Introduction

For many lines of insurance, the acceptance and pricing of a risk by an insurer is no longer determined by an individual underwriter but by the electronic application of an underwriter formulated algorithm. Prospective policyholders or their brokers are asked to respond to a set of questions on an electronic policy proposal form by selecting the applicable multiple-choice responses. Once submitted, the insurer’s software compares those responses against programmed criteria to determine whether the prospective risk needs to be passed to a human underwriter for review or whether coverage can be automatically offered or declined based upon that information alone. Zurich’s Z trade is such a system, but most readers will be familiar with similar systems on insurance price comparison sites. Automated underwriting platforms allow underwriting decisions and insurance quotes to be generated in a cost effective manner within moments, however, prospective policyholders face difficulties where the scope and wording of questions are unclear or do not directly mandate information which a policyholder might have volunteered if speaking to an agent on the telephone, but which cannot be adequately expressed by the binary multiple choice responses generated by the software. Whilst policyholders should recognise that their duty of disclosure might involve proactively volunteering material information not requested  by the questionnaire, in practice this may often not occur, and in some circumstances the requirement to do so may be circumscribed by the scope of policy proposal questions themselves waiving the broader duty of disclosure in relation to the same matters.

Accordingly, it has never been more important for insurers to carefully and accurately formulate their policy proposal questions to ensure that the questions as framed request all information that is material to the underwriting decision and do not inadvertently limit the scope of the request. Such a case arose in Ristorante Ltd (trading as Bar Massimo) v Zurich Insurance plc [2021] EWHC 2538 (Ch). The fact that Zurich made an elemental error in formulating an insolvency question contained within their commercial property policy proposal questionnaire, then sought to avoid the policy on the basis that information in relation to the same matter but outside the scope of the question had not been volunteered, and then litigated in defence of their unsustainable position is surprising in light of two earlier authorities: the Court of Appeal decision in Doheny v New India Assurance Co [2005] 1 All ER (Comm) 382 and the High Court decision in R&R Developments v Axa Insurance UK plc [2010] 2 All EW (Comm). Nevertheless, Ristorante Ltd (trading as Bar Massimo) v Zurich Insurance plc [2021] EWHC 2538 (Ch) is a useful confirmation and elucidation of the applicable law on the interpretation of policy proposal questions and the extent to which their wording can operate as a waiver to limit the scope of the insured’s broader and ongoing duty of disclosure towards the insurer. As Ristorante demonstrates an insurance proposal question like a proposal of marriage, must be directed to the correct person in appropriate and clear terms. Whilst the policyholder must ordinarily volunteer information that is material to the risk where not requested by the proposal, the wording of the insurer’s proposal might serve as to limit the scope of that duty, in which case non-disclosure might not be grounds for divorce (or in insurance terms, avoidance ab initio), and the original shortcoming might result in any claim having to be met in full.

The Facts

Ristorante Ltd (“Ristorante”) owned a restaurant called Bar Massimo. The company had three directors, each of which had previously been a director or company secretary of three other companies: Massimo Leisure Ltd, Massimo Edinburgh Ltd, and Collecastello Ltd.  Those companies had all previously entered compulsory or voluntary liquidation and subsequently been dissolved. None of the directors had personally been subject to insolvency proceedings, such as an IVA or bankruptcy.

In October 2015, Ristorante acting through its directors and its insurance broker, Munro and Sons Limited, obtained insurance coverage for its business premises with Zurich. Cover was then subsequently renewed in 2016 and 2017. Prior to the original inception of the policy and each subsequent renewal, Ristorante acting through its insurance broker was required to complete an electronic insurance policy proposal form submitted to and evaluated by Zurich’s Z-Trade automated computer underwriting system.

Zurich’s evidence was that applications for coverage under its restaurant policies were submitted and evaluated on Z-Trade by an algorithm without any involvement from an individual underwriter. The restaurant sector was said to be a “flat trade,” denoting a low-risk insurance domain subject to strict rules with less scope for discretion in the underwriting process.

The Relevant Policy Question

One of the Z-Trade proposal questions sought a binary agree/ disagree response to the following statement:

No owner, director, business partner or family member involved with the business:

 

•  (i) has ever had a proposal or renewal for insurance declined or cancelled; a policy voided, withdrawn or suspended, or special terms imposed by any insurer.
• (ii) has ever been convicted of, or charged (but not yet tried) with any criminal offence, other than motoring offences or offences that are spent under the Rehabilitation of Offenders Act 1974.
• (iii) has ever been the subject of a winding-up order or company/individual voluntary arrangement with creditors, or been placed into administration, administrative receivership or liquidation.

Ristorante answered “agree” to all three statements, representing inter alia that:

“no owner, director, business partner or family member involved with the business has ever been the subject of a winding-up order or company/ individual voluntary arrangement with creditors, or been placed into administration, administrative receivership or liquidation.” (“The Insolvency Question”.)

That was of course technically true as the three directors had not been subject individual IVAs and as individuals could not themselves be subject to the various corporate insolvency events described, which taken literally would only apply if Ristorante’s directors or shareholders had been companies rather than individuals. On a strict reading of the Insolvency Question, its purpose was to ascertain the historic solvency of directors and shareholders (whether individuals or directors), although notably and somewhat incongruously, in the context of individuals it only refers upon IVAs and not bankruptcy. The focus of the Insolvency Question appears to be on corporate rather than personal insolvency, which at first glance may seem strange given that the majority of directors and a substantial proportion of shareholders of companies operating restaurants are likely to be individuals rather than companies. Equally, it is difficult to see how a company could have been subject to some of the insolvency events described yet remain a shareholder or director of the policyholder. One would imagine that in the context of most policies a more material consideration would be the personal insolvency history of directors and the insolvency history of companies in which they had previously participated. Accordingly, the question of whether Ristorante’s directors had ever been involved with a company that had “ever been the subject of a winding-up order or company/ individual voluntary arrangement with creditors, or been placed into administration, administrative receivership or liquidation,” was a more obvious proposal question, as management decisions contributing to the insolvency of other companies might conceivably be repeated at Ristorante. The question was thus whether the Insolvency Question, when properly interpreted had that meaning, and if it did not whether Ristorante’s wider duty of disclosure mandated that it volunteer the fact that its directors had previously been directors of three insolvent companies.

Needless to say, not only did Ristorante’s directors fail to construe and respond to the Insolvency Question as if it bore the latter meaning, but also failed to proactively volunteer the fact that its directors had previously been directors of three insolvent companies.

In January 2018, the restaurant was damaged by fire, and Ristorante proceeded to claim for the loss thereby caused. In March 2018, Zurich purported to avoid the Policy from its inception alleging misrepresentation and or material non-disclosure of risk regarding previous company liquidations. Zurich declined cover on the basis that “this non-disclosure is highly material, and induced us to provide cover, which we would not otherwise have provided.”

Ristorante commenced its claim in March 2020 for breach of contract alleging wrongful avoidance of the Policy by Zurich and the refusal to meet its claim under the policy in respect of the fire, seeking declaratory relief and damages of £633,000.

The Arguments

Ristorante

Ristorante accepted that its response to the Insolvency Question was a material inducement, but contended that the response it had given was not a misrepresentation. It argued that the Insolvency Question had a clear meaning: whether the Directors themselves had a personal insolvency history. Given they did not, that the response provided was true. Ristorante argued that if Zurich had wanted to know about “insolvency events of other entities with which the owners or directors had been connected or involved, it could easily have included words that raised the question,” for example by inserting the following words in parenthesis:

“no owner or director (or any company in which any owner or director have been involved…. has ever been subject of a winding-up order or company/individual voluntary arrangement with creditors, or been placed into administration, administrative receivership or liquidation.”  

It continued that it would be impermissible to interpret the representation as if the words in parenthesis had been included, when plainly they had not.  

In the alternative, Ristorante averred that if the Insolvency Question did not have the clear meaning advanced above, its construction was an objectively reasonable interpretation and applying the contra proferentum principle and the principle in Revell v London General Insurance Co Ltd (1934) 50 LI L Rep 114 that:

            “It is elementary that if there is an ambiguity in this question so that upon one view of the reasonable meaning which is conveyed to the reasonable reader of it the answer was not false, the company cannot say that on the other meaning of the words the answer was untrue so as to invalidate the policy”

the Representation should be deemed to be true on the basis of the objectively reasonable interpretation it had adopted in answering the Insolvency Question.  

Ristorante submitted that on the basis that its interpretation was either correct or objectively reasonable and its representation was true, it followed that the effect of the Insolvency Question was to waive Zurich’s entitlement to be provided with information about the Director’s involvement with other insolvent companies. It admitted that in the absence of such a waiver, its failure to volunteer information about its director’s involvement with insolvent companies would have constituted a misrepresentation and or unfair presentation of the risk which would entitle Zurich to avoid the policy. As will be seen, although the omission of aspects from a proposal question does not always give rise to waiver, in many cases it is taken to do so.

ZURICH

Zurich submitted that Ristorante’s interpretation was overly literal and lacked commercial sense, that by chiefly addressing itself to corporate insolvency, the only sensible meaning of the Insolvency Question was to ascertain whether other corporate entitles with which the directors or owners had been involved had been subject to a referenced insolvency event. Zurich contended that it made business common sense for an insurer to know about such matters as it involved “moral hazard” and the past failure of companies, which is often due to mismanagement by directors and shareholders. It would accordingly be relevant in forming a view as to the ability of a policyholder’s directors and shareholders to exercise sound management of the policyholder company. Whilst the contention has some logical appeal, Zurich were always likely to encounter difficulty on this point given the guidance provided in two previous cases on the meaning of insolvency policy proposal questions.

Zurich also contended, somewhat ambitiously, that no words needed to be added into the Insolvency Question, as a company’s directors or shareholders could be said to be “the subject of” a company’s winding up. This ultimately failed as a matter of construction, but would also seem somewhat tenuous as a matter of Insolvency Law.

 Finally, Zurich argued that the formulation of the Insolvency Question did not constitute a waiver of the Claimant’s general obligation to disclose material facts relating to its directors’ or owner’s involvement in prior failed companies on the basis that Zurich had made it clear both in the Policy and Renewal that the policyholder had an ongoing duty of disclosure and that said involvement with failed companies was such a clear moral hazard that it would be clear to any broker that Insurers would expect to be told about it.  Again, the first contention appeared optimistic given settled caselaw as to the effect of question formulation, and the second, though ingenious, was unsupported by authority as to the relevance of broker opinion to interpreting proposal questions or indeed expert testimony evidencing that there was a clear state of settled broker opinion on the meaning of insolvency questions.

THE COURT’S JUDGMENT

Snowden J held that the “starting point must be to consider the natural wording of the natural meaning of the words used in the Insolvency Question, in light of the wording of the proposal on the Z-Trade Platform as a whole.”

This involved interpreting the “No owner, director, business partner or family member involved with the business” element not only in relation to the Insolvency Question (the third representation contained within the relevant paragraph), but also in relation to the first two, whether:

No owner, director, business partner or family member involved with the business

 

• (i) has ever had a proposal or renewal for insurance declined or cancelled; a policy voided, withdrawn or suspended, or special terms imposed by any insurer.
• (ii) has ever been convicted of, or charged (but not yet tried) with any criminal offence, other than motoring offences or offences that are spent under the Rehabilitation of Offenders Act 1974.

Zurich admitted that it would have no interest in whether the policyholder’s directors or shareholders had previously been involved in a company which had either had a policy declined or which had been convicted of an offence, and that accordingly it considered that  “No owner, director, business partner or family member involved with the business” should be construed literally in respect of those representations but in a broader manner to encompass third party companies in relation to the Insolvency Question.

As Snowden J held, given that a Policyholder would adopt a literal construction in relation to the first two representations, they would:

“therefore not come to the third Insolvency Question with any predisposition to think that the Defendant was interested in other companies with which the owners or directors of the applicant company were or had been involved.”

Snowden J rejected Zurich’s contentions as to commercial absurdity of a literal interpretation. Whilst his Lordship noted that the majority of the Insolvency Question focused on corporate insolvency, it refers to individual IVAs (if not bankruptcy) which could pertain to individual directors and shareholders, and:

“it is perfectly possible (and indeed commonplace) for a business or company to be owned by another company. It is also perfectly possible (albeit less common) to have corporate directors. A corporate owner or corporate director could obviously have been the subject of, or placed into, any of the corporate insolvency procedures identified in the question. Accordingly, the references to corporate insolvency procedures in the Insolvency Question are potentially meaningful without any need for the expanded meaning for which the Defendant contends.”

His Lordship held that it did not matter that there were no corporate directors or shareholders in the instant case as:

“it was obvious that the Insolvency Question was posed on a standard template, and the fact that many of the alternatives might not be applicable in a particular case would not, I consider, cause a person completing the form to consider that a broader meaning was intended.”

His Lordship flatly rejected the contention “either as a matter of the general use of language or on the specific wording and structure of the Insolvency Question” that a director or shareholder could be said to be “subject of” a winding up order or a corporate voluntary arrangement. Snowden J held:

“It is plain that individuals cannot, either grammatically or legally, be the subject of a winding up order or a corporate voluntary arrangement. Moreover, the second part of the Insolvency Question speaks in terms of a person being been placed into administration, administrative receivership or liquidation.Even on the broadest meaning of words, if a company goes into administration, one does not speak of its directors being placed into administration.”

Snowden J also took issue with the practical implications and potentially limitless scope of Zurich’s interpretation. Strictly speaking it would require a shareholder with a minority shareholding (perhaps a single share), within a large publicly listed corporation, to provide the same standard response if they were unfortunate enough for said company to fail through no fault of their own, as if they had personally entered into an IVA. Equally, given the Insolvency Question wording included not only directors and shareholders but family members involved in the business, the question arose as to how much involvement such a family member would need to have. Though not directly posited, would a declaration have to be made if a grandmother who assists in the kitchen once per month had a couple of shares in Thomas Cook before the company failed?

As his Lordship held:

“Such lack of clarity in the meaning which the Defendant argued I should give to the Insolvency Question is, in my judgment, a significant factor which supports the view that this is not a reasonable interpretation to give to the question.”

The learned judge rejected the contention that a reasonable broker would have understood the insurer to be interested in insolvency events of companies in which the directors or owners of Ristorante had previously been involved on the basis that:

First, I was not shown any evidence as to whether, and if so, how a reasonable broker would have understood the Insolvency Question differently from the ordinary and natural meaning of the words to which I have referred. Second, and in any event, I was not taken to any authority to suggest that the appropriate hypothetical reasonable person for the purposes of interpretation is one who is advised by a hypothetical reasonable broker."

His Lordship then turned to two similar decided cases. In the first, Doheny v New India Assurance Co [2005] 1 All ER (Comm) 382 (CA), the Court of Appeal interpreted whether:

“No director/partner in the business, or any Company in which any director/partner have had an interest, has been declared bankrupt, been the subject of bankruptcy proceedings or made any arrangement with creditors”

required disclosure of insolvency events in relation to other companies of which the policyholder’s director had previously served as a director.

Unlike the present Insolvency Question, the above policy proposal wording clearly refers to “any Company in which any director/ partner have had an interest,” which Snowden J held was “a key point of distinction.” The only real ambiguity in the above wording is that it refers to bankruptcy which is technically a term pertaining to individual rather than corporate insolvency. Nonetheless, the Court of Appeal held that “in common parlance the word bankruptcy is under to apply more generally to any form of insolvency.”

In the second case, R & R Developments v Axa Insurance UK plc [2010] 2 All EW (Comm) the High Court interpreted:

“Have you or any Directors either personally or in connection with any business in which they have been involved ever been declared bankrupt or are the subject of any bankruptcy proceedings or any voluntary or mandatory insolvency?”

Axa raised essentially the same argument in that case as Zurich advanced in the present: that the representation required disclosure of insolvency events impacting companies with which the policyholder’s director was associated. 

Whilst that case does not refer to “any Company in which any director/ partner have had an interest” as in Doheny, it does refer to “Directors…either personally or in connection with any business any business in which they have ever been involved been....subject of any voluntary or mandatory insolvency.” It is difficult at first glance to see why the wording would refer to bankruptcy “personally or in connection with any business” if it was only concerned with the Director’s own insolvency history, as it need only refer to the Director being made bankrupt to cover both possibilities. The “in connection with any business” hints at an interest in third party corporate insolvency in a manner that is simply not present in the Zurich case.  Nonetheless, the High Court held that the representation only extended to the director’s personal insolvency history holding:

“The grammar and syntax are clear, from which it follows (see Investors Compensation Scheme Ltd v West Bromwich Building Society, Investors Compensation Scheme Ltd v Hopkin & Sons (a firm), Alford v West Bromwich Building Society, Armitage v West Bromwich Building Society [1998] 1 All ER 98 at 115, [1998] 1 WLR 896 at 913) 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 in 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 insurers 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.”

As Ristorante argued “there were clear similarities between the factual position in R&R Developments and the instant case, but that the [Ristorante] is in an even stronger position than the policy holder in R & R Developments….unlike in R&R Developments, the language of the Insolvency Question includes no reference whatsoever to any other businesses in which owners or directors have been involved.”

Snowden J further held that:

a reasonable insurer in 2015 could at very least be expected to have known of the decisions in both Doheny and R&R Developments. On that basis, I would have expected such insurer to understand the importance, if it wished to make an inquiry into insolvency events of other companies with which the directors of an applicant company had been involved, of using some words at least referring to such other companies. But as I have indicated, the Insolvency Question did not do that.”

Accordingly, the Learned Judge held that Ristorante’s interpretation of the Insolvency Question was indeed the “clear meaning of it,” but if there had been ambiguity he would have accepted that Ristorante’s “interpretation was (at least) a reasonable one, and that the [Ristorante] did not therefore commit a misrepresentation by answering the Insolvency Question in the way that it did.”

Turning then to waiver, the Learned Judge, referred to MacGillivray at 17-018 and 17-020 which states:

The questions put by insurers in their proposal forms may either enlarge or limit the applicant's duty of disclosure. As a general rule the fact that particular questions relating to the risk are put to the proposer does not per se relieve him of his independent obligation to disclose all material facts. Thus, if a burglary insurance proposal form asks questions chiefly concerned with the nature of the proposer's premises and the business carried on there, this will not of itself relieve him of his duty to disclose material facts relating to his personal experience, such as the possession of a criminal record.

It is possible that the form of the questions asked may make the applicant's duty more strict. The applicant may well be reminded by a particular question that the general duty of disclosure enjoins him to state material facts in his possession relating to the subject-matter of the question but outside its ambit.

It is more likely, however, that the questions asked will limit the duty of disclosure, in that, if questions are asked on particular subjects and the answers to them are warranted, it may be inferred that the insurer has waived his right to information, either on the same matters but outside the scope of the questions, or on matters kindred to the subject-matter of the questions.

Thus, if an insurer asks, [h]ow many accidents have you had in the last three years? it may well be implied that he does not want to know of accidents before that time, though these would still be material. If an insurer asks whether individual proposers have ever been declared bankrupt, he waives disclosure of the insolvency of companies of which they have been directors. Whether or not such waiver is present depends on a true construction of the proposal form, the test being, would a reasonable man reading the proposal form be justified in thinking that the insurer had restricted his right to receive all material information, and consented to the omission of the particular information in issue?

Snowden J also looked at the consideration of waiver in both Doheny and R&R Developments.

In the former, the Court of Appeal held that had it not taken the view that the representation embraced third party corporate insolvency

• “..if (contrary to the view expressed above) the true construction of the declaration is that it only applies to insolvency of individuals the insurer has made it plain that he is not interested in insolvencies of the corporate vehicle through which the insured is trading.”

 

• “So far as the question of 'waiver' is concerned, had declaration 5 omitted altogether the words 'or any Company in which any director/partner have had an interest' then like Longmore LJ I would incline to the view that a reasonable man reading the proposal form would be justified in thinking that the insurer had consented to the omission of reference to the insolvency of a company in which the Dohenys had had an interest. “

In R&R it was held:

“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, the 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  (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.”

 Snowden J held:

First, I accept that the summary of the law given in MacGillivray accurately captures the present state of the law: the question is whether a reasonable man reading the Insolvency Question would be justified in thinking that the insurer had restricted its right to receive all material information, and had consented to the omission of specific information (here, the Other Insolvency Events). In the language of the authors of MacGillivray, the question is whether the Other Insolvency Events concerned the same matters but outside the scope of the [Insolvency Question], or matters kindred to the subject-matter of the Insolvency Question.

 To my mind, having identified previous liquidations as a subject on which theDefendant required disclosure, and having specified the persons in respect of whom a previous liquidation would be disclosable, the Defendant thereby limited its right of disclosure in respect of other (unspecified)  persons or companies which had been placed into liquidation. The Other Insolvency Events were all liquidations. They were therefore precisely the same type of insolvency matters which were the subject of the Insolvency Question: the difference is that they related to a different set of persons than those identified in the question.

I therefore conclude that it was a reasonable inference for the Claimant to draw that the Defendant did not wish to know about any other liquidations (or, indeed, administrations, administrative receiverships, company voluntary arrangements, and so on), other than those specified in the Insolvency Question.”

Accordingly, the Learned Judge held that there had been no misrepresentation, that Zurich by formulating the Insolvency Question in the manner that it had, had waived its right to receive further information about the insolvency history of third-party companies of which the Ristorante’s directors had also been directors. Accordingly, Zurich were unable to avoid the policy and were required to meet the claim.

KEVIN HOLDER © 2021

BARRISTER

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NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.