Insurance agent need not disclose own fraud

LAW REPORT 8 September 1995

PCW Syndicates v PCW Reinsurers; Court of Appeal (Lord Justice Staughton, Lord Justice Rose and Lord Justice Saville) 31 July 1995

An insurer cannot avoid the contract of insurance on the ground of non- disclosure by an agent of the assured of the fact that he has been defrauding his principal.

The Court of Appeal dismissed an appeal by 24 insurance companies and 62 Lloyd's syndicates with whom the claimants, the "names" or underwriting members of 56 syndicates managed by PCW Underwriting Agencies Ltd between 1967 and 1982, had contracts of reinsurance, against a ruling by Mr Justice Waller, sitting as a judge- arbitrator, upon a preliminary issue referred to him by agreement of the parties.

The issue arose because, according to a DTI report, certain individuals in PCW Ltd had been fraudulently enriching themselves by misappropriating premiums received for the benefit of the names on the 56 PCW syndicates. The appellant reinsurers, with whom (through brokers) PCW Ltd had arranged contracts of reinsurance on behalf of its syndicates, purported to avoid these contracts for non-disclosure. Although the fact that the PCW names were being defrauded could have no direct effect on the incidence of the risks the reinsurers took upon themselves, it was said to be relevant to the moral hazard.

Kenneth Rokison QC and John Lockey (D.J. Freeman) for the PCW Syndicates; Michael Beloff QC and Richard Jacobs (Ince & Co) for the reinsurers.

Lord Justice Staughton said it was agreed that the relevant law was as stated in the Marine Insurance Act 1906.

By section 18(1):

the assured must disclose to the insurer . . . every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him.

By section 19,

where an insurance is effected for the assured by an agent, the agent must disclose to the insurer (a) every material circumstance which is known to himself, and an agent to insure is deemed to know every circumstance which in the ordinary course of business ought to be known by, or to have been communicated to, him; and (b) every material circumstance which the assured is bound to disclose.

The reinsurers rightly did not argue that the PCW names knew or ought to have known of the fraud within section 18(1) since, at any rate during the period concerned, most outside members were told little or nothing about how their underwriting business was being conducted, and it seemed distinctly implausible that an agent would disclose to his principal that he was defrauding him.

Even if knowledge were attributed or imputed to the PCW names by rule of law, the principle formulated in Re Hampshire Land [1896] 2 Ch 743 provided an exception. As Buckley LJ explained in Belmont Finance Corp v Williams Furniture Ltd [1979] Ch 250 at 261:

if the agent is acting in fraud of his principal and the matter of which he has notice is relevant to the fraud, that knowledge is not to be imputed to the principal.

The reinsurers argued that under section 19 an agent to insure must disclose, as a "material circumstance", his own dishonesty, failing which the insurance would be vitiated. But his Lordship could see no warrant for creating such a remarkable difference between sections 18 and 19. If the dishonesty of an agent was not something which ought to be known to the principal (section 18), why should it be held against the principal merely because the agent was an agent to insure (section 19)?

His Lordship would hold that the Hampshire Land principle was not confined to cases where the agent's knowledge was by law to be imputed or attributed to the principal, or deemed to be the principal's knowledge, but should extend to a case where the principal's rights were affected if the agent did not make disclosure to a third party.

An alternative route to the same conclusion was that adopted by Mr Justice Waller:

The obligation of an agent to insure to disclose arises out of the fact that he is acting as an agent, and there would be no obligation to disclose a fraud on his principal, since that knowledge he would not hold as agent.

Lord Justice Saville concurred on the ground that PCW Ltd was not the "agent to insure" within section 19, as that phrase only covered the brokers employed to deal with the reinsurers.

Lord Justice Rose concurred with both judgments.