclosure been made, and cannot be assessed with the benefit of hindsight.  However, it is also important to show that that underwriters followed internal procedures and kept records of why they reached decisions.
• It will be useful for insurers to be able to point to a similar risk where a consistent underwriting approach has been taken, or to be able to distinguish examples there a different approach was taken.
• But expert underwriting evidence is also necessary. The Court relied on insurers’ expert underwriting evidence both as to what a prudent underwriter would consider material and in support of the factual underwriting evidence on inducement.

This publication is intended as a general overview and discussion of the content dealt with. It should not be used in any specific situation, in which case you should seek specific legal advice.