R&R Developments Ltd v AXA Insurance UK Plc

This is an appeal from the judgment of Deputy Master Hoffmann, given on 22^nd December 2008, and supplemented by a note dated 22^nd December 2008 and by a further judgment dated 4^th February 2009, the effect of which was that he declined to grant declarations for which the claimant sought summary judgment, and ordered the claimant to pay the defendant’s costs of the application.

The claim relates to a Commercial Combined and Contract Works insurance policy taken out by the claimant to insure itself against theft and damage to the contract works at a small development of two houses on a site near Milton Keynes. Issues have arisen between the parties as to the accuracy of answers given by the claimant to the defendant on a questionnaire which was part of the proposal for the insurance and as to whether the claimant disclosed all material facts.

There have been some minor procedural complexities, but it is unnecessary to go into them. The present position is that both parties wish me to decide certain questions of law and construction, in effect as preliminary issues. There is no procedural reason why I should not do so. They are raised in the notice of appeal and the respondent’s notice, and in any event CPR 1.4(1)(c) requires the court to decide issues summarily where possible.

The Policy was entered into on 2^nd June 2006 and covered the period to 1^st June 2007. It was arranged by the claimant’s brokers, a firm called Towergate Risk Solutions. The Proposal was incorporated in, and formed the basis of, the Policy. General Condition 1 provided that the Policy was to be voidable in the event of misrepresentation, misdescription or non-disclosure in any material particular. The Proposal form was headed “Commercial Combined Statement of Fact” and there was a warning in the following terms:-

There then followed a document headed “Acceptance Criteria”, which I set out in full in the form in which it was completed by the claimant save that I have added the numbers (1) to (8):-

At the end there was a Declaration signed on behalf of the claimant which included the following passages:-

The following facts or alleged facts were not disclosed to the defendant:-

Mr. Molton, a director of the claimant, had been a director of a company called Robinson & White Limited, which had been placed by its bankers in administrative receivership and remained in administrative receivership in June 2006. There is an issue as to whether Mr. Molton was still a director of this company at the time of the proposal in June 2006.

Mr. Molton had also been a director of the Galliers group of companies, consisting of five companies, of which three were placed in creditors voluntary liquidation on 20^th April 2001, one went into member voluntary liquidation in May 2001 and one was placed in compulsory liquidation, also in May 2001. All these companies had been dissolved by June 2006.

There may have been (but there is an issue about this) an unsatisfied judgment for £4,601 against one of the Galliers companies dated September 2002.

There is evidence that the Galliers companies made or may have made two insurance claims before they were placed in liquidation.

The Defendant contends that the answer to the first question under the heading ‘General Details’ was a misrepresentation, because Mr. Molton had been involved, as a director, in Robinson & White Limited, which was still in administration in June 2006. This raises two issues. First, does the question relate only to the insolvency on the insured or any of its partners or directors, or does it extend to the insolvency of any company or other separate legal entity in the business in which they have been involved? Secondly, is administrative receivership a form of “mandatory or voluntary insolvency?”

The defendant does not contend that there was any misrepresentation resulting from Mr. Molton’s involvement with the Galliers companies because they had all been dissolved by June 2006, so that on any view it could by then no longer have been said that they “are” the subject of any bankruptcy proceedings or involuntary or mandatory insolvency.

The parties approach to the above two issues differs. Mr. Howard Smith on behalf of the claimant submits that, where a question put to the insured is ambiguous, the court does not have to decide on one true construction; there is no misrepresentation if the answer is true on a reasonable interpretation of the question.

In support of this submission, he relied on the decision of MacKinnon J. in Revell v. London General Insurance Company Limited [1934] 50 Lloyd’s List L.R. 114, in which the insured had answered the question “have you or any of your drivers every been convicted of any offence in connection with the driving of any motor vehicle?” in the negative, when one of her drivers had been convicted of driving without a suitable reflecting mirror and of driving while uninsured. The judge expressed the principle in the following way:-

The actual decision is perhaps surprising, in that one might have thought that driving without a proper mirror did reflect on the relevant standard of care and skill. Possibly, the judge was influenced by the position of the victims of the accident as it would have been in the pre-Motor Insurers Bureau era. However, his statement of the principle is quite clear, and it has been applied on several occasions: see Colinvaux & Merkin Insurance Contract Law at A-0665. Questions in a proposal form which are to be answered by the insured are construed contra proferentem: see in Roberts v. Plaisted [1989] 2 Lloyd’s Reports 341 at 346-7. Relying on this principle, Mr. Smith submitted that what I have to consider is not, what is the correct construction of the question, but whether the answer to the question was correct on the basis of a meaning which could reasonably be attributed to it.

Mr. Taylor in response made two main points. First, he submitted that where the answer to a question became a term of the contract this approach was not available: the court had to decide what the correct construction of the question was and then consider whether, on that basis, it had been correctly answered. Secondly, even if this was wrong, the insured could only rely on the ambiguity of a question if he had in fact understood it in the sense for which he now contended. Therefore, in the present case, no declaration could be granted at this stage because there was a factual issue as to whether the person who completed the proposal form had understood the question to relate solely to the insolvency of the insured or the directors personally.

Professor Clarke in ‘The Law of Insurance Contracts’ expresses the principle applicable where there is an ambiguity in this way:-

To similar effect MacGillivray 11^th ed. at §16-025:-

Again to similar effect, Colinvaux and Merkin on Insurance Contract Law April 2009 issue at §A-0665:-

All these textbooks suggest that the subjective understanding of the insured is crucial, or at least relevant. MacGillivray goes on to illustrate what it says by reference to Revell, and to suggest that the judge had found on the facts of that case that the insured had thought that the question related only to offences involving reckless or careless driving. However, as I read the judgment, MacKinnon J. did not consider what Mrs. Revell had actually thought, in which case the decision is an authority for the contrary proposition, namely that it is sufficient to show that the answer was true on the basis of a reasonably available meaning of the question, without more.

MacGillivray also cites four other authorities, in addition to Revell, at footnote 87, in support of the proposition stated above, but in my view none of them does support it. It is perhaps sufficient to refer to the leading authority, Condogianis v. Guardian Assurance [1921] 1 A.C. 125 in which the relevant passage at 130 is as follows:

Although it is possible to read the third sentence in the above passage as meaning that the person giving the answer must have relied on the fair and reasonable construction of the question, I do not think that this is the correct reading. In my view, the Privy Council was treating the question as being simply one of construction, precluding the insurer from relying on a wider meaning of the question so as to render the answer untrue. Immediately after this passage Lord Shaw refers to the judgments of Fletcher-Moulton L.J. in Jowell v. Law Union & Crown Insurance Co. [1908] 2 K.B. 863 at 886 and of Vaughan Williams L.J. in Etherington’s case [1909] 1 K.B. 591, 596, both of which explain the doctrine in similar terms and neither of which suggests that the court should conduct an enquiry into the sense in which the proposer understood the question.

There is then another relevant passage at page 132. Referring to the judgments in the Supreme Court of Victoria, Lord Shaw says this:

Although what is here being referred to is the possibility of using bona fides to limit a reasonable meaning of the question, the passage – and the decision of the Privy Council as a whole – suggests that the proper approach is to determine the objective meaning of the question, where appropriate applying the contra proferentem principle, and not to enquire into the subjective understanding of the insured. This would of course, as Mr. Smith has pointed out, be entirely consistent with the normal objective approach to the construction of contracts.

Mr. Smith has also referred me to the judgment of Lord Chelmsford L.C. in Hallows v. Fernie (1868) 3 Ch. App. 467 at 476, relating to ambiguous passages in a company prospectus:-

This too, although not in the context of representations made by answering questions, provides support for the approach contended for by the claimant in this case, although it cannot be right to say that it would be impossible to test the truth of an assertion by somebody that he understood a question, or a representation, in a particular sense: where a fraudulent representation is alleged, the subjective understanding of the representor is commonly an issue which the court has to resolve: see Akerhielm v. De Mare [1959] A.C. 789.

MacGillivray also refers, in the same section, to the decision of MacNaghten J. in Taylor v. Eagle Star Insurance Co. Limited (1940) 67 Lloyd’s List L.R. 136, in which the relevant facts (for present purposes) were identical to the facts in Revell. He upheld the arbitrator’s somewhat reluctant decision to follow Revell. He said:

Although the emphasised words set out above support the proposition that reliance can only be placed on an ambiguity in a question if it is understood in that sense, it is clear from the statement of facts in the report that the insured had been killed in the accident, so that there was no evidence as to how he had understood the question, and that there was no express finding by the arbitrator that he had answered it bona fide. The arbitrator decided the point on the basis that he was bound by Revell and that the issue was a question of law.

This is not an easy point, but in my view, despite the way in which the matter was put by MacNaghten J., and in which it is put in the textbooks, the authorities do not support the proposition that it is necessary to consider in what sense the insured actually understood the question. The better view is that, where there is an ambiguity, the contra proferentem principle is to be applied both to the representation and, where it becomes a term, to the term of the contract of insurance.

I have some doubt as to how satisfactory this is. For one thing, the contra proferentem principle is generally regarded as the last resort. Secondly, what is in any given case contra proferentem may depend on what answer the insured has given. In some cases the answer may be incorrect if one of the possible meanings of the question is taken, which is then to be rejected. In another case, it might be incorrect if another possible meaning is taken, in which case it is that meaning which is to be rejected. However, that objection applies to any application of the contra proferentem principle. It also seems unreasonable for an insured to be able to rely on a meaning which (but for contra proferentem) would not have been the meaning attributed to the question and which was not how he understood it. Nevertheless, the authorities in my view establish that, in this context as in all others except for fraud, objective construction reigns supreme and subjective understanding is irrelevant.

What is however clear is that there must be a genuine ambiguity. The court will simply reject a meaning which, even if grammatically possible, is not one which can reasonably have been how the question was understood by the insured. An illustration of this is to be found in the recent decision of the Court of Appeal in Doheny v. New India Assurance Co. Limited [2005] I.R.L.R. 251, where the insured signed a declaration which included the following:

Turning to the first issue which arises on question (1) in the General Details section, namely whether it was seeking to elicit if any company in which a partner or director had been involved was the subject of bankruptcy proceedings or was insolvent. T he questions are certainly not models of precision. This is perhaps not surprising, since they represent an attempt to frame a series of questions covering various topics in a proposal form which was likely to be used either by an individual who might have partners or by a company which might have directors. The questions were not drafted with reference to any individual insurance.

Mr. Smith submits that, on the plain meaning of the words used (omitting the reference to “Partners” which is irrelevant here), this section of the Acceptance Criteria asks questions relating to the insured company and its directors alone, and makes it clear in relation to the directors that the question applies not only to their personal affairs but also to any businesses in which they have been involved. Thus, for example, if a director had been made bankrupt it would not matter whether this had happened because he had lived outside his means, or because he had carried on a business unsuccessfully or because he had been personally liable for the debts of a company with which he was involved. Similarly, in relation to the questions about insurance cover, it would not matter whether a declined proposal related to his house insurance or to some insurance which he required in connection with a business which he was carrying on. As a matter of simple grammar and syntax, the questions do not relate to the position of anybody other than the insured and its directors. They alone are the subject of the question.

Mr. Taylor submits that the purpose of distinguishing between directors “personally” and directors “in connection with any business in which they have been involved” must be to broaden the scope of the enquiry to include the affairs of businesses in which the directors have been involved, even if carried on by companies or other separate legal entities. This, it is submitted, would make commercial sense because an insurer might readily be expected to be interested in the claims and insurance history of companies in which the directors have been involved.

In my opinion, Mr. Smith’s submissions are clearly right. The grammar and syntax are clear, from which it follows (see the Investors’ Compensation case [1998] 1 W.L.R. 896 at 912) that they must be followed unless the court is satisfied that “something has gone wrong with the language”. There is no reason to think that it has. It makes perfect sense to ask the insured about the directors’ personal position, whether arising from their personal affairs or from any businesses which they have been involved, without going further and asking about the position of the companies as well. The literal construction makes good commercial sense. It is true that it might also make good commercial sense for the insurer to ask questions about the claims and insurance history of companies with which the directors had been involved, but they have not done so and that is not particularly surprising, since insolvency is not a risk which is insured against even as regards the insured and the directors, let alone remoter parties. The choice is between a sensible construction which accords with the language used by the insurers, and a construction which may be sensible but does not, and plainly the first must be adopted.

There are three further considerations which lead to the same conclusion. First, the insurers contend in effect that the opening words should be read as “have you or any Partners or Directors or any business in which they have been involved...”. If that is what had been intended, would have been very simple to say so. The words “either personally or in connection with” would have been unnecessary. Their inclusion suggests strongly that what was intended was something which was more limited and less straightforward to express, namely that the questions related to both the personal and business affairs of the Partners or the Directors.

Secondly, on the insured’s construction, the representations required of the insured would be both unreasonably vague and unreasonably wide. The person completing the proposal form on behalf of the insured might reasonably be expected to be able to ascertain from the directors whether they are able to answer the questions in the negative so far as their personal position is concerned. However, if the question relates to the position of “any business” in which any of them have been “involved”, the question would immediately arise as is to what is meant by “involved”. Does it cover, for example, a company which one of the directors was employed by in a senior position? Or in a junior position? Would it matter how long ago? Supposing it was a large public company: how could even the director of the insured know what the correct answer would be to all these questions? Whilst obviously there is no limit on what question insurers may ask, where the scope of the intended questions is as wide as these insurers contend, they must ask them clearly and explicitly: no court is going to assist insurers with a benevolent construction of questions which (if they were indeed what was intended) were asked in a muddled and confusing manner.

Thirdly, the wording of the penultimate question in the General Details supports the claimant’s argument:

Accordingly, without applying any presumption contra proferentem, I hold that, on the proper construction of the first question in the General Details section the negative answer was correct. What the question sought was confirmation that neither the insured nor any of its directors had ever been declared bankrupt, or were at the time of the proposal the subject of any bankruptcy proceedings or voluntary or mandatory insolvency, from which it follows that the answer given by ticking the no box against the question was true.

Even if I had taken the view that the question was ambiguous, for the reasons set out above I would still have held that the meaning contended for by the insured was a fair and reasonable meaning which could be attributed to the question and I would therefore, applying the contra proferentem principle, have granted a declaration that the answer given by ticking the box was true.

It is accordingly unnecessary for me to decide the second issue on the first question, namely whether the administrative receivership of Robinson and White Ltd. a “voluntary or mandatory insolvency”, since the position of the companies with which the directors were involved is irrelevant. I will therefore deal with it only very briefly. The administrative receivers were appointed extra-judicially under the terms of the fixed or floating charge dated 25^th February 1993. I do not think that this would fall within the definition of a “voluntary or mandatory insolvency”. The words “voluntary or mandatory” refer in my view to appointments by the court under an insolvency regime, not to extra-judicial remedies then available to secured creditors.

The next issue relates again to Mr. Molson‘s connection with Robinson and White Ltd., and also with the Galliers companies. Put shortly, the issue here arises because the insurers contend that these were material facts which ought to have been disclosed, whereas the insured contends that, by asking the specific questions set out in the Acceptance Criteria section, relating to the insured and the directors alone, any enquiry relating to such questions in relation to companies in which the directors were involved was waived, even assuming that the answers would otherwise have been notified.

The relevant principle as stated in MacGillivray was approved by Woolf J. in Hair v. Prudential Assurance Co. Ltd [1983] 2 Lloyds Reports 667 and (obiter) by the Court of Appeal in Doheny:-

In Doheny, the issue which would have arisen, if the Court of Appeal had taken a different view on construction, would have been very similar to the issue in this case. The position would then have been that the question sought information as to whether any director or partner in the business had been declared bankrupt, or had been the subject of bankruptcy proceedings or had made any arrangements with creditors, but would not have sought any information relating to the insolvency of any company in which he had had an interest. All three members of the Court of Appeal, albeit obiter, said that they would have been inclined to hold that, by asking questions about the insolvency of the individuals but not of corporate entities in which the individuals were involved, even though it was clear from the terms of the question that they had businesses in which the individuals were involved in mind, the insurers made it plain that they were not interested in information about the insolvency of such businesses: see per Longmore L.J. at §21, Sir Christopher Saughton at §29 and Potter L.J. at §37-8.

Although I am not bound by these tentatively expressed opinions, I take the same view. It is clear from the question that the defendant had the concept of businesses with which the directors or partners of the insured were involved in their minds, but chose not to ask questions about the position of such businesses. This is not particularly surprising: given the nature of the insurance, a lack of interest in the insolvency of parties connected with the insured would be natural. In my view, proper inference for the claimant to draw was that the defendant had no interest in the insolvency of any party other than the defendant and its directors. There is no question of a waiver of all information which might be material; the waiver is limited to information as to the insolvency of businesses with which the directors have been involved, and (where relevant) to information relating to the position of such businesses as regards the other questions applicable to the position of the insured and its directors, but not to the position of businesses with which they were involved.

Mr Taylor submits that the declarations at the end of the Statement of Fact (see §6. above) operate as an effective anti-waiver, and make it clear that, in addition to accurate answers to the questions, the claimant must disclose all material information which “may influence” the insurer in its acceptance of the cover or its terms. I do not agree with this because if (as I have held) the wording of the question implies a lack of interest on the part of the defendant in a particular subject matter, then ex hypothesi the information is not information which “may influence” it . Indeed, there was a not dissimilar declaration in Dohney.

The question of whether the administrative receivership was a material fact, and if so whether there was a waiver, does not arise. However, had the waiver issue arisen, I would have taken a different view. There is nothing in the way that part of the question is put to indicate that the claimant, in framing the question, had administrative receivership in mind but was not interested in it. Therefore, if the point had arisen, I would have held that there was no waiver of the need to disclose the administrative receivership, if it had otherwise been a material fact.

The remaining issues relate to question (7) of the General Details questions: -

On the assumption that there was a judgment against Galliers Holdings Limited (of which Mr Molton was a director) within 5 years of the Statement of Fact being completed, the negative answer was still correct for the reasons set out at §32-6 above, and for the additional reason that, on any sensible construction, these questions relate to losses or claims which were the subject matter of insurance or, if they were not, could have been the subject matter of insurance. It is not suggested that the judgment against Galliers Holdings Limited was for such a claim (e.g. for damage caused in the course of a building project).

Similarly, on the assumption that one of the Gallier companies suffered an insurable loss within 5 years of the Statement of Fact, the negative answer to the question was still correct for the same reasons.

There is then a further issue as to whether, assuming these facts to have been material, disclosure of them was waived. Essentially for the same reasons as are set out at §40-3 above, I hold that disclosure of these facts, (if otherwise material) was waived. So far as the judgment is concerned, the defendant asked questions which were limited to the bankruptcy or an insolvency of the claimant and its directors. The claimant was therefore entitled to assume that the defendant was not interested in the financial position of other companies in which the directors were involved. Indeed, even if the judgment had been a judgment against the claimant, the claimant would have been entitled to assume that the defendant was not interested in matters affecting its financial position (including a judgment against it) which fall short of bankruptcy or any form of voluntary or mandatory insolvency. So far as the insurance loss is concerned, the claimant was entitled to assume that the defendant was not interested in the insured or insurable losses of anybody other than itself or its directors.

Accordingly, I will grant declarations to reflect what I have held at §36, 42 and 46-8 above. I should be grateful if the parties would seek to agree the form of the order. If the parties are able to do this, and to agree costs and any other consequential matters, there will be no need for anybody to attend at the handing down of the judgment. Since this is a second hearing, I believe that any application for permission to appeal would have to be made to the Court of Appeal.