Avoidance of insurance policies – moral hazard and inducement (UK)

In this judgment, Berkshire Assets (West London) Limited v AXA Insurance Plc [2021] EWHC 2689 (Comm) the insured sought to recover an indemnity pursuant to a Contractors’ All Risks and Business Interruption policy.

The insured denied liability and avoided the policy alleging that the insured failed to disclose the admitted fact that one of its directors was the subject of criminal charges in Malaysia at the time the policy was renewed. The question was whether the charges against the director which were not prosecuted amounted to a moral hazard requiring disclosure.  Had the fact been disclosed, the insurer said it would not have agreed the insurance in respect of CAR or BI or any other cover.  Having heard evidence, particularly evidence from the insurer’s underwriter, the court held that the charges should have been disclosed. They were material circumstances contemplated by the relevant legislation.  It could not be expected of the insurer at the time to resolve the issue of whether the charges against the director did or did not involve allegations of deceit or dishonesty.  The charges clearly arose from a dishonest and fraudulent scheme on a huge scale. The court held that facts raising doubt as to the risk are sufficient to be material.

Bear in mind that under English law the test for materiality involves that of the prudent insurer and whether there has been a fair presentation of the risk, to be assessed principally from the perspective of an insurer. The position is different in South African law which applies the test of the reasonable person in determining materiality.

Despite that, the judgment contains some useful learning on the question of moral hazard. In both English and South African law materiality of a particular fact is a question of fact to be determined by the circumstances of each case and tested at the time of placement and not by reference to subsequent events.

As in English law, facts raising doubts as to the risk are sufficient to be material.  It is not necessary for the facts to be shown with hindsight to have actually affected the risk.

There is no settled definition of “moral hazard”.  The judgment reviews some of the authorities in that regard.

The court said that the absence of a settled definition was unsurprising in circumstances where each case will depend on its own facts.

The insured contended that a moral hazard is all about honesty and dishonesty but it is not the case that any instance of prior dishonesty has to be disclosed.

The insurer contended that a moral hazard might include a wide range of adverse factors, including dishonesty, incompetence and carelessness.

The court said that it is well established that a charge of a criminal offence would often constitute a material circumstance.  If at the time of placement the insured is under investigation for or has been charged with an offence which they know they did not commit and of which they were subsequently acquitted, the investigation or allegation is nonetheless material and should be disclosed.

The insured also argued that the case of inducement had to fail because if there had been a disclosure it would have been established that the director was not in fact if the matter was properly understood on the receiving end of an allegation of fraud and that would have been an end to the enquiry and any question of inducement.  The insured argued that there was no evidence upon which a finding of inducement could be made.  The court found that if the charges had been disclosed and any exculpatory material referred to, that on the evidence the insurer would have declined the risk as it ultimately did when the facts were at hand.  The court said that there was nothing to suppose that different considerations would or may have been taken into account if disclosure had been given at the outset.

The decision of the court must be viewed through the lenses of English law on materiality but is an important reminder that an insurer seeking to avoid a policy must prove inducement (the position on inducement is no different in South Africa) and it contains a useful discussion of what may constitute a moral hazard which in South African law is subject to an objective test. It also emphasises the importance of ensuring the relevant subjective and objective (by way of documentary support for asserted underwriting procedures and practices) underwriting evidence is lead to establish inducement.