QBD Hands Down First English Insurance Act Judgment: Berkshire Assets (West London) Limited and AXA Insurance UK Plc (2021)

On 08 October 2021, the QBD handed down judgment in a BI and CAR coverage dispute between Berkshire Assets Limited and AXA Insurance UK PLC. The Court was required to determine whether Berkshire had made a fair presentation pursuant to Section 3 of the Insurance Act 2015 (“IA”). This is the first known English IA judgment. It indicates how the courts are likely to approach fair presentation in practice and clarifies that the pre-IA case law on material circumstances remains relevant.

Relevant Background

Berkshire was a joint venture vehicle, set up to facilitate the development of a multi-million residential complex, including a gym and cinema.

AXA insured Berkshire under CAR and BI policies. A pre-inception quote issued in November 2018 contained a “fair presentation of risk” section, which stipulated that cover was provided subject to statements about Berkshire’s previous history, including a statement that Berkshire’s directors had not “either personally or in any business capacity, been convicted of a criminal offence or charged (but not yet tried) with a criminal offence.”

The subsequent November 2019 renewal schedule explained that its contents were based on the information provided by Berkshire and that it “must tell [AXA] any information that may influence [AXA] in offering this renewal and the terms provided. If [Berkshire is] not sure if something is important or relevant [Berkshire] should tell [its] insurer adviser about it. Relevant information is something that could affect [AXA’s] decision to renew your policy or affect the terms of your policy.”

The renewal schedule also stipulated that Berkshire “must make a fair presentation of the risk” and warned that if it failed to “tell [AXA] about any changes, or fail to advise [AXA] of any inaccuracies or omissions” the policy might not respond in the event of a claim.  

A Berkshire director – Mr Garside, checked the renewal documents and approved the renewal.

On 01 January 2020, the development suffered an escape of water, resulting in physical damage and business interruption loss. Berkshire made BI and CAR claims.  

During the course of AXA’s investigations, it transpired that in August 2019, the Malaysian authorities had charged sixteen people, including a Berkshire director - Mr Sherwood, with criminal offences in connection with fraudulent bond transactions. AXA therefore concluded that Berkshire had failed to make a fair presentation of the risk under Section 3 IA.  It avoided Berkshire’s CAR and BI cover, but continued to provide CAR cover for another company involved in the development.  

Berkshire asserted that Mr Garside was unaware of the charge against Mr Sherwood (or that he needed to check if his co-directors had been charged or convicted with a criminal offence) but that Berkshire had, in any event, made a fair presentation because the charges against Mr Sherwood were not material; they had arisen through Mr Sherwood’s directorship of an unrelated Goldman Sachs subsidiary company, which had failed to make a required disclosure in connection with the transactions. Mr Sherwood had not been involved with underlying transactions and had not been accused of acting dishonestly. Berkshire further argued that the charges were politically motivated, with a view to pressuring Goldman Sachs into a commercial settlement with the Malaysian Government.

After AXA reached its decision, the charges against Mr Sherwood were in fact dropped, following a commercial settlement between Goldman Sachs and the Malaysian government.

The Insurance Act 2015

Section 3(1) IA provides that “… Before a contract of insurance is entered into, the insured must make to the insurer a fair presentation of the risk ...”.

Section 3(3)(a) and 3(4)(a) define a fair presentation as a presentation which discloses “every material circumstance which the insured knows or ought to know”.

As per Sections 7(3) and 7(4), circumstances are material if they “would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms”. Examples of material circumstances include “anything which those concerned with the class of insurance and field of activity in question would generally understand as being something that should be dealt with in a fair presentation of risks of the type in question ...”.

The Judgment

The Court addressed two issues:

(1) Was the fact that Mr Sherwood had been charged a material circumstance for the purposes of the duty of fair presentation? (Materiality)

(2) If it was, and if it had been adequately disclosed, would AXA have agreed to insure Berkshire in respect of business interruption, or at all, under the renewed Policy? (Inducement)

The Court clarified that the pre-IA case law on material circumstances remained applicable. Accordingly, the relevant principles were:

(1) The materiality of a particular fact is a question of fact and is to be determined by the circumstances of each case.

(2) Materiality is to be tested at the time of placement and not by reference to subsequent events: Versloot Dredging v HDI Gerling Industrie Versicherung (The DC Merwestone) (2017).

(3) 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: The Dora (1989).

(4) The overall effect of the ‘prudent insurer’ test is that whether there has been a fair presentation of the risk remains to be assessed principally from the perspective of an insurer.

(5) A circumstance does not have to be decisive for the hypothetical prudent insurer in determining whether to take the risk or on what terms.

Issue 1: Materiality 

The Court concluded that:

• There was no settled definition of moral hazard. A preferable approach was “for the court to rely on the statutory definition of material circumstance in Section 7(3)(4) IA when considering the facts of the particular case before it”.
• Case law such as March Cabaret Club v. London Assurance (1975), Reynolds v. Phoenix Assurance Co (1978), The Dora, Brotherton v. Aseguradora Colseguros (No. 2) (2003) and North Star Shipping v. Sphere Drake Insurance (2005) established that the charge of a criminal offence was material, regardless of whether the insured is innocent and subsequently acquitted.
• The court accepted AXA’s factual and expert evidence that the charge was material. Important factors included:
  • At the material time, AXA was not in a position to determine if the charges involved dishonesty or personal wrongdoing by Mr Sherwood.
  • The alleged offences arose from a dishonest and fraudulent scheme of huge scale and Goldman Sachs companies played a significant role.
  • Facts raising doubt as to the risk were sufficient to be material.

Issue 2: Inducement

Berkshire argued that even if the charges had been disclosed, AXA could not establish that it would not have written the policy because:

1. AXA would not have wanted to alienate Berkshire’s broker.  
2. The knowledge and experience Mr Sherwood gained in his Goldman Sachs role was material in a positive way.  
3. It had to be considered “whether it would have been desirable for AXA to take a step which would have had extremely unfortunate consequences for Mr Sherwood personally”.

The Court was not persuaded by these arguments, finding that if these factors had been of concern to AXA, it would not have taken the steps it did on learning of the criminal charge.

Berkshire also argued that had the matter been disclosed, AXA would have investigated, discovered that Mr Sherwood had not been accused of dishonesty and not taken any further action. Whilst the court accepted that Mr Sherwood had not been dishonest, it did not accept the argument. A key factor was the existence of an AXA Practice Note which made clear that underwriting risks in circumstances where there were criminal allegations, was outside its underwriting strategy.

The Court also found that it was irrelevant that other underwriters were prepared to cover the risk despite knowing of the allegations as the policy types that they were willing to write were different from those under consideration in the present case.

Comment

The case illustrates the importance of complying with the duty of fair presentation and the continued relevance of the pre-IA authorities on material circumstances. It also serves as a useful reminder of the importance of having clear underwriting guidelines in place, AXA’s Practice Note being a key factor behind the Court’s conclusion that Berkshire’s failure to make a fair presentation had induced the writing of the risk.