UK: Undisclosed Principals: when can they sue, and must their interest be disclosed?

Talbot Underwriting Ltd –v– Nausch Hogan & Murray (“Jascon 5”)

The position of undisclosed principals was recently revisited by the commercial court in Talbot Underwriting Ltd v Nausch Hogan & Murray ("Jascon 5"). Among other issues, the court considered the circumstances in which an undisclosed principal is entitled to sue on an insurance contract and whether the existence of an undisclosed principal is a material fact needing to be disclosed to the insurer.

The court held:

• There is a presumption that an undisclosed principal can sue as an assured on a policy made by its agent but the presumption can be rebutted as a matter of construction of the policy;

• Although the existence of an undisclosed principal is not a matter that automatically requires disclosure, the role of the undisclosed principal in relation to the subject matter of the insurance may nevertheless be material. Further, if the existence of an undisclosed principal would impact on the insurer's subrogation rights this could well be a material fact requiring disclosure.

To view the article in full, please see below:

Full Article

Can a ship builder be covered as an undisclosed principal under a builder’s all risks insurance policy taken out in the name of the ship owner? If so, is the interest of the shipbuilder a material fact which the insured is required to disclose to the insurer? These were just two of the questions faced by Cooke J as preliminary issues in Talbot Underwriting Ltd. v Nausch Hogan & Murray ("Jascon 5") recently.

This case concerned a ship known as "Jascon 5". The ship was owned by CPL, one of the companies in the Sea Truck group of companies. Work was undertaken on the ship by the shipbuilders Sembawang ("S"). The relationship between S and CPL was governed by a contract. One of the terms of this contract was that CPL would obtain builders’ all risks insurance on behalf of S. The defendant brokers ("NHM") were instructed by CPL to place a builders’ all risks policy covering the ship, with the policy to include S as a named insured. The claimant insurers underwrote 40% of the risk under a slip policy.

The policy stated that the assured was certain identified companies in the Sea Truck group "and/or Subsidiary, Affiliates, Associated and Interrelated Companies and/or Joint Ventures as may be required as their respective rights and interest may appear." Under the Conditions, the policy identified the following additional assured interests: interest of Mortgagees… Loss Payees, Additional Assureds… as may be required". The policy made no mention of S as a co-insured.

The ship was damaged whilst it was being refloated following drydocking at S’s shipyard. S claimed under the policy. The claim was refused on the grounds that S was not an assured under the policy.

A number of preliminary issues were heard by Cooke J. These included the following:

Whether S was in fact a co-assured under the policy, either by way of the policy terms, or on the basis that S was an undisclosed principal via the agency of CPL.

Whether insurers would have been entitled to avoid the policy on the basis of non-disclosure by CPL of the fact that S was an undisclosed principal. This raised questions as to whether this fact required disclosure in principle and, if so, whether insurers had waived disclosure.

Whether there was an arguable case based on negligence against NHM if S was in fact insured under the policy.

Cooke J held that S did not fall within the definition of assured in the policy. He stated that the cover was framed as group cover for the Sea Truck group of companies. The broadest terms used in the assured clause were "Associated and Interrelated Companies and/or Joint Ventures". These terms in context nevertheless required a degree of common control, ownership or enterprise between the entities. The only legal relationship between CPL and S was that of ship owner and builder. This was insufficient to bring S within the definition of assured.

Cooke J held that the conditions section of the policy which identified "Additional Assureds", qualified and explained the assured clause. "Additional Assureds" was intended to refer to those entities falling within the description of the assured but which were not in existence at the time the Policy was concluded. Alternatively, it was intended to refer to the unnamed assureds specifically identified in the assured clause. Either way, it did not refer to S. The inclusion of the words "as may be required" did not alter this conclusion.

Cooke J considered NHM’s submission that CPL contracted as agent for S (as well as in CPL’s own right), and that, as an undisclosed principal, S could enforce the insurance even where insurers were unaware of the existence of S. There is clear authority in the context of Marine Indemnity Insurance that an undisclosed principal can sue on a policy made within the agent’s actual authority: Siu Yin v Eastern Insurance Co. Ltd. (Privy Council) [1994]. In that case, the Privy Council stated that the courts would apply an assumption that the undisclosed principal could sue on the policy. It was nevertheless recognised by the Privy Council that the express terms of the policy could preclude the right of an undisclosed principal to sue on the policy. Cooke J held that in this case, where the definition of assured was limited to members of the Sea Truck group of companies, this limitation was inconsistent with the right of S to sue as undisclosed principal. S therefore could not do so.

In Siu Yin, the Privy Council rejected the submission that a contract of insurance is a personal contract which rendered inconsistent recognition of the rights of an undisclosed principal. The Privy Council stated that the identity of the insured in that case was a matter of indifference to the insurer and "not material to the risk".

Cooke J held that Siu Yin did not state categorically that disclosure of the identity of the insured would never be required. He concluded that the fact that role of the undisclosed principal was a ship builder, and the fact that designation as undisclosed principal might affect insurers’ subrogation rights were both capable of being material facts. Whether or not this was in fact material in this particular case, and therefore whether or not there had been a fair presentation of the risk, required investigation at trial.

NHM also submitted that by the terms of the policy, insurers had waived disclosure of this information. Cooke J followed previous authorities in holding that the question of waiver could only be determined once the court had decided whether or not there had been a fair presentation of the risk. In this case, in his view, if the wording of the policy was not apt to include S as principal, insurers had not been put on notice of the possibility of, or expressed any consent to, S intervening as an undisclosed principal. Cooke J doubted therefore whether in fact waiver could arise; he thought the case would turn on whether or not the risk had been fairly presented.

Cooke J stated that if NHM did not obtain cover which clearly included S as co-assured without room for significant debate, then this represented a failure by NHM to act with reasonable care and skill. In failing to procure the naming of S as a co-assured, NHM had, at the least, exposed S to arguments that they were not covered. Cooke J held that there was therefore an arguable case that NHM had been negligent, even if they ultimately succeeded in their arguments that S were in fact covered.

There remains presumption that an undisclosed principal can sue as an assured on a policy made by its agent.

This presumption may, however, be rebutted as a matter of construction of the policy. In the "Jascon 5" case, the terms of the policy were inconsistent with the undisclosed principal’s rights to sue in its own name. The undisclosed principal was therefore precluded from doing so.

The existence of an undisclosed principal is not a matter which automatically requires disclosure. The role of the undisclosed principal in relation to the subject matter of the insurance may nevertheless be such as to be material. In this case, the fact that the undisclosed principal was repairing the insured ship was found to be capable of being a material fact requiring disclosure. Further, if the existence of the undisclosed principal impacted on the insurer’s subrogation rights, this could be material. The question of materiality required determination at trial after full investigation. The tone of Cooke J’s judgment nevertheless suggested that in this case, these factors were likely to be material.

Even if the undisclosed principal is ultimately found to be covered, if the conduct of the broker has left the insured at risk of arguments to the contrary, this may in itself amount to negligence on the broker’s part.

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

The original publication date for this article was 17/01/2006.