Underwriters of an After-the-Event (ATE) insurance policy may be entitled to avoid for material misrepresentation and non-disclosure where the insured's claim is found to be based on dishonest evidence. So the court found in a recent case which saw the successful defendant in the underlying proceedings unable to rely on ATE insurance cover obtained by the claimant to cover costs which had been awarded in favour of the defendant.
The defendant claimed directly against the insured's ATE insurers for its costs under the Third Parties (Rights Against Insurers) Act 1930 since the original claimant had been wound up soon after judgment in the underlying action. The ATE insurers sought to avoid for misrepresentation and non-disclosure relying on the principle that the third party claiming direct against an insurer under the 1930 Act cannot be in any better position than the insured would have been had it claimed from the insurer. Specifically, the ATE insurers relied on the findings of the court in the underlying proceedings that the claimant's claim had been fraudulent, in the sense that the claimant knew that the claim was bound to fail and/or was based on dishonest evidence.
The defendant argued that any finding by the judge in the underlying proceedings that the claim was fraudulent should be disregarded. That was rejected by the court. It followed from this that the defendant's claim failed.
The court proceeded, however, to review the position in the event that the claimant had not presented a fraudulent claim but had during the placement provided dishonest evidence to bolster what they thought was a legitimate claim. The court held that in these circumstances, too, the ATE insurers were entitled to avoid. The court concluded that the ATE insurer had been induced by the misrepresentations/non-disclosures in the evidence presented to it to allow it to evaluate the claim and decide whether to underwrite the risk. The court rejected the defendant's argument that the ATE insurer had been negligent in its underwriting so that it would have had no regard to full disclosure and accurate representations. The court also rejected the contention that the ATE insurers had affirmed the policy by failing to avoid at certain points when it knew of the facts which gave rise to the right to avoid.
The decision is, on its face, limited to cases where there the insured has been dishonest in either presenting the claim to ATE insurers or in bolstering the underlying claim through dishonest evidence. Strictly speaking, however, it is open to ATE insurers to run misrepresentation or non-disclosure arguments (and particularly the former) in any circumstances where the court says that the insured is mistaken in its version of events, assuming that the evidence in question was a material part of the presentation to insurers. In reality, this risks defeating the purpose of the cover, which after all is intended to protect the insured in the event that it loses. One common reason that a case is lost is precisely because one version of events is preferred to another.
It also serves as a reminder of the problems associated with claims brought under the Third Parties (Rights Against Insurers) Act 1930: any claim is only as good as that of the original insured. In this case the defendant found itself in the unenviable position of standing in the shoes of the party whose dishonest evidence it had established and it was this very finding that ultimately proved fatal to its claim against insurers.
Further reading: Persimmon Homes Ltd and Persimmon (City Developments) Ltd v Great Lakes Reinsurance (UK) PLC [2010] EWHC 1705 (Comm)
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 30/07/2010.
