As Andrew Jones and Daniela miklova report, the recent case of Ristorante Limited t / a Bar Massimo c. Zurich Insurance plc  EWHC 2538 is a useful overview of how the Court will interpret questions and answers in insurer proposal forms in coverage disputes. It also shows how insurers can lose potential policy defenses by writing proposal form questions that go wrong.
In Restaurant, the claimant company owned a restaurant. In January 2018, a fire broke out in the restaurant, prompting the plaintiff to seek compensation under his insurance policy from Zurich for losses totaling some £ 633,000.
Zurich, however, has avoided the policy due to material misrepresentation and non-disclosure.
The proposal form
Zurich relied on the applicant’s response to what was called the “insolvency question” in Zurich’s online proposal form. This asked the claimant to agree or disagree with the statement:
“No owner, director, business partner or family member involved in the business… has ever been the subject of a liquidation order or voluntary corporate / individual agreement with creditors, or ‘has been placed in receivership or liquidation. “
The Claimant replied “agree” indicating that the statement was true.
Eagle-eyed readers may have already noticed the problem with the insolvency question:
- The first part of the insolvency question is about owners / administrators etc. of the plaintiff company – in this case, as would be usual, they were all people.
- However, all of the insolvency events in Part 2 of the Insolvency Question except one – winding-up orders, CVA, administrations and liquidations – are all insolvency events applicable only to companies. There was no mention of bankruptcy, which applies to individuals.
The three directors of the plaintiff company had all been directors of other companies which had been the subject of judicial liquidation.
The questions put to the Court were therefore:
- What was the correct interpretation of the insolvency question? Was it broad enough to include the liquidations of other directors’ companies, or simply limited to cases of insolvency of the directors themselves?
- If the insolvency question did not include the insolvency events of other companies of the directors, had Zurich waived the need for the plaintiff to disclose them by limiting the question to only the insolvency events of the directors?
(1) Interpretation of the proposal form
The claimant argued that he answered the insolvency question correctly and that there was no misrepresentation as the question was simply about the insolvency events of the owner / directors etc. , and did not cover the insolvency events of any of their other companies. In the alternative, the Claimant argued that his interpretation was objectively reasonable and that there had therefore been no misrepresentation.
Zurich argued that this was too literal an interpretation given that the insolvency question mainly concerned insolvency events which could only affect businesses, and the only reasonable meaning was that the question was therefore addressed to other companies in which the directors were involved. If this was correct, the insolvency question clearly received the wrong answer.
The Court provided a useful summary of the approach to interpreting the Proposal Forms, in particular:
- As with all contractual documentation, the interpretation of the proposal forms involves identifying the objective meaning of the words used rather than the subjective intention or understanding of the parties.
- If there is a real ambiguity in a proposal form prepared by the insurers, it will be resolved in favor of the policyholder.
The Court took into account the context of the foregoing questions and the fact that a company could be the owner / administrator of the policyholder and therefore be subject to the corporate insolvency events listed in the insolvency question. The Court ultimately concluded that the clear objective meaning of the insolvency question was that it only addressed the insolvency cases of owners / directors personally and not of their other companies in which they had an interest.
The Court went on to say that, even if this was not the case, it would have accepted the alternative case of the Applicant that the Applicant’s interpretation to this effect was reasonable, and therefore it meant that there was no no misrepresentation.
Interestingly, the meaning of similar (unfortunately drafted) insolvency proposal form questions have been discussed in two previously reported cases, which the Court has Restaurant took into consideration: Doheny v New India Assurance Co (2005) and R&R Developments v Axa Insurance UK plc (2010). In both cases, the directors of the policyholder had also been directors of other companies subject to insolvency events. One case focused on insurers and another against:
“No director / partner in the company, or any company in which a director / partner has had an interest, has been declared bankrupt, has been the subject of bankruptcy proceedings or has concluded arrangement with creditors. “
As can be seen, this question only referred to an insolvency case, “bankruptcy», Which is only relevant for people.
However, the Court concluded that a reasonable person would interpret “bankruptcy”In this question to mean the insolvencies of companies, too, although bankruptcy does not apply strictly to businesses, given the reference to “Or any company in which the director / partner has had an interest”. Consequently, he made must be the disclosure of the insolvencies of other companies of the directors. Avoidance maintained.
“Have you or a … directors, personally or in the context of a company in which they have been involved … have you ever been declared bankrupt or are you the subject of bankruptcy proceedings or ‘voluntary or compulsory insolvency? “
On the other hand, the Court held that this question does not not require the disclosure of the other insolvency of other companies of the directors, since the issue only concerned the personal insolvencies of the directors.
The Court concluded that the insolvency question more closely resembled this question in R&R developments addressed only the insolvency cases of the directors of the Applicant and not of their other companies. The Court distinguished Doheny, since the question in that case had expressly referred to “or any company in which a director or partner has had an interest”.
The Court also rejected Zurich’s argument that since the plaintiff had retained the services of an insurance broker to obtain the policy, the meaning of the insolvency question should be interpreted from the point of view of a reasonable insurance broker, who would understand that the matter was intended to be addressed more broadly. However, the Court rejected this argument on the grounds that there was no evidence as to how a reasonable insurance broker would interpret the question, nor any authority to support Zurich’s argument that the broker’s view insurance was the right one.
(2) Waiver of disclosure obligation
Although the Insolvency Question turned out to be directed only at the directors personally, the Plaintiff accepted that the previous liquidations of the directors’ other companies were material and, unless Zurich waives them, the Plaintiff still had an obligation to disclose them. Such prior liquidations constitute a moral hazard well known for insurers of goods and companies.
The plaintiff argued that by limiting the issue of insolvency events to those of the directors only, Zurich had waived the plaintiff’s duty to disclose the insolvency events of the directors’ other companies.
This argument was based on the principle that if an insurer asks specific questions in a proposal form on a particular subject, it can be inferred that the insurer has waived its right to information on the same subject which is outside the scope of scope of the question. A classic example is if a car insurer asks how many accidents the insured has had in the last three years, this implies that he does not want to know that there are more than three years of accidents and therefore has waived the obligation of the insured to disclose these accidents even if they were material.
The Court accepted this principle applied to the insolvency issue and, by asking only for past insolvency events for the directors personally, a reasonable person would understand that Zurich did not want to be aware and thus waived the Requirement of the applicant to disclose the insolvency events of other company directors. The Court concluded that the fact that the proposal form expressly warned that the applicant was under an obligation to disclose material facts did not change this conclusion.
First, this decision should serve as a reminder of the importance for insurers to carefully consider what information they want and don’t want to know about particular topics and to ensure that the questions on their application forms answer it correctly. Otherwise, insurers may unwittingly forgo important information that they still want to know for underwriting. Repeated and bold warnings for policyholders to disclose all material facts will not save insurers in these circumstances.
Secondly, Doheny shows that all is not lost for insurers if writing the questions on a proposal form goes wrong. The interpretation of the proposal forms is very wording specific. A court may always be prepared to depart from a pure and literal interpretation of the question. However, this will probably only be in the clearest cases. In case of ambiguity, it will be resolved in favor of the policyholder.
Third, although claimants are required to comply with their obligation to disclose all material facts, this ruling re-establishes that it is not for a policyholder to decipher what is required by questions that may have different interpretations. . If the policyholder’s interpretation is reasonable, an insurer will not be able to avoid it simply because its own interpretation might also be reasonable.
Insurers should regularly review their proposal forms and ensure that the questions reflect recent developments in case law. In Restaurant, the Court expressly stated that the insurance market should be required to know the decisions in Doheny and R&R developments and the risks, therefore, of limited or vague questions. Don’t be the next reported case!