Law Report: Claim fails over non-disclosure: Pan Atlantic Insurance Co Ltd and others v Pine Top Insurance Co - House of Lords (Lord Templeman, Lord Goff of Chieveley, Lord Mustill, Lord Slynn of Hadley, Lord Lloyd of Berwick), 25 July 1994.

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A 'material circumstance' such as was required by section 18 of the Marine Insurance Act 1906 to be disclosed by the assured to the insurer, and the non-disclosure of which might entitle the insurer to avoid the contract, was one which would have had an effect on the mind of the prudent underwriter, in deciding whether or not to accept the risk or in fixing the premium, though it need not have a decisive influence.

However, such material non-disclosure should only entitle the insurer to avoid the policy if it had actually induced the making of the contract on those terms.

The House of Lords dismissed an appeal by the plaintiffs, Pan Atlantic Insurance Co Ltd against the decision of the Court of Appeal ((1993) 1 Lloyd's Rep 496), affirming the dismissal by Mr Justice Waller ((1992) 1 Lloyd's Rep 101) of their claims against the defendants, Pine Top Insurance Co Ltd.

Section 18 provided: '(1) . . . the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured . . . If the assured fails to make such disclosure, the insurer may avoid the contract. (2) Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.'

Michael Beloff QC, Steven Berry and Sarah Moore (Ince & Co) for Pan Atlantic; Adrian Hamilton QC, Timothy Saloman QC and Simon Picken (Alsop Wilkinson) for Pine Top.

LORD MUSTILL said that between 1977 and 1982 Pan Atlantic had written a quantity of direct American liability insurance. Much of this was 'long tail' business, in which a long time might elapse before claims matured. Recent experience showed that such business could involve the insurer in disastrous losses and this case was no exception.

The dispute arose from a contract under which Pine Top reinsured Pan Atlantic's casualty account for excess of loss above a certain figure for the year 1982, as it had previously done for the years 1980 and 1981. Disputes had arisen in respect of all three years but judgment was given in Pan Atlantic's favour in respect of the first two, which were no longer in suit.

The basis of Pine Top's purported avoidance of the 1982 contract was the presentation made by Pan Atlantic's broker to Pine Top's underwriter, which failed to disclose the true extent of Pan Atlantic's previous losses. In particular the loss record for 1981 was presented as dollars 235,768 when the true losses, of which Pan Atlantic had information before the slip was signed, were dollars 468,168. On the basis of that understatement, the judge upheld Pine Top's defence.

Pan Atlantic's appeal raised two questions as to the nature of a 'material circumstance' and the effect of its non-disclosure, which it was convenient to consider by reference to section 18 of the 1906 Act, since it was accepted that the common law rules, which the Act had codified for marine insurance, were the same for non-marine insurance.

In CTI Inc v Oceanus Mutual Underwriting Assn (Bermuda) Ltd (1984) 1 Lloyd's Rep 476, the Court of Appeal held that a circumstance was material if if would have had an impact on the formation of an underwriter's opinion and on his decision-making process.

The case also made clear that the test in relation to non-disclosure or misrepresentation was influence on the judgment of a 'prudent insurer', and thus the right to avoid did not depend on whether the particular insurer was in fact influenced as to risk or premium.

The CTI decision had proved unpopular both in legal and insurance circles. Pan Atlantic argued that 'material' in section 18 meant a circumstance which would, if disclosed, have a decisive effect on the hypothetical prudent underwriter, in causing him to decline the risk or increase the premium. His Lordship disagreed: the section had left 'influence' unadorned by such words as 'decisively' or 'conclusively', and to 'influence the judgment' was not to change the mind.

As to inducement, though, it seemed curious that an underwriter should escape liability even if the matter complained of had in fact had no effect on his thought processes. In his Lordship's opinion there should be implied into section 18(1) a requirement that material misrepresentation or wrongful non-disclosure could only entitle the underwriter to avoid the policy if it had induced the making of the contract. To the extent it held otherwise, the CTI case should no longer be followed.

LORD GOFF and LORD SLYNN concurred.

LORD TEMPLEMAN and LORD LLOYD, dissenting on the first issue, opined that a 'material circumstance' must be one that had a decisive influence, in causing the underwriter to reject the risk or increase the premium.