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HIGHERDELTA LIMITED AGAINST COVEA INSURANCE PLC


Submitted: 14 June 2017

Web Blue CoS

OUTER HOUSE, COURT OF SESSION

[2017] CSOH 84

 

CA51/16

OPINION OF LORD BANNATYNE

In the cause

HIGHERDELTA LIMITED

Pursuers

against

COVEA INSURANCE PLC

Defenders

Pursuers:  A Smith QC,  O’Brien;  Balfour & Manson LLP for Levy & McRae

Defenders:  Stephenson QC, Thomson;  DAC Beachcroft

14 June 2017

Introduction
[1]        This matter came before me in the Commercial Court as a Proof of the liability of the defenders (the insurers) to indemnify the pursuers (the insured) in respect of a fire at the pursuers property at Loch 17, Annandale, Bonnybridge, Stirlingshire (“the premises”), which was operated as a restaurant, on 16 July 2013. 

 

Issues
[2]        The following two questions required to be determined by the court: 

1.         Whether or not, at 16 July 2013, the pursuers held a valid policy of insurance with the defenders in respect of the premises?

2.         In particular, whether the insurance policy ex facie held by the pursuers was void as a result of the pursuers’ failure to disclose or misrepresentation of facts material to the appraisal of risk under the insurance policy?

 

The Grounds for Avoidance
[3]        Initially the defenders sought to avoid the policy on the basis as set out in their letter of 17 September 2014 and it is perhaps convenient at this stage to set out the material terms of that letter: 

“AMENDMENT TO THE POLICY 12 MARCH 2012

 

When proposing for amendment to the Policy by the addition of a property at 4 Larchfield Road, Moodiesburn, Glasgow, G69 OEF, you failed, when proposing the amendment to the insurance cover, to disclose to us :-

(a)   that your director Harbhajan Singh Sandhu, your beneficial owner (hereafter referred to as ‘Mr Sandhu’) had been declined insurance cover for his substantial personal residential property portfolio by his then insurer AVIVA due to poor claims experience; and

 

(b)  that as at that date, Mr Sandhu had been unable or unwilling to insure his said personal residential property portfolio, whether through choice or through a failure to obtain an insurer willing to underwrite the risk.

 

These facts were material to the risks for which the insurance was being proposed. The withholding of these facts, which were known to you, amounted to non-disclosure of material facts. Had we been aware of these facts when you were proposing for the amendment to the insurance, we would not have accepted the additional risk. As a result of the non-disclosure of these material facts, we were induced into making the amendment to the Policy that we would not have made.

 

As a result of the said non-disclosure of these material facts, we are entitled to, and do hereby, void the amendment of the Policy with effect from the effective date of the amendment. As a result, the amendment to the Policy is of no effect.

 

Renewal of the policy on 19 January 2013

 

Further, when proposing for renewal of the Policy, which purportedly commenced again on 19 January 2013, you failed to disclose the following facts, which facts were material to our consideration of the risks for which you were proposing for insurance:-

 

(a)  You again failed to disclose to us that Mr Sandhu had had insurance declined for his personal portfolio of residential properties due to poor claims experience and further, that his said substantial personal portfolio of residential properties had remained uninsured for a period of at least 9 months, if indeed the properties have ever been validly insured at all;

 

(b)  You failed to disclose to us that Mr Sandhu, in relation to his own personal property portfolio, in December 2012, proposed for insurance for a number of properties within his portfolio and when he did so, he misrepresented to those insurers the following facts:-  (i) that he had never had insurance declined or a refusal to renew by an insurer when in fact he knew very well that his previous insurers Aviva had refused to renew his insurance due to his poor claims experience;  ( ii) that the properties had been continuously insured when in fact there had been a break of insurance of nine months;  (ii) that he had had no losses in the previous three years when in fact he had had a very substantial loss following a fire at his property at 11 Pine Place, Cumbernauld in 2011, a property which in fact we have been advised has remained, and continues to remain, uninsured.

 

(c)   You failed to disclose to us that during the course of the two years prior to renewal, you had had significant problems with tenants who had failed to pay rent, electricity, gas, and other charges, the problems becoming so pronounced that for a period of at least four weeks the Premises were required to be closed, during which time they were boarded up and unoccupied. These facts, which were material, and were known to you, are indicative of a failure on your part to take reasonable steps to ascertain the credit worthiness of prospective tenants before letting the Premises, and your other commercial properties. It was in itself a material fact that your judgment as to the choice of tenants appears to have been significantly impaired.

 

(d)  You failed to disclose to us that during the period of closure of the Premises in 2012, they were subject to a break in, when electrical equipment was stolen from the Premises. This fact had a material bearing on the risk to the Premises;

 

(e)   You failed to disclose to us that the Premises, insured for in excess of £1 million, were let on the basis of informal leases prepared without the benefit of any legal or other professional advice, to the extent that it ought to have been obvious to you, and Mr Sandhu from his relationship and knowledge of his latter tenant, and from his commercial experience in the letting of property, that tax lawfully due to HM Revenue & Customs, such as Stamp Duty Land Tax, was not, and would not be, paid, on the lease purportedly entered into between you and Balraj Singh Sohal, the purported tenant of the Premises. It was a material fact that you knew, or ought reasonably to have known, that preparing an informal lease in this manner would result in taxes being improperly kept from the knowledge of the tax authorities and this fact ought to have been disclosed to us by you.

 

(f)   You failed to disclose to us that as at the date of commencement of the purported lease, and as at the date of renewal of the Policy, according to the records of the local licencing authority of the Premises, Falkirk Council, Mr Sandhu remained as the Personal Licence Holder in respect of the Premises, and yet he maintained during the investigation into this matter, that at no time from the re-letting of the Premises in November 2012, or indeed earlier, had he taken any part in the proper running of the Premises. If true, this means that Mr Sandhu was in breach of his statutory obligations under and in terms of the Licencing (Scotland) Act 2005. This fact was a material fact and ought to have been disclosed to us by you when proposing for insurance.”

 

[4]        The defenders position somewhat changed.  In particular the failures to disclose as set out in paragraphs (c), (d) and (e) were at the proof not asserted to be material to the appraisal of the risk of the policy.  There was also an alteration of position as regards inducement with respect to paragraph (f).  Lastly a further failure to disclose was added at a later date.  The significance of these changes of position will be discussed later.

 

The Agreed Factual Background
[5]        The following background was agreed in terms of a Joint Minute of Admissions:

·    the Defenders are providers of insurance;

·    the Pursuers are owners of commercial properties;

·    at all the material times Harbhajan Singh Sandhu (sometimes known as “Johnny Sandhu”) (hereafter “Mr Sandhu”) was the Company Secretary, a Director and a shareholder, of the Pursuers;

·    by contract of insurance dated 19th January 2007, and renewed annually thereafter, the Pursuers contracted with the Defenders whereby the Defenders insured certain premises against a number of risks (the “Policy”);

·    number 6/1 of process is a true copy of the schedule applicable to the Policy (the “Schedule”);

·    Property 4 on the Schedule is “Loch 17”, Annandale, Bonnybridge, Stirlingshire (also known variously as “Lock 17” and “The Underwood Lockhouse”) (hereafter the “Premises”);

·    Mr Sandhu, on behalf of the Pursuers, had proposed the addition of the Premises to the Policy by proposal form dated 11th March 2009;

·    Number 7/3 of process is a true copy of the foregoing proposal form dated 11th March 2009;

·    the Premises were situated on the B816 road between Allandale and Bonnybridge, directly opposite Lock 17 of the Forth and Clyde Canal;

·    the Premises comprised a detached building, originally constructed in or around 1770 but substantially rebuilt following a fire in or around 1980;

·    the Premises included a bar, a restaurant and function rooms;

·    number 6/2 of process is a true copy of the terms and conditions applicable to the Policy;

·    as more fully set out in the Policy, the Premises were insured against certain risks;

·    the Policy did not provide cover· in respect of loss of rent resulting from damage to the Premises;

·    on or around 16th July 2013 the Premises were seriously damaged as a consequence of fire;

·    following the foregoing loss, the Pursuers submitted a claim to the Defenders under the Policy;

·    the Defenders refused to make payment under the Policy;

·    by letter dated 17th September 2014 the Defenders alleged that the Pursuers had failed to disclose facts material to their appraisal of the risks under the Policy and that the Policy was therefore void;

·    certain of the alleged non-disclosures contained within the Defenders' letter dated 17 September 2014 are not now relied upon by the Defenders as being material to the appraisal of the risks of the policy;

·    number 6/3 of process is a true copy of the letter from the Defenders to the Pursuers dated 17th September 2014;

·    Mr Sandhu was at all material times prior to 12 March 2012 the heritable proprietor of a portfolio of residential properties;

·    prior to 1st March 2012 those properties were insured by Mr Sandhu with Aviva Insurance Limited ("Aviva");

·    Mr Sandhu had the insurance of the properties with Aviva via brokers, CCV Risk Solutions Limited, trading as Household Insurance Services ("HIS");

·    HIS operated in conjunction with Aviva a delegated personal lines scheme (the "Scheme") that allowed HIS to offer insurance cover on Aviva's behalf for certain portfolios of residential lets;

·    Mr Sandhu's portfolio of properties was insured on this basis for several years until 29th February 2012;

·    at or about the beginning of October 2011 one of Mr Sandhu's properties (2 Pine Place, Cumbernauld) caught fire.

·    Mr Sandhu had previously submitted a fire claim in respect of one of his properties in July 2009,

·    the insurance for that portfolio of properties fell due for renewal on 1st March 2012;

·    Aviva reviewed Mr Sandhu's claims history and informed HIS that they were not willing to renew the insurance cover of Mr Sandhu's properties with Aviva under the Scheme;

·    in early February 2012 HIS sought from Aviva a quotation for insuring Mr Sandhu's property portfolio as a commercial (that is a non-Scheme) risk;

·    in response to that request, Aviva refused to offer a quotation in view of previous claims experience with Mr Sandhu;

·    on 3rd February 2012 Mr Sandhu was advised, by telephone by HIS, that Aviva would not be renewing the insurance policy over the residential properties due to a recent large total loss claim. HIS told Mr Sandhu that they had "referred it high up at Aviva to try and obtain a quotation as he [had] been with them for a number of years but unfortunately the decision is final" or similar;

·    following that telephone discussion, HIS sent a letter to Mr Sandhu dated 7th February 2012 in which they stated inter alia "As advised Aviva will not be inviting renewal of this policy. We are currently in the process of seeking alternative quotations for you and will be in touch with you shortly."

·    number 7/10 of process is a true copy of HIS's said letter dated 7th February 2012;

·    number 7/11 of process is a true copy of a further letter from HIS to Mr Sandhu dated 29th February 2012;

·    number 7/49 of process is a true copy of a letter from the Pursuer's agents dated 16th August 2016 together with enclosures, being HIS's records relating to the insurance of Mr Sandhu's properties, each of which documents is what it respectively bears to be.

·    on 29th February 2012 HIS spoke to Mr Sandhu by telephone to confirm to him that his property portfolio would become uninsured at midnight that night;

·    on 1st March 2012, Mr Sandhu's property portfolio became uninsured (that is, it was not insured by any insurance company);

·    on 1st March 2012 the Defenders received an email from Roxburgh Group which requested that the Defenders quote for the addition to the Policy of a property at 4 Larchfield Road, Moodiesburn, Glasgow. The email stated inter alia "The client also has another company - Sandhu Properties which covers residential flats. There has been a few claims under the policy he has in force, I have attached details of the claims for your records."

·    as at the date of the foregoing email, namely, 1st March 2012, Mr Sandhu did not have any insurance policy in force in respect of his property portfolio;

·    number 7/4 of process is a true copy of the said email dated 1st March 2012, and the attachments referred to therein;

·    in response to the said email request dated 1st March 2012, by email dated 8th March 2012, the Defenders provided a quotation for the addition of the property at 4 Larchfield Road, Moodiesburn;

·    with effect from 12th March 2012 the Policy was amended so as to include the property at 4 Larchfield Road, Moodiesburn;

·    in December 2012 Mr Sandhu insured sixteen of his residential properties with Catlin Insurance Company (UK) Limited ("Catlin");

·    numbers 7/12 to 7/27 of process (inclusive) are true copies of "Statement of Fact" documents submitted on Mr Sandhu's behalf to Catlin;

·    the foregoing "Statement of Fact" documents were intended to replace the need for Mr Sandhu to complete proposal forms;

·    the Policy fell due for renewal on 19th January 2013;

·    by letter dated 15th January 2013 the Defenders issued to the Pursuers a quotation for the renewal of the Policy;

·    number 7/6 of process is a true copy of the Defenders' said letter dated 15th January 2013;

·    the Pursuers did not provide any material additional information to the Defenders in respect of the insurance position regarding Mr Sandhu's personal property portfolio;

·    the Policy was renewed with effect from 19th January 2013;

·    number 7/7 of process is a true copy of the Policy Schedule for the period 19th January 2013 to 19th January 2014;

·    number 7/29 of process is a true copy of a statement by Mr Sandhu, signed by him on 16th October 2013;

·    number 7/30 of process is a true copy of a further statement by Mr Sandhu, signed by him on 17th September 2013; and

Beyond the terms of the Joint Minute, it was not contentious that Mr Sandhu was the sole director and controlling mind of the pursuers.

 

Evidence  
[6]       It being accepted that the onus was on the defenders to make out their defence they led at the Proof and in particular led the following witnesses:

·    Mr Sandhu.

·    Holly Buckingham (an insurance broker).

·    Andy Boyd (sales and distribution manager with Aviva).

·    Sally Gibbs (trading underwriter with Aviva).

·    Tracy Branham (had been an insurance broker with JC Roxburgh).

·    Lorraine Keenan (insurance broker with JC Roxburgh).

·    Stewart Roxburgh (insurance broker with JC Roxburgh).

·    Ersin Yildirim (insurance underwriter).

·    James Thornhill (market underwriter – at relevant time employed by the defenders).

·    Steven Black (development underwriter – at relevant time employed by the defenders).

·    Michael Clothier (head of technical underwriting defenders).

·    Colin Thomson (at material time an underwriter with the defenders).

·    Miles Emblin (defender’s expert).

The only witness called on behalf of the pursuers was their expert Victor Broad.

[7]       There was a wide ranging objection to the admissibility of opinion evidence given by various witnesses called by the defenders and I deal with that objection later in this opinion.

[8]       Turning to the evidence given by the witnesses:  Mr Boyd, Mr Yildirim, Mr Thomson and Mr Black’s evidence did not go beyond what was set out in their statements. 

[9]       Mr Broad and Mr Emblin spoke to their various reports and later in this opinion I will deal in detail with various parts of their evidence which I believe to be significant in relation to the specific issues raised in this case.  In summary their positions were:  Mr Emblin each of the alleged material failures to disclose or alleged material misrepresentations relied on by the defenders at the proof was material;  Mr Broad regarded each of the failures to disclose or misrepresentations as not being individually material and when considered cumulatively they were not material. 

[10]     Turning to the other witnesses: 

·    Holly Buckingham, she worked for Smith and Pinching who had arranged landlord property insurance for Mr Sandhu’s personal portfolio between 2005 and 1 March 2012.  This insurance was with Aviva.  She spoke to her statement.  She added little to the statement other than saying her contacts in January to March 2012 were with Mr Sandhu personally and not with Mrs Kaur.  (Mr Sandhu’s wife).  It was her position that she did not expect she would be able to get an insurance quote on Mr Sandhu’s personal portfolio.  She believed DSS tenants were more of a risk than other tenants.

·    Sally Gibbs worked with Aviva, she adopted her statement and on reviewing the evidence she gave she did not add materially to that statement other than to say Mr Sandhu’s personal portfolio was not target business for Aviva given that it was largely DSS tenants in the property.  Such tenants were an issue for Aviva.  There was a concern that there would be a likelihood of further claims resulting from there being a mainly DSS tenant base. 

·    Tracy Branham:  she was a broker with JC Roxburgh who had had dealings in a number of respects with Mr Sandhu regarding insurance matters.  She spoke to her statement regarding this.  Beyond that in her evidence she spoke to the keenness of Mr Roxburgh to get Mr Sandhu’s personal business portfolio.  She could not remember ever obtaining an insurance quote for Mr Sandhu relative to his personal portfolio.  Lastly she referred to the sending of the fax to the defenders listing the fires (upon which the defenders based one of their arguments of material non-disclosure:  (arson not disclosed) [see:  joint bundle page 129].  She was asked whether she believed that advising the insurers of the fires but without  reference to arson was sufficient and answered that “Covea didn’t query – if wanted further information they would query it.”  Much of her evidence I ruled as inadmissible.

·    Lorraine Keenan, once again a witness from Roxburgh’s who spoke to her statement.  Much of her evidence, which she gave outside her statement I held inadmissible as opinion evidence she was not entitled to give.

·    Colin Thomson:  in summary he thought the following factors would have caused him to refuse insurance:  declinature of insurance on Mr Sandhu’s personal portfolio;  failure to insure the personal portfolio;  the misrepresentation by Mr Sandhu in answering questions and breach of licensing law.  I observe that between paragraphs 99-111 of his statement he relies on factors for rejecting the proposal that the defenders now do not seek to rely upon.  He made no reference to the fires/arson being a factor he would have considered.  He accepted any decision not to renew would be referred to Mr Thornhill. 

·    James Thornhill, an underwriter with the defenders.  He spoke to his statement.  Beyond that the only significant pieces of evidence he gave were (1) that on the basis of the licensing issue alone it did not induce the policy and (2) he accepted on the basis of the information before them regarding the fires the defenders, should have gone back and asked for clarification. 

·    Michael Clothier – was the next one in the chain of authority at the defenders with respect to whether a policy should be accepted or refused.  First was Mr Thomson, the matter was then referred to Mr Thornhill and lastly to him.  He spoke to his statement. 

[11]     Turning to the issue of credibility and reliability only two witnesses’ credibility was challenged:  first Mr Roxburgh.  Miss Branham in her evidence had spoken to Mr Roxburgh being very keen to obtain the insurance business relative to Mr Sandhu’s personal portfolio. I had no difficulty in accepting her evidence on this issue.  Mr Roxburgh’s position in evidence was that he had had no knowledge of the personal portfolio until this litigation.  I did not believe he was being truthful when he gave this evidence.  The unsatisfactory nature of this evidence caused me to hold I should not accept any of his evidence.  Secondly, Mr Stephenson challenged the credibility of Mr Sandhu.  I will deal with this issue later in this opinion.  As regards the other witnesses, I had no difficulty in accepting that they were credible and reliable.  The issue with respect to Mr Emblin and Mr Broad did not turn on issues of credibility and reliability.  The issue with respect to their evidence turned on whether their opinion evidence should be accepted.

 

Submissions on behalf of the Pursuer
[12]     Mr Smith commenced his submissions by succinctly setting out the legal framework within which his submissions were to be made which was as follows:

[13]     At common law, an insured proposing or renewing a policy of insurance is under a duty to disclose all material facts, and not to make any misrepresentation in relation to material facts;  and if the insured fails in those duties, the insurer may avoid the policy.  Those tests were codified in relation to marine insurance by sections 18 and 20 of the Marine Insurance Act 1906, which is generally taken as accurately reflecting the common law positon in relation to other forms of insurance. 

[14]     Section 18(2) of the 1906 Act provides that:  “Every circumstance is material which would influence the judgement of a prudent insurer in fixing the premium or determining whether he will take the risk.”  In Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd, [1995] 1 AC 501, the House of Lords confirmed that this reflected the common law test of materiality in relation to other policies of insurance, and held (by a majority) that in order to show that a representation or non‑disclosure was material, it was sufficient for the insurer to show that it was a matter which would have had an effect on the prudent insurers mind.  It was not necessary, in order to establish materiality, to show that the matter would have led a prudent insurer to offer different terms or a different premium. 

[15]     Materiality he submitted was judged from the standpoint of the notional reasonable insurer, and is a matter for expert evidence.  However, it is not to be determined by the defenders bringing in particular insurers stating that they would have been influenced;  equally, nor it is to be determined by the pursuers bringing in other insurers to say that they would not have been:  see Involnert Management Inc v April Grange Ltd [2015] EHWC 2225 (Comm) per Leggat J at paragraph 98.  Nor are the views of the insurer in question relevant to materiality (as distinct from inducement).

[16]     The House of Lords in Pan Atlantic also went on to hold that an insurer can only avoid a policy on these grounds where he can show that he was in fact induced by the material representation or non‑disclosure to enter into the policy, either at all, or on the terms on which the policy was made.  If the misrepresentation or non‑disclosure made no difference to the terms offered by the insurer, then it did not induce the making of the policy, and it cannot be used as grounds for avoidance.  In other words, to make out the defence, the insurer must show both that the matter in question would have been material to a hypothetical reasonable insurer and that it in fact induced him to enter into the policy, at least in the sense of affecting the terms which he offered.  This interpretation of Pan Atlantic has been confirmed by the Inner House in Mitchell v Hiscox Underwriting Limited [2010] CSIH 18 at paragraphs 22 – 23. 

[17]     Turning to the issue of what was contained within the concept of material facts Mr Smith divided these into physical risk and moral hazard.  Physical risk he defined as the likelihood of the particular loss insured occurring.  With respect to moral hazard he said this:  it related to the character of the insured.  The concept denotes:  “circumstances invariably involving dishonesty on the part of the assured, which give rise to a concern that there will be dishonesty in the reporting and presentation of claims”  see:  Sharon’s Bakery (Europe) Limited v AXA Insurance UK Plc [2011] EWHC 210 (Comm) at paragraph 61. 

[18]     Mr Smith emphasised that the defenders’ expert in his report had expressly referred to and relied upon the above definition and that Mr Broad’s position in the course of his evidence had been in conformity with this definition. 

[19]     Mr Smith went on to argue that it followed:  matters relating to other insurance policies, relating to different risks and different insured parties, are not necessarily material to the policy in issue in this case.  Indeed, prima facie they are not material at all unless they bear on moral hazard.

[20]     Moreover, in the absence of an actual allegation or investigation by a third party, “there is no duty of disclosure in relation to circumstance involving the assured or his property or affairs that might objectively raise a suspicion that he had been involved in criminal activity or misconduct going to moral hazard, but which the assured knows not to be the case”:  Collinvaux’s Law of Insurance, 11th Edition [2016], paragraph 7-121 and Strive Shipping v Hellenic Mutual War Risks Association[2002] Lloyds Rep IR 669. 

[21]     Mr Smith’s submissions in respect of the legal framework concluded by dealing with a short but critical section of the evidence of Mr Emblin.  He had asserted that:  “a director of a company who is the beneficial owner and is the controlling mind of a company proposing for insurance and who also trades in another business capacity is for underwriting purposes required to disclose material facts in relation to other business entities”:  7/51 at pages 1 and 2.  He claims that this proposition is supported by Joseph Fielding Properties (Blackpool) Limited v Aviva Insurance Limited [2010] EWHC 2192 (QB).  However, Fielding does not support this proposition.  In that case, Aviva were held entitled to avoid a policy on the grounds that the controlling mind of the insured company had made a fraudulent claim against another insurer, and had made knowingly false misrepresentations and non‑disclosure when presenting to other insurers in the past, because this went to moral hazard:  see paragraphs 2, 134 – 136, 146 and 215.  The misrepresentations and non‑disclosures in that case were not innocent:  the judge found that:  “any detailed investigation would have revealed that for the most part Mr Leonard knowingly entered a false answer” (see paragraph 215).

[22]                 Thus, Mr Smith went on to argue, Fielding is not authority for the general proposition that the other affairs of the insured’s controlling mind are material and disclosable.  It merely illustrates that they may be relevant where they demonstrate dishonesty and moral hazard.

[23]     Mr Smith then turned and asked this question:  what is the defenders case with respect to Mr Sandhu?  It was his position, that on a sound reading, the defenders case was not one based on dishonesty on the part of Mr Sandhu and in particular was not one based on fraud on the part of Mr Sandhu. 

[24]     In development of the above he argued that the defenders did not aver dishonesty on the part of Mr Sandhu, whether in his dealings with them or with Discount Insurance, or indeed with anyone else.  That would amount to a case of fraud, and it is elementary that fraud must be clearly and distinctly pled. 

[25]     In further elaboration of this he argued:  the defenders do aver that certain statements made by Mr Sandhu were “untrue”, but that is an averment of misrepresentation, not of fraud indeed, the defenders refer to the duty not to make representations as “a duty...to refrain from making untrue statements”.  Nor is it sufficient for the defenders to point to the incorporation of their letter of 17 September 2014.  An allegation of fraud should not be made obliquely by the incorporation of a production:  cf Royal Bank of Scotland Plc v Holmes 1999 SLT 563.  In any event, the defender’s letter does not aver dishonesty either.  Rather, it asserts that the allegedly material facts would have given rise to “very significant concerns as to the integrity of your director”:  Joint Bundle at page 44.  That falls far short of the clear notice that must be given in a case of fraud.  To say that something would have raised concerns is very different from saying that a fraud had been committed. 

[26]     In any event, even if fraud had been averred, it was not put to Mr Sandhu in examination.  Accordingly, it is not open to the pursuers to aver dishonesty. 

[27]     In respect to each of the specific grounds upon which the defenders sought to avoid the policy Mr Smith on the basis of the foregoing analysis argued this:  given the definition of moral hazard to which he had referred and given that it was only where a moral hazard was established against the controlling mind of an insured that it transferred across to the insured, the failure of the defenders case to seek to prove or prove dishonesty meant that the defenders case was bound to fail. 

[28]     Mr Smith then turned to the opinion evidence which had been led. 

[29]     In the course of the proof Mr Smith had objected to the leading of certain opinion evidence on behalf of the defenders.  That evidence was heard under reservation.  Mr Smith renewed his objection in the course of submissions.  His objection was based on the principles set out in Kennedy v Cordia (Services) LLP [2003] UKSC 6.  Mr Smith’s objection had been twofold:  firstly with respect to evidence given by underwriters employed or formerly employed by the defenders.  His position with respect to them was that they lacked the necessary independence to be relied upon as experts in their own right.  Secondly he objected to evidence given by a number of insurance brokers who were adduced on behalf of the defenders to give opinion evidence with respect to whether a failure to disclose was material.  It was his positon that given the clear distinction between the role of a broker and an underwriter any opinion evidence given by them on that issue was not admissible.  They were unable to give any clear insight as to how an underwriter might approach the particular matters said to be relevant in the instant case and did not have the necessary experience and knowledge to comment on the issues in this particular case. 

[30]     Turning to what he described as the admissible expert evidence, namely:  that given by Mr Broad on behalf of the pursuers and Mr Emblin on behalf of the defenders Mr Smith made the following general points with respect to their evidence before turning to look at their evidence in some detail under each of the particular heads which were relied upon by the defenders as their basis for avoiding the policy.

[31]     It was his position that the evidence of Mr Broad was plainly to be preferred to that of Mr Emblin.  His first basis for arguing this was:  Mr Emblin’s experience was largely in broking, Mr Broad’s experience with respect to the position of being an underwriter was plainly far greater.  Moreover, Mr Broad gave clear reasons as to why particular matters would or would not affect the judgement of the notional underwriter.  As he would turn to deal in detail later, Mr Emblin did not.  He submitted that Mr Emblin’s evidence consisted largely of unexplained assertion, or circular explanations that things were relevant because they were material.  Where further reasons were offered, they were largely illogical.  This was highlighted he submitted by the defenders having to resort to leading questions to extract any form of reasoning from him.  The evidence so obtained should be rejected.  He also submitted that Mr Emblin had trespassed inappropriately into speculating on the truth or otherwise of Mr Sandhu’s evidence.

[32]     With respect to the detailed grounds put forward on behalf of the defenders as their basis for seeking to avoid the policy Mr Smith made a preliminary point:  that items (c) to (f) in the letter of 17 September 2014 were no longer insisted upon and would accordingly not be dealt with.  However, he submitted, the defenders willingness to put forward (and initially to plead) supposedly material facts which their own expert was ultimately unable to support should be borne in mind in relation to matters on which they continue to rely.  It was his position that the licensing issue (point (f)) was abandoned on the fifth day of the Proof.  I will turn to deal with that particular issue later.

 

The Specific Grounds
(a)        The Defenders Position in relation to Mr Sandhu’s Personal Property Portfolio
[33]     The defenders made two points regarding the position in relation to Mr Sandhu’s personal property portfolio:  one, that Mr Sandhu failed to disclose that he “had had insurance declined on his personal portfolio of residential properties due to poor claims experience” and in addition two, had failed to disclose that the portfolio “had remained uninsured for a period of at least 9 months.”

[34]     It was accepted that Mr Sandhu was the pursuer’s sole director and controlling mind.  However, Mr Smith said that his personal affairs could only be material in relation to the policy in issue if they went to the question of moral hazard.  Not only was Mr Sandhu a separate entity from the pursuers, but his personal portfolio involved a different category of property, residential as opposed to commercial. 

[35]     With respect to this first matter under this head Mr Smith began by making this point:  factually, it is not correct that Aviva declined insurance for Mr Sandhu’s personal portfolio, although it is accepted that they did not invite renewal. 

[36]     However the important point was this:  Aviva was concerned about the claims record on the policy, which was not itself suggestive of any moral hazard, as opposed to the physical risk associated with that particular portfolio. 

[37]     In development of that argument, he submitted that it is clear that Aviva had no concerns about the moral hazard.  The portfolio consisted of residential accommodation at the bottom end of the market where risks were inherently high:  Mr Broad described it as distressed business.  Andy Boyd and Sally Gibbs of Aviva both gave evidence to the effect of the concern related simply to the volume of claims and its suitability for their book.  That particular point was illustrated by Mr Boyd’s email of 2 December 2011;  Joint Bundle page 469.  In that email, he acknowledged the entire Sandhu property claims history, describing two of the fires as arson;  and also points out that the portfolio had grown to more than four times the size suggested by the relevant underwriting guide.  Further, Mr Boyd’s proposal was not to cease insuring Mr Sandhu but rather to move to a commercial policy.  Mr Emblin, seemed to suggest that, had Aviva’s position been made known, a reasonably prudent underwriter would have wanted to look at the reason for refusal.  He did not explain why such an underwriter, having learned of the reasons, would have regarded that as relevant to the pursuer’s wholly different portfolio. 

[38]     Moreover, nor was there any evidence produced to suggest that Mr Sandhu knew or ought to have known that Aviva’s position had anything to do with moral hazard.  Although Mr Sandhu did not recall it, the parties have agreed by Joint Minute that he was told the reason for Aviva’s stance was the recent large total loss claim, not even the whole claims history.  That position was consistent with Holly Buckingham’s file note of 3 February 2012:  Joint Bundle page 409. 

[39]     Beyond that the defenders do not even attempt to explain what dishonesty on the part of Mr Sandhu is supposed to be implied by Aviva’s attitude to the claims record, let alone allege that Mr Sandhu was in fact dishonest in a way that might be material to moral hazard.  Although Mr Emblin suggested that the claims record on Mr Sandhu’s residential portfolio bore on the physical risk associated with Lock 17, he did so under reference to “the physical characteristics of the risk, such as the building construction, fire protections, tidiness of premises, and previous loss experience”;  7/51/2.  He offered no explanation of how the building construction, fire protection and tidiness of a portfolio of residential properties could shed any light on the risk associated with a separate commercial property.  He accepted that the rating of risk for residential properties was very different from the rating for commercial properties.

[40]     Moving to the second issue under this head, namely:  the interruption of cover over the personal portfolio.  It was once again Mr Smith’s position that nothing in this suggested dishonesty, nor did the defenders articulate what dishonesty is said to be suggested.  Mr Emblin himself acknowledged that “it may be that there is a simple administrative reason for the lapse in cover”.  Further it was Mr Emblin’s positon that even if cover was unavailable, it may simply reflect the physical risk associated with the personal portfolio:  7/51/2 paragraph b.  It was Mr Smith’s position that Mr Emblin offered no logical reason why those matters would bear on moral hazard.  In his oral evidence, he initially regarded the interruption of cover as relevant only because it may have prompted inquiries which would have led to the discovery of Aviva’s position.  In fact, Mr Sandhu explained the interruption of cover in terms which do not reflect on any moral hazard, see his affidavit at paragraphs 52 and 53.  The evidence of Holly Buckingham and Mr Broad was that the portfolio by its nature, would be very difficult to insure.  Mr Emblin’s approach completely ignored the broader picture that would have been apparent from any disclosure. 

[41]     To the extent that the evidence of the brokers was relevant (and his position was that it was not) that evidence was consistent with nobody having regarded the claims history on the Sandhu personal property portfolio as material.  The defenders were made aware of that claims history by Tracey Branham (who was erring on the side of caution), yet they clearly regarded it as of no consequence.  It did not prompt any questions.  Further, Roxburgh were well aware of the existence of the Sandhu properties portfolio, despite Stuart Roxburgh’s denials, this was clear from Miss Branham’s evidence that the firm had previously tried to gain the business, and that the nature of the portfolio was such that they had been unable to quote for it competitively.  If they had genuinely believed that the claims record in relation to Sandhu’s property was relevant, they would have at least been asking for regular updates.  Yet they did not. 

[42]     Mr Smith went on to say this:  in assessing whether non‑disclosure of a fact is material, or whether it has induced the insurer to make the policy on particular terms, the court does not view that fact in isolation but rather has regard to the whole circumstances which would have been made known as part of any disclosure, or would have become known as a result of investigations made in response to the disclosure:  see example, Drake Insurance Plc v Provident Insurance Plc [2003] EWCA Civ 1834 at paragraphs 74 and 135.  The onus is on the insurer to show that, in those circumstances, the policy would have been made on different terms, or not made at all.  It flowed from this:  in considering materiality the court considers not the bare fact of the portfolio being uninsured, but any other circumstances which would have been made known to the insurer to explain that fact.  No coherent explanation has been offered as to why, in the circumstances described above, any reasonable insurer would have regarded the insurance positon in relation to Sandhu’s properties portfolio as relevant to an application for insurance by the pursuers. 

 

(b)        The Alleged Misrepresentation in 2012
[43]     Mr Smith then moved on to the second detailed basis for avoidance upon which the defenders relied, namely:  the alleged misrepresentation in December 2012.  This particular head broke into three parts as follows:  that when seeking insurance for his personal portfolio from Discount Insurance in December 2012, Mr Sandhu misrepresented (1) that he had never had insurance declined;  (2) that the properties had been continuously insured;  and (3) that there had been no losses in the previous three years. 

[44]     Mr Smith firstly referred me to Mr Sandhu’s affidavit at paragraphs 62 to 66 where he sought to explain why he considered his statements to Discount Insurance to be correct in view of his understanding of the question which he was asked.  He submitted that I should accept this explanation.  In any event, in determining whether Mr Sandhu’s answer to the questions posed by Discount Insurance were misrepresentations for the purposes of the right to avoid a policy, it was important to understand that the court does not ask whether his interpretation of the question was correct, but simply whether his interpretation was reasonably open to him:  see example R & R Developments Limited v AXA Insurance Ltd [2009] EWHC 2429 (Ch).  In the instant case he submitted that a question about the claims history was clearly capable of being read as referring to the specific risks being insured.  Even Mr Thornhill accepted that.  The word “risk” is commonly used to describe the particular thing being insured against under a policy.  That can be seen from the use of the term within the case law and in the 1906 Act.  The very duty on which the defenders rely is commonly described as the requirement for a “fair presentation of the risk”. 

[45]     Beyond that, a misrepresentation made by the pursuer’s director, in relation to a different insurer could only be a material fact in the present context, if it bore on moral hazard.  It was his position that it would only do so if it was a dishonest misrepresentation.  That he argued flowed from the definition of moral hazard which both experts gave.  A merely inadvertent misrepresentation would not be material to a different policy.  It was not put to Mr Sandhu that any of his answers had been dishonest.  Nor is that pled.  Accordingly, the defenders have not established that any errors in the disclosure to Discount Insurance were of a nature capable of giving rise to moral hazard.  Mr Emblin evidently assumed the misrepresentations to be dishonest, but that is not the pleaded case.  Moreover, he gave no coherent explanation as to why innocent misrepresentation might be relevant in respect to the pursuers;  he simply asserted that it was relevant. 

 

(c)        The suspected Arsons
[46]                 The third matter to which Mr Smith turned was the alleged suspected arson. In Answer 3, although not in the original letter, the defenders complain of a failure to disclose the two fires occurring in Mr Sandhu’s personal portfolio were suspected to have been caused by arson.  The factual aspects of this allegation are dealt with in Mr Sandhu’s witness statement.  It was Mr Smith’s primary point that there was no non‑disclosure of arson, arson was only ever a possible cause. 

[47]     Even if the court were not with him in relation to that submission the defenders do not explain why any suspicion of arson in relation to these properties was material.  He reminded the court that it should not consider the particular fact of a suspected arson in isolation, but rather should consider the whole circumstances that would have been disclosed.  As he had already submitted:  these were properties at the very bottom end of the housing market.  There was no suggestion that Mr Sandhu was complicit in any arson.  On the contrary any suspicion related to deliberate fire starting by vandals:  see Mr McKie’s statement paragraphs 30-34 and 99 and 100.  On that basis there was no intelligible issue  of moral hazard.  He accepted that it was conceivable that repeated arson attacks might give rise to a risk hazard:  to put it colloquially, if somebody was “out to get” Mr Sandhu, then they might attack both his personal and his commercial property.  However, the defenders do not suggest that that was the case here. 

[48]     Looking beyond the above, the evidence was overwhelming that the fires had, in any event, been disclosed in the normal way.  The defenders accepted that it was told of the two fires;  its complaint is that it should have been specifically notified that they were thought to be arson.  Holly Buckingham’s evidence was that the reference to fire on her spreadsheet was sufficient, and that it was for the insurers to ask if they wanted any further details.  Tracey Branham agreed that a reference to fire was sufficient to put the insurers on notice.  James Thornhill and Michael Clothier accepted that having been notified of the fire, the defender should have asked questions if they wanted to know more.  Mr Emblin likewise accepted that the defenders were on notice.  Reference was made to his answer to question 9 from the pursuers, in their written list of questions asked prior to Proof.  Moreover, his evidence was that a prudent underwriter would have asked for further details in relation to Pine Place and would not have regarded the remaining claims history as relevant at all.  He said that if the defenders had not asked about Pine Place, then they had accepted the situation. 

[49]     Accordingly Mr Smith’s position was this:  there is no evidence that normal practice would have involved any further disclosure regarding the fires;  and in event there is no evidence that a disclosure of the suspicion of arson, given the context, would have any bearing on the assessment of moral hazard in relation to the pursuers. 

[50]     Having looked at the issue of materiality Mr Smith then moved to the separate issue of inducement. 

[51]     With respect to this he argued that the renewal of the policy in January 2013 was dealt with by Colin Thomson.  In his witness statement, Mr Thomson stated that he would have declined cover on the basis of the lack of cover of the personal portfolio (see:  paragraph 60 – 62 and 76);  the alleged misrepresentation to Discount Insurance (see:  paragraph 97);  and the licensing issues (see:  paragraph 115).  However, he also stated therein that the ultimate decision would in each case have been taken by his colleague James Thornhill (see:  paragraph 77, 98 and 116).  He accepted that the underwriting guide of the defenders was only a guide and that any explanations offered would have been taken into account. 

[52]     Mr Thomson, gave no evidence that the question of fire and arson was of any relevance to his thinking, or that he would have referred that point onwards.  Accordingly, for that reason alone, the defenders have failed to lead evidence as to inducement in relation to fire and arson.  In relation to the other matters his evidence was that the ultimate decision would have been for his superior, namely, Mr Thornhill. 

[53]     Moving to Mr Thornhill, he stated that he would consider it material that Aviva had not invited renewal of cover in respect of the portfolio on the grounds of poor claims experience, “as this would indicate the potential for claims under this policy”, (see:  paragraph 49).  Mr Smith submitted that there was no rational basis for that view when the claims record was viewed in context as it must be for this purpose.  At paragraphs 59 and 60 Mr Thornhill asserted that the two earlier fires were material because they were arson claims;  however, the defenders case is only that they were supposed to be arsons, and Mr Thornhill does not explain why any such suspicion would be material.  At paragraph 72 he asserts, without explanation, that he would have considered it material that certain properties were uninsured.  He did not expand on this in his oral evidence, and he was not asked to comment on the actual reasons for non‑renewal, even though he accepted that more questions could have been asked.  At paragraph 80 to 88 he criticises Mr Sandhu’s answers to Discount Insurance, where his reasons are premised on the answers being dishonest.  His evidence on the licensing issue was that it was irrelevant so far as the issue of inducement was concerned. 

[54]     Mr Thornhill referred to the defenders underwriting code (see:  paragraph 94 – 98).  However, the only matter on which he claims to derive support from the guide is the purported relevance of Aviva not inviting renewal of Mr Sandhu’s personal policy.  Mr Thornhill stated that the guide provided that “an acceptable risk would be one where the proposer for insurance or the directors or any partners has never had a proposal for property insured declined” and that an acceptable risk is defined accordingly.  In fact those passages of the guide refer to the insurance of “properties owned by proposers, directors and partners” (Joint Bundle pages 517 and 520).  That is consistent with the questions listed at page 525 in relation to changes of ownership:  question (a) inquires whether a director has had insurance declined etcetera (either in the name of the business proposed or in the name of any other business in which you (the insured) have an interest).  That plainly limits the inquiry to refusals of insurance connected with the insured’s business, and not the affairs of the director more generally.  In any event the guide is plainly not intended to set out absolute rules as it expressly refers to unacceptable risk being referred for further consideration (see:  page 516 and 525 of the Joint Bundle).  In addition Mr Thomson confirmed that it was just a guide. 

[55]     Further, Mr Thornhill in turn states that the actual decision would not have been taken by him alone rather he would have referred it in turn to Nick Dinsdale and Michael Clothier (see:  paragraph 92).  Mr Dinsdale did not give evidence.  Mr Clothier states that he would have regarded the claims experience of Mr Sandhu as a material consideration, but he contends that the positon is that Mr Sandhu was having to self‑insure because nobody else was willing to underwrite the risk;  and that the two earlier fires  were in fact arson claims (see:  paragraphs 86 – 88).  Again this goes beyond the defenders offer to prove;  that in any event he does not explain why these matters would have been relevant in the context of a portfolio of properties at the bottom end of the housing market, or how they would have borne on any assessment of the risk posed by the pursuers.  In any event he accepted that the defenders had failed to ask questions in relation to the disclosure of fires.  In so far as he relies on the representations made to Discount Insurance, he assumes them to have been dishonest.  In so far as he relies on the guide, his evidence adds nothing to Mr Thornhill’s. 

[56]     For the above reasons it was Mr Smith’s positon that the court should not be satisfied with reference to the issue of actual inducement.

[57]     In summary Mr Smith said this:  to make out their defence, the defenders must identify:  (1) the misrepresentation or non‑disclosure;  (2) which is “material” in the sense that it would have been taken into account by a notional reasonable insurer in assessing the risk, and (3) which in fact affected the terms in which the cover was offered.  The defenders had failed to do so.  All of the alleged misrepresentations or non‑disclosures on which the defenders continued to rely were either unfounded in fact or failed the test of materiality and/or actual inducement. 

[58]    

[59]     Accordingly the defences should be repelled and decree pronounced in terms of the first conclusion.

 

Submissions on behalf of the Defenders
[60]     Mr Stephenson at the outset of his submissions set out the legal framework in terms of which he was advancing his various submissions.  He made the following points

[61]     There is a general duty on the assured of disclosure.  The duty of disclosure can be summarised thus:

“Subject to certain qualifications considered below, the insured must disclose to the insurer all facts material to the insurer’s appraisal of the risk which are known or deemed to be known by the insured but neither known nor deemed to be known by the insurer.  Breach of this duty by the insured entitles the insurer to avoid the contract of insurance so long as he can show that the non‑disclosure induced the making of the contract on the relevant terms.” (see:  MacGillivray on Insurance Law paragraph  17–009.)

 

The duty of disclosure arises not just at policy inception but also (a) when any variation is proposed and at renewal (see:  MacGillivray at paragraph 17-026 and 17-025). 

[62]      In the case of corporate insured persons:

“...the knowledge of those who represent the directing mind and will of the company and who control what it does, is to be identified as the companies knowledge, whether or not they are responsible for arranging the insurance cover in question.” (see:  MacGillivray at paragraph 17-011)

 

[63]      The reason for non‑disclosure is not relevant, in particular, just as fraudulent intent is not necessary in order for the insurer to be entitled to avoid the contract, equally, it will not avail the insured to show that the non‑disclosure arose through oversight or was an innocent admission (see:  MacGillivray at paragraph 17-017). 

[64]      The scope of the duty of disclosure may be affected by the terms of the contract, and the questions contained in the proposal forms.  Thus:

“The questions put by insurers in their proposal forms may either enlarge or limit the applicants 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.” (see:  MacGillivray at paragraph 17-018)

 

[65]      It is necessary that non‑disclosure or misrepresentation be material in order to justify the insurer in avoiding the policy.  As to that, the starting point is section 18(2) of the Marine Insurance Act 1906 relative to non‑disclosure, and section 20(2) relative to misrepresentation, which provide respectively:

“Every circumstance is material which would influence the judgement of a prudent insurer in fixing the premium or determining whether he will take the risk.

 

A representation is material which would influence the judgement of a prudent insurer in fixing the premium, or determining whether he will take the risk.”

 

[66]                 MacGillivray expands on this at paragraph 17-036 where he says this:

“The word ‘judgement’ does not mean ‘final decision’ but simply ‘formation of an opinion’.  Accordingly, a fact may be material although, if disclosed, it would not have led the prudent insurer to decline the risk or stipulate for an increased premium.  It is enough that he would rightly take it into account as a fact when coming to his decision.  It has been suggested by Scrutton LJ that the statutory definition should be glossed by adding the words ‘in that type of insurance’ after ‘prudent insurer’.”

 

[67]                 The approach to the question of materiality is by applying the test of the “prudent insurer”.  It follows from this, and is consistent with the above that it does not matter why the non‑disclosure or misrepresentation arose:

“The opinion of the particular insured as to the materiality of a fact will not as a rule be considered, because it follows from the accepted test of materiality that the question is whether a prudent insurer would have considered that any particular circumstance was a material fact and not whether the insured believed it to be so.  The maxim uberrima fides is therefore to an extent misleading, since an insured might believe in all honesty that he was complying with the duty of good faith, and yet fail to discharge the duty of disclosure...” (see:  MacGillivray, at paragraph 17-039)

 

[68]                 Ultimately the question of whether a given fact is or is not material is one of fact to be determined by jury or a judge as the trier of fact” and “rests on the judge’s own appraisal of the relevance of the disputed fact to the subject matter of the insurance;  it is not something which is settled automatically by the current practice or opinion of insurers. (see:  MacGillivray, at paragraph 17-042.)

[69]     Quite apart from avoidance of the policy as a result of non‑disclosure, a contract of insurance may also be avoided as the result of misrepresentation.  In the case of innocent misrepresentation:

“In order for an innocent misrepresentation to entitle a party to avoid the contract of insurance it must satisfy the following conditions: 

(1)        it must be a statement of fact or, in relation to the insurers remedy under section 20 of the 1906 Act only, statement of opinion or belief; 

(2)        it must be untrue; 

(3)        if made to the insurer, it must be material to his appraisal of the risk, and in other cases material in the wider sense;

(4)        it must be a statement as to present or past fact and no defuture;  and

(5)        it must be induced the aggrieved party to enter into the contract of insurance.” (see:  MacGillivray, at paragraph 16-011)

 

[70]                 As a preliminary matter Mr Stephenson responded to the objection to admissibility put forward by Mr Smith.

[71]     It was his positon that what he described as the standing objection took on a variety of forms from when it was advanced at the outset of the Proof.  It appeared, in its final articulation, simply to be the proposition that witnesses cannot give evidence on the ultimate issue before the court.  For the defenders, he accepted that a witness cannot usurp the function of the court in deciding the issue in dispute.  In reality, however, it was inevitable that there should be evidence about what was and was not material from the witnesses who gave evidence. 

[72]     He submitted that the evidence of the brokers was admissible because they are persons whose job it is to provide information to underwriters.  By virtue of the experience they gain they inevitably come to know what type of information is or is not looked for by underwriters.  While there is doubtless a question as to the weight to be given to such evidence, there is no reason to characterise it as inadmissible. 

[73]     As to the evidence of underwriters, that evidence is indisputably admissible and relevant for the purposes of the question of inducement.  It does also, however, have relevance to the question of materiality as such, the authorities do no more, on close examination, than say that a matter is not material simply because the underwriter says so.  That is quite different from saying that the view of the underwriter is irrelevant and inadmissible it is as is so often the case, a question of weight.

[74]     In short, therefore, he submitted that the objection to the admissibility of such opinion evidence from the brokers and underwriters should be repelled. 

[75]     Moreover it was his position that no matter what view the court took with respect to the above objection the evidence of these various witnesses was nevertheless of importance in the following respects: 

[76]     First, the brokers were unanimous in their view regarding materiality of the non‑disclosures to which they spoke in their witness statements.  The simple fact of the matter is that they all believe that the matters in question were material and ought to have been disclosed.  Each would in fact have made the disclosures had they known, or appreciated, the true position.  None had any reason to do anything other than be truthful in the evidence they gave on this point.  There can be no doubt, that had Mr Sandhu made them aware of the true/full position in relation to the various contentious issues, they would have disclosed them to the defender.

[77]     Secondly to the extent that there were any material factual differences between the evidence of Mr Sandhu and the evidence of the brokers, the evidence of the brokers should be preferred, it being the position of Mr Stephenson, for reasons he later elaborated upon that the evidence of Mr Sandhu was unsatisfactory and should be rejected.  By contrast there was no basis for questioning the integrity or honesty of the broking witnesses.

[78]     Thirdly and fundamentally in the cross‑examination of the brokers, in particular the witnesses from JC Roxburgh, one could be forgiven at times from thinking that that what one was watching was a professional negligence action against them at the instance of the pursuers or Mr Sandhu.  In this respect, he made two points:  (1) the pursuers are bound by the actions of their agents and it does not matter why an agent omits to disclose a material fact, the mere fact of non‑disclosure is all that matters;  and (2) despite the fact that some of the brokers had put to them, and accepted, that there may have been fault on their part, they did not in that state of affairs seek to depart from their positon regarding materiality, although he submitted it plainly might have suited their own purposes to do so.  He described that as being to their credit. 

[79]     So far as the other witnesses led Mr Stephenson commented as follows:

 

(i)        Mr Sandhu
[80]                 Mr Sandhu was a deeply unimpressive witness.

[81]     Mr Sandhu claimed (in paragraph 53 of his Affidavit, No 44 of process) that it was his former partner who had dealt with insurances for the pursuer's properties.  It was clear that he did so to support the proposition that, when the properties became uninsured on 1 March 2012, that was as a result of “administrative oversight’.  As was put to Mr Sandhu in examination in chief, however, it was clear that Mrs Kaur had ceased to have any dealings with the brokers from 4 October 2011 onwards.  Moreover, he in fact knew the properties in question were uninsured - indeed, he himself claimed to have secured a quotation for insurance of those properties (as it happens, a claim which, it is submitted as discussed below, was patently untrue).

[82]     In respect of the fire at Greenrigg Road, Mr Sandhu accepted that he knew the cause of that fire was that a sofa had been set alight, although he then went to claim he only “thought that that was what happened” and that “nothing was confirmed”.

[83]     In respect of the fire at Pine Place, Mr Sandhu confirmed that he understood from the police that someone had broken into Pine Place and had set the fire.  When pressed to identify any possible causes other than arson he remarked “it could have been anything, it's a rough area”.

[84]     In short, it is quite clear that Mr Sandhu knew that the only available or credible explanations for the two fires was that they had been caused by arson.

[85]     As to the insurance of his personal property portfolio, Mr Sandhu was (as was agreed in the Joint Minute, at paragraph 36) aware that Aviva would not be renewing the insurance policy due to a recent large total loss.  Remarkably, however, Mr Sandhu sought to dispute this fact in the course of his evidence (“I don't know how that's got in, but I was definitely not told”).  Of course, the evidence actually given by Mr Sandhu in that regard is all the more remarkable because, not only did it contradict the position agreed in the Joint Minute, it would render inexplicable Holly Buckingham's file note of 15 February 2012 (“He has fully disclosed all the claims history and that Aviva have declined to renew.”) (7/49/4)  He was further aware (paragraph 41 of the Joint Minute) that his properties would become uninsured at midnight on 29 February 2012.

[86]     Mr Sandhu provided no coherent explanation for his assertion that the properties were uninsured as a result of oversight.  His attempts to deflect blame onto his former partner, and the breakdown of that relationship, were an obvious attempt to divert attention from the true position.

[87]     That is to say, not only did Aviva decline to renew the existing policy, it further refused to quote on a commercial basis.  Brokers could not obtain a quotation from any other insurer.  Mr Sandhu's claim to have obtained a quotation himself was - obviously - untrue.  Similarly, his claim that a quotation was provided by JC Roxburgh was also quite clearly untrue.  These claims, moreover, were themselves inconsistent with his claim that the properties were uninsured due to “administrative oversight”.

[88]     It also follows that Mr Sandhu's claim to have disclosed to JC Roxburgh the fact that his policy with Aviva had ended at midnight on 29 February 2012 cannot be true;  given the strong views held by the broking witnesses from JC Roxburgh it is inconceivable that they would have represented to the defender that a policy was in force if they knew that not to be the case.  Indeed, it was not seriously suggested to the JC Roxburgh witnesses in cross‑examination that they did in fact know that the policy had expired at midnight on 29 February 2012.

[89]     Mr Sandhu's evidence regarding the fact that his (tenanted) properties were uninsured for a period of at least nine month was remarkable.  He seemed wholly unconcerned that his tenants, and anyone visiting the properties, would not, for example, have the protection of public liability insurance.  He continued to maintain that it was an “oversight” that the properties went uninsured for so long, despite the fact he actually knew they were not insured.

[90]     He also sought to advance wholly contradictory claims regarding the insurance of the personal property portfolio, at one point remarking that “money was tight” (implying that he was unable to afford the premiums) and then in the same breath claiming that he had put aside “a pot of money ... in case anything happened to the properties”.  Throughout all of this, he also stuck to his claim that it was mere oversight which caused the properties to be uninsured.  His account was riddled with inconsistencies and contradictions.  It was plainly not the truth.

[91]     The plain truth of the matter, as Mr Sandhu knew, was that the properties were uninsured and he simply did not seem to care that that was the case.

[92]     As to the position with Discount Insurance/Catlin Insurance, the pursuer's position on Record was that all of the questions in the “Statement of Fact” documents were filled out on the advice of his brokers.  An order having been made for further specification in this respect, the pursuer's solicitors confirmed by letter dated 22 September 2016 (7/55 of process) that Mr Sandhu could not recall who it was who had given him such advice, nor specifically whether it was “Sandrine Borazo”.

[93]     Remarkably, however, by the time Mr Sandhu came to swear his affidavit (on 24 January 2017) he was confidently able to say that it was Sandrine Borazzo who had given him such advice.

[94]     Even more remarkably, when questioned about this, Mr Sandhu's position in evidence was that it was only in respect of question 17, and not questions 8 or 12, that he had received advice from Ms Borazo.

[95]     Notably- and this was a theme which emerged from Mr Sandhu's evidence- no other witness (such as Ms Borazo) was called to support Mr Sandhu's account.  The failure to adduce such evidence amply entitles the court to reject Mr Sandhu's evidence.

[96]     Mr Sandhu's evidence in respect of his position as “Designated Premises Manager” was striking in that he plainly regarded it as entirely acceptable for him to take on that position of responsibility, with no intention of fulfilling the duties in question, simply to obtain a licence from the local licensing authority.  He accepted, of course, that he had nothing to do with the running of the business at the Premises, and only attended perhaps once a week or so to collect rent.  He accepted that he had done nothing to check what, if anything, had happened concerning the licensing position.

[97]     Again, and as already noted, no other witness was called to support Mr Sandhu's claims regarding any understanding or arrangement which he claims to have had regarding transfer of the licence.  The court ought to draw the inference that Mr Sandhu's claims are untrue.

[98]     Overall, Mr Sandhu was a poor witness.  To the extent that his evidence differed from that of any of the other factual witnesses, his evidence ought to be rejected.

[99]     Beyond that, his evidence was striking to the extent that it laid bare the manner in which he conducted his business and his affairs with brokers and insurers.

 

(ii)       Covea Underwriters
[100]               There was no cross‑examination of the Covea underwriting witnesses regarding their evidence on inducement.  It was simply never put to these witnesses that their evidence as to what they would have regarded as material, and the approach they would have taken had certain disclosures been made, was factually untrue, or even that their position was in these respects unreasonable, or not that of the prudent underwriter.

[101]   The witnesses plainly gave their evidence in an honest and straightforward manner.  To take Mr Thornhill, as an example, he no longer works for the defender.  In giving his evidence, he did not support every aspect of the defender's position on materiality.  He, and the other underwriting witnesses, were simply trying to assist the court.  The evidence given by these witnesses on inducement - which was effectively unchallenged - ought to be accepted.

 

(iii)      The Expert Evidence
[102]               He then turned to look at the evidence of the two designated experts, namely:  Mr Emblin (for the defenders) and Mr Broad (for the pursuers).  It is perhaps helpful at this stage to set out certain legal submissions made by Mr Stephenson regarding materiality, and in that context in particular the significance of refusal of insurance on other properties, or in respect of other perils.  With respect to this matter he directed my attention to a passage in MacGillivray at paragraph 17.069 which was in the following terms:

“Thus, in Locker and Woolf Ltd v Western Australia Insurance Co Ltd [[1936] 1 KB 408] it was held that insurers were entitled to avoid a fire insurance on account of the insured's failure to disclose that an application for motor insurance had been declined on the ground that untrue answers had been given in the proposal in order to conceal the previous claim and losses. In another case [Cornhill Insurance Ltd v Assenheim (1937) 58 Lloyd's Rep 27, 30], it was conceded that a refusal to renew a motor policy on the grounds of poor claims experience should be disclosed to insurers to whom the insured was proposing for motor insurance on a different vehicle three weeks later. In Joseph Fielding Properties (Blackpool) Ltd v Aviva Insurance Ltd [[2010] EWHC 2192 (QB); [2011] Lloyd's Rep IR 238] the claimant insured claimed an indemnity from the defendant's insurer in relation to a fire at the claimant's industrial estate. One of the defendant's defences was that the claimant had failed to disclose to the defendant the claimant's previous failures to disclose to other insurers his material previous conviction. This defence (along with the defendant's other two defences) was successful. Therefore, even if a material conviction is spent, the insured's prior failure to disclose the same (when it was not spent) to previous ·insurers will likely be material for the purposes of a later application for insurance."

 

[103]   Against that background Mr Stephenson first turned to the evidence of Mr Broad and made the following points:  He described Mr Broad as being an advocate for the pursuers.  This was based upon Mr Broad’s refusal to give a straight answer, or indeed, any, answer to the simple question put to him about an “all risk” insurance policy.  This Mr Stephenson described as being “highly revealing”.  Mr Broad claimed he would not engage in discussion about the meaning of such words despite the fact that he had been very ready to offer views on issues of construction/interpretation when it suited his purpose to do so.

[104]   Mr Stephenson described the core position taken up by Mr Broad in his evidence in this way:  his refusal to accept that there was any connection, so far as moral hazard was concerned, between the Pursuer and Mr Sandhu trading as Sandhu Properties.  This was despite (a) the fact that in his own report (6/12 of process, paragraph 6.4) he recognised the likelihood of transference in “small companies”;  and (b) the inescapable truth that the pursuer and Mr Sandhu were, for insurance purposes, evidently indistinguishable.  The pursuer had no employees and was simply a vehicle through which Mr Sandhu rented out a mixture of commercial and residential properties.  That was precisely the same business (albeit with a different mix or balance of properties) which Mr Sandhu carried on personally.  It is impossible to imagine a situation in which there would more obviously be a transfer of any moral risk from one “entity” to the other.  Mr Broad's refusal to accept this evident truth undermined the entirety of his evidence.

[105]   Beyond that, Mr Stephenson submitted regarding the evidence of Mr Broad that:  Perhaps even more fundamentally, however, it became apparent, as Mr Broad gave evidence, that (surprising as this may seem) he simply did not understand the nature of “materiality”.  In short, his evidence was consistently to the effect that, in order to be a “material fact” the non‑disclosure of that ‘fact’ had to produce a result.  That is wrong in law - the question of inducement is a wholly separate question from the prior issue of whether a fact is material.  (By contrast, Mr Emblin clearly understood, and applied, this distinction in his own report and the evidence he gave.)  As to materiality, all that is required is the fact be one that would have an effect on the mind of the prudent insurer in estimating the risk and that it is not necessary that it should have a decisive effect on his acceptance of the risk or on the amount of the premium demanded (Pan Atlantic Insurance Ltd v Pine Top Ltd that it would “influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk” (Marine Insurance Act 1906, section 18(2)).  Ultimately, as MacGillivray puts it (paragraph 17-036):

“The word ‘judgment’ does not mean ‘final decision’ but simply ‘formation of an opinion’. Accordingly, a fact may be material although, if disclosed, it would not have led the prudent insurer to decline the risk or stipulate for an increased premium. It is enough that he would rightly take it into account as a factor in coming to his decision,”

[106]    In summary he said this regarding the evidence of Mr Broad there can be no real doubt that Mr Broad appeared, from his evidence, simply not to understand the proper meaning of “materiality”.  Given his misunderstanding on a matter of such importance, it is respectfully submitted that, however lengthy his experience, Mr Broad's evidence simply cannot be accepted on the key question of the materiality of the non‑disclosures.  Indeed, in this respect, it is worth noting that Mr Broad also appears to have made a similarly elementary error regarding the significance of the reasons for non-disclosure.  Thus, at paragraph 4.2 of his report, he opines that “an insurer is not able to rely on innocent non­disclosure as a mean of avoiding a claim”.  That is simply wrong as a matter of law;  the reason for the non‑disclosure (whether fraudulent, negligent or innocent) is entirely irrelevant.  It may also be observed that the examples then given by Mr Broad are plainly nothing to do with “innocent non-disclosure”.  His thinking on this entire subject appears to be very muddled.

[107]    He submitted for these reasons that the evidence given by Mr Broad should not be accepted.

[108]    Turning to the evidence of the other expert, Mr Emblin, he said this with respect to Mr Emblin’s experience as an underwriter:  the simple fact of the matter was that he was speaking from many decades of experience both as a broker and an underwriter.  He was perfectly able to engage both with the views of Mr Broad and the issues raised with him in examination in chief and cross‑examination.

[109]    He went on to say this with respect generally to the way in which Mr Emblin had given evidence:  it is also worth observing, at the outset, that Mr Emblin gave his evidence in a far more measured and balanced manner than did Mr Broad.  Mr Emblin was prepared, where appropriate, to accept the force of points put to him in cross‑examination and make appropriate concessions or qualifications to his evidence.  That approach was in stark contrast to the approach of Mr Broad.

[110]    Moving on to the substance of the evidence of Mr Emblin he made three detailed points:  First, Mr Emblin's position regarding the significance of the Sandhu Properties' insurance position so far as the pursuer's insurance position was concerned made obvious sense – one cannot seriously dispute the proposition that the pursuer was a “one man band” engaged in the same essential business as Mr Sandhu's sole trader business.  While Mr Broad accepted the basic principle that moral hazard will transfer more readily in the case of “small companies” his attempts to explain why the force of his own reasoning did not apply to the Sandhu Properties/Higherdelta situation (his evidence being that people might behave differently while wearing “different hats”) simply did not make sense on the facts of the present case.  That is to say, on the fundamental question of whether, in the context of moral hazard, the way that Mr Sandhu behaved in the context of his own personal portfolio would be relevant to or “transfer” to risk the pursuers presented, it is submitted that Mr Emblin's evidence should plainly be preferred.  There is, it is submitted, something “other worldly” about the idea that the two “entities” should be regarded as wholly unrelated and separate.  Secondly, the overall tenor of Mr Emblin's evidence concerning what constitutes a “moral hazard” was that one is not just concerned with dishonesty as such (even if that might be the paradigm, or most commonly encountered, type of “moral hazard”) but that issues concerning poor management or the like can equally give rise to a moral hazard.  In that respect, he was at one with Mr Broad (see paragraph 6.3 of Mr Broad’s initial report and the example given regarding fire precautions).  In this respect, it is submitted that Mr Emblin was quite correct to characterise both the non‑disclosure of the reason for Aviva coming off cover and, even more obviously, the fact that the personal portfolio was uninsured for such a long period of time, as matters relating to the moral hazard of both Mr Sandhu and the pursuers.  In short, a proposer who does not bother (and that is what it was - it was not an “oversight”) to insure a portfolio of c50 residential properties is properly to be seen as someone who represents a moral hazard to the prudent underwriter in the position of the defender.  In circumstances, moreover, where that uninsured state of affairs arises because the existing insurer has declined to renew and has refused to quote on a commercial basis, and no other insurers have even been willing to quote, the moral hazard is clear. 

[111]    Thirdly, much was made in cross-examination of Mr Emblin of the fact that those insurers from whom quotations were sought by HIS did not refuse to quote because Aviva had declined to renew.  The problem with this line of cross‑examination, however, is that it ignores the fact that these were insurers to whom proper disclosure of that fact had actually been made - that is to say, these were insurers who were given the opportunity of deciding what to do on the basis of full and proper disclosure, the very opportunity which was denied to the defenders, as Mr Emblin explained. How any particular underwriter reacted to the proposal is one thing - and the simple fact was that not one of those underwriters was prepared to quote - but it is quite another to conclude (as the line of questioning implied) that none of those insurers was bothered about the fact of Aviva's decision not to offer renewal.  The critical point, as explained by Mr Emblin (and indeed the other broking and underwriting witnesses) is that the insurer should be given the opportunity to take the decision on an informed basis.  The defenders were never given that opportunity.  As it happens, moreover, one knows from the defenders’ underwriting guide, and the evidence of its underwriters, that had disclosure of the Aviva refusal to renew been made, the pursuer would have been regarded as an “unacceptable risk” and renewal would not have been offered. 

[112]    Overall, it is submitted that Mr Emblin's evidence (which was given in a much more balanced and moderate manner than Mr Broad’s evidence) should, where they differed in material respects, be preferred to that of Mr Broad.

[113]    Mr Stephenson made the following comments regarding the evidence of Ersin Yildirin:  surprisingly, he was not cross‑examined on his evidence regarding Discount Insurance “statement of fact” documents, what the questions were concerned with, and the position Discount Insurance would have taken had the questions been answered by Mr Sandhu differently, that is, truthfully.  It is presumed, therefore, that that evidence is not disputed.  There is no reason to doubt the evidence and it is submitted that it should be accepted.

[114]    Against the background of the legal framework he had set out and his commentary on the evidence Mr Stephenson made the following submissions with respect to each of the grounds relied on as the basis for avoidance of the policy.  These submissions were contained in the written submissions lodged on behalf of the defenders and I believe in the circumstances it is appropriate to quote these ad longum.

“80.     The Pursuer submitted a proposal form dated 11th March 2009 (7/3 of process) proposing that the Premises be added to the Policy. The parties are agreed that Mr Sandhu was the controlling mind of the Pursuer (see Joint Minute, paragraph 6). His knowledge thus falls to be attributed to the Pursuer. To the extent that there was evidence regarding the meaning of question 4 (‘in respect of any of the risks against which you now wish to insure’) it is submitted that the construction contended for by the Defender is obviously the right construction as a simple matter of language and, moreover, the assistance which Mr Emblin was able to give on that matter (in contrast to the evasive position adopted by Mr Broad) amply supports that view.

 

81.       In that proposal form the Pursuer answered ‘No’ inter alia to these questions:

 

‘4.        In respect of any of the risks against which you now wish to insure:

 

[...]

 

(ii)        Has any previous insurer declined a proposal, refused to renew a policy or imposed special terms or conditions?

 

(iii)       Have you or any director or partner (whether a current or any previous trading name or interest) incurred any loss destruction or damage or made any claim or had any claim made against you during the last 3 years?’

 

82.       In addition, all of the proposed forms which were submitted to the Defender by the Pursuer contained the following section:

 

‘MATERIAL FACTS (Complete in all cases)

A material fact is any fact which could influence the assessment or acceptance of this proposal. Failure to tell us a material fact my lead to the policy being of no effect. If you are in any doubt as to whether a fact is material, for your own protection you should let us know.

 

“Are there any other material facts you should disclose?” Yes      No

 

If “Yes”, please give details below’

 

83.       The Pursuer answered ‘No’ to that question. The Pursuer was thus aware of the need to make disclosure of ‘material facts’, and not to misrepresent the position. Moreover, as explained in paragraph 8, above, ‘each renewal is made on the understanding that the original representations remain true and that no new fact has emerged which ought to be disclosed’. To the extent that it was argued that Mr Sandhu might have simply forgotten the terms of the original proposal forms, therefore, that is simply nothing to the point. As Mr Emblin pointed out, moreover, it was for the brokers to advise Mr Sandhu/the Pursuer in relation to these issues. If they failed to do so that is a matter between them and the Pursuer, and does not, in a question with the Defender, make any difference to the Defender's entitlement to avoid for material non­disclosure or misrepresentation.

 

84.       The Policy was proposed for renewal on 19th January 2013. The Defender issued to the Pursuer's broker (and agent, and thus to the Pursuer) a renewal quotation dated 15th January 2013 (7/6 of process). That document expressly stated inter alia:

 

‘All material facts must be disclosed to Covea, if you notice any differences between this quotation and your presentation you must disclose these prior to acceptance of the policy or this may seriously affect your client's cover ... ‘

 

85.       This express warning was consistent with the default legal position, namely, that ‘each renewal is made on the understanding that the original representations remain true and that no new fact has emerged which ought to be disclosed"’ (see paragraph 8, above).

 

86.       In these circumstances, the Pursuer breached its duty of disclosure. That was so because the representations which had been made (inter alia in 7/3 of process) no longer continued to be true.

 

87.       Specifically, the true position was that the Pursuer's Mr Sandhu, in connection with the other business operated by him (being his sole trader business ‘Sandhu Properties’) had had an insurer refuse to renew insurance over 41 properties owned by him, and had had numerous insurers decline his proposals.

 

88.       Mr Sandhu's agents (House Insurance Services (‘HIS’)) had written to him by letter dated 7th February 2012 (7 /10 of process) in which letter it was stated inter alia:

 

‘Further to our recent telephone conversation, we write to advise the above mentioned policy falls shortly due for renewal on 01 March 2012.

 

‘As advised Aviva will not be inviting renewal of this policy. We are currently in the process of seeking alternative quotations for you and will be in contact with you shortly.’

 

89.       On 29th February 2012, HIS wrote again to Mr Sandhu (7/11 of process) informing him:

 

‘Following my previous letter of 7 February 2012 and our telephone conversation today, I write to confirm that unfortunately I cannot offer you a competitive quotation compared to those you have already obtained yourself. All cover will therefore cease from 29th February 2012.’

 

90.       It might be thought there could be said to be a question as to what is meant by the phrase ‘Aviva will not be inviting renewal of this policy’. A full examination of the available documents makes it clear, however, that Aviva refused to renew the policy (and, for that matter, that Mr Sandhu, and thus (as he was its controlling mind) the Pursuer, knew that to be the case). In this respect, see Holt's Motors v South East Lancashire Insurance Co (1930) 37 Lloyd's Rep 1.

 

91.       The HIS file was recovered by mandate. It is produced as 7/49 of process. See also the Witness Statement of broker Holly Buckingham. In addition to the letters mentioned above, the following documents should be noted in connection with Aviva's refusal to renew: (in date order):

 

•          email exchange between HIS and Aviva dated 2nd December 2011 (7/49/66-67)

•          email from Aviva to HIS dated 1st February 2012 (7/49/69)

•          email exchange between Aviva and HIS dated 1st February 20111 (7/49/66)

•          file note entry dated 3rd February 2012 (timed at 11:30) (7/49/11)

•          file note dated 15th February 2012 (7/49/4)

•          file note dated 24th February 2012 (7/49/3)

•          file note entry dated 29th February 2012 (timed at 09:04) (7/49/11)

•          file note dated 29th February 2012 (7/49/2)

 

92.       These documents indisputably disclose that: Aviva refused to renew insurance of the 41 properties (whether under the ‘delegated’ scheme or on a commercial basis) due to adverse claims experience (7/49/66-69); Mr Sandhu (and thus the Pursuer) was aware that that was the case (7/49/7); and indeed that Mr Sandhu claimed to have disclosed not just his prior claims experience but also ‘that Aviva have declined to renew’ to other insurers (7/49/4), something which, by definition, he could not have done if, as he apparently now claims, he was unaware that Aviva had refused to renew his insurances because of adverse claims experience (see, for example, paragraph 50 of Mr Sandhu's Witness Statement).

 

93.       As to the position in respect of declinature by other insurers, 7/49 of process contains numerous entries which make it clear that it was not the case that HIS was unable to secure commercially attractive quotations but, rather, that it was simply unable to obtain any quotations because insurers declined to offer terms: see, for example, 7/49/37;43; 59.

 

94.       Indeed, for completeness, it should also be noted that Mr Sandhu's claim to his brokers to have secured a quotation at a ‘price of just under £10,000 with a much lower excess’ (7/49/4) is neither spoken to by Mr Sandhu in his Witness Statement nor vouched by any written material. As discussed above, Mr Sandhu's position in this respect was demonstrably untrue.

 

95.       In short, therefore, the Pursuer simply did not disclose, as it was required to do, the fact that its controlling mind, Mr Sandhu, had indeed been refused a renewal of insurance, and had had insurers decline his proposals. On the basis of the contemporaneous documentation referred to above, moreover, it is quite clear that Mr Sandhu/the Pursuer were well aware that that was the case.

 

96.       Moreover, following on from this non-disclosure, the positive representation which was made on the Pursuer's behalf in the email dated 1st March 2012 (7/4 of process) that there a ‘policy in force’ was also untrue; in point of fact, all of the properties were uninsured at that time, until insurance cover was secured for some of them via Catlin Insurance (again in circumstances where there was a material failure to make proper disclosure to that insurer, as discussed below). In this respect, it should be remembered that one is not simply dealing with the type of situation put in cross-examination (i.e. the representation made 5 minutes after a policy had lapsed) but, rather, with a representation which was not corrected for a period of almost 2 weeks before the policy was amended - as Mr Emblin rightly pointed out - and indeed the representation was still not corrected at renewal in January 2013, almost a year later). It will also be recalled (see paragraphs 29 and 30, above) that the proposal forms contained specific wording requiring the disclosure of ‘material facts’ and that the Pursuer, on renewal of the Policy in 2013, gave an untrue answer (its answer was deemed to remain ‘No’), which misrepresented the true position. Thus, quite apart from the failure to make disclosure, the Pursuer positively misrepresented the position to the Defender.

 

97.       As to the position in respect of claims arising from fire damage is concerned, although a ‘claims history’ was sent to the Defender by the Pursuer's agent, JC Roxburgh & Co Ltd, under cover of the email dated 1st March 2012 (7/4 of process), that ‘claims history’ did not disclose anything concerning the cause of the fires in July 2009 at Greenrigg Road, and in October 2011 at 2 Pine Place.

 

98.       Mr Sandhu/the Pursuer was aware that the likely or probable explanation for the fires was arson. The available evidence discloses no other candidate causes. This analysis is consistent with the statement Mr Sandhu gave to loss adjusters at the relevant time (7/54 of process).

 

99.       In short, therefore, there was a failure to disclose that the fire claims in respect of Greenrigg Road and 2 Pine Place were likely caused by arson. Indeed, such disclosure as was made in respect of the fire claim concerning 2 Pine Place was additionally misleading since it was stated (in the ‘claims history’ attached to the email 1st March 2012 (7/4 of process) that that claim had been ‘settled at £67,000’. The true position was that the claim so far as Mr Sandhu is concerned was settled in 2013, with payments made to date exceeding £89,000 (see Witness Statement of Andy Boyd, paragraphs 20 and 21 as qualified by his oral evidence, and Witness Statement of Stewart Roxburgh, paragraph 91 et seq). On the evidence led at proof, however, it has to be accepted that the Defender was on notice and ought to have made further enquiry. The Defender's underwriting witnesses were not able to explain why no such further enquiry had been made, given that they were clear it ought to have been made. One is driven to conclude that these enquiries were not made due to human error on the part of the underwriters who actually dealt with the proposal (as opposed to the suggestion that the issues were not in fact material).

 

100.     The insurance cover which Mr Sandhu in due course secured for some of the properties within his personal portfolio via Catlin Insurance in December 2012 (the Pursuer having represented in March 2012 that there was such insurance cover in force, which was untrue) was itself secured in circumstances where Mr Sandhu failed to make proper disclosure of the true position to Catlin Insurance. The submissions above concerning the circumstances in which there was such a failure to make proper disclosure should be recalled.

 

101.     The various ‘Statement of Fact’ documents which were submitted to Catlin Insurance on Mr Sandhu's behalf are produced as 7/12 to 7/27 of process. They each contain a number of warranties which are of significance in the present case, as follows:

 


 

Have you or any of the interested parties had insurance declined, terminated, renewal refused or been subject to special terms?

 

NO

Have you had continuous insurance on the property since you acquired it?

 

YES

Have you or any interested parties suffered any losses, or had any claims made against you during the last three years, whether insured or not?

 

NO

 

102.     It appeared, at least on from the pleadings, that some issue arose concerning the proper interpretation of these questions, and the basis upon which Mr Sandhu gave the answers which he did. In his evidence, Mr Sandhu materially departed from both the Pursuer's pleadings and his own witness statement on these issues.

 

103.     As to the first point, it is submitted that it could not be clearer that in general terms, each and every one of the questions in the Statement of Fact could not - and could not sensibly be said to - relate only to each particular property which was the subject of the Statement of Fact in question.

 

104.     One only has to look at the entirety of the questions to see that some relate to the property which is the subject of the proposal (each of which such questions mentions ‘the property’) while others do not and are of much more general application. To the extent that the Pursuer argues otherwise that argument is unsound.

 

105.     As to the second issue, the Pursuer claims that Mr Sandhu was ‘advised by his broker that the questions within related to the particular property for which insurance was sought’ (Article 3d of Condescendence). There are three points to be made in response:

 

105.1   for the reasons discussed in section C, paragraph 11, above, in a question between Mr Sandhu and Catlin Insurance, as a matter of substantive law, it would not matter whether or not any such advice was given by the broker if the advice was wrong and there was a failure to make the disclosure which was actually required by the Statement of Fact (and one knows from the other available evidence that Catlin Insurance would have declined Mr Sandhu's proposal had proper disclosure been made - see the witness statement of Ersin Yildirim); and

 

105.2   in any event, the Pursuer's position (particularly in light of the evidence actually given by Mr Sandhu) on this issue is neither credible nor reliable. After committing himself to the position that he could not recall who gave him the advice in question (see 7/55 of process) Mr Sandhu then appeared to suggest that he was given that advice by Sandrine Borazo (Witness Statement of Mr Sandhu, paragraph 62). No other evidence - including specifically evidence from Ms Borazo - is offered by the Pursuer in support of this position. He took up a yet further different position in his oral evidence; and

 

105.3   It follows from the foregoing that Mr Sandhu made an untrue representation to Catlin Insurance for the purpose of securing cover of sixteen of the properties which had hitherto been uninsured following the refusal of renewal by Aviva. On any view, the making of that representation was a material consideration which bore upon the moral hazard of Mr Sandhu/the Pursuer. That is to say, even if (which the Defender does not accept) the answers were given honestly and in good faith, the failure or inability to answer these questions truthfully and competently gives rise to a moral hazard.

 

106.     The final matter upon which the Defender relied, is the Pursuer's failure to disclose that he was recorded as the Designated Premises Manager (‘DPM’) for the Premises (with effect from 21st November 2012 (see, for example, numbers 7/48 and 7/49 of process), despite the fact that he was not involved in the running of the business being carried on from those premises, in breach of the Licensing (Scotland) Act 2005. The Premises required to have a DPM who worked on the premises, in order to sell alcohol, under reference to section 19 and Schedule 3 Premises Licence Mandatory Conditions of the 2005 Act. The DPM is responsible for the day to day running of the premises, and in particular is responsible for the training and supervising of the staff, and ensuring the premises are run in accordance with the requirements of the licence. An individual intending to be a DPM must also be the holder of a valid Personal Licence. A person can only be the DPM of one premises at a time. If a DPM stops working at the premises for any reason, the licence holder must notify the Licensing Board within one week or the premises will not be able to continue selling alcohol.

 

107.     In his witness statement, Mr Sandhu says (at paragraph 43) that he ‘transferred the license [sic] into my own name. I did this to ensure that there was still a licence holder in place for the premises while it was being renovated. When lndoscot Spice Limited entered into occupation it was agreed that Mr Singh would apply to transfer the licence into this name. My understanding is that he never got round to dealing with this.’

 

108.     There was of course no other evidence adduced by the Defender to support his position that there was an agreement to transfer the licence into the name of Mr Singh. The Defender did not state in his Witness Statement that he believed the transfer had taken place.

 

109.     In any event, and more fundamentally, it is indisputably the case that Mr Sandhu simply did not in any sense comply with his duties as Designated Premises Manager. He appeared to accept that despite the application to appoint him Designated Premises Manage it was not his actual intention to undertake the duties of the role. Although he appears not to have regarded them as such, those duties were important. He was not entitled simply to disregard them.

 

110.     Mr Sandhu's conduct in these respects plainly impacted upon the moral hazard presented by the Pursuer (see the reports of Mr Emblin and the Witness Statement of Colin James Thomson, at paragraphs 112-116). Mr Sandhu's failure to perform the functions of DPM also impacted upon the risk hazard, the Premises not being operated with the level of supervision and control required.

 

111.     It is accepted that the evidence adduced at proof did not support the proposition that the Defender was induced to offer renewal in this respect (cf the evidence of Mr Thornhill) but the fact of the matter still is that the issue raised relates to the moral hazard presented by Mr Sandhu/the Pursuer. That evidence is still germane to the Court's overall consideration of whether there was indeed a moral hazard in this case.

 

112.     In each of the foregoing respects therefore (the failure to disclose the refusal of renewal and insurers declining proposals; the misrepresentation of the position of Mr Sandhu's insurances; the failure to disclose that two losses had likely been caused by arson; the failure to disclose that misrepresentations had been made to another insurer, Catlin Insurance; and the failure to disclose the breach of statutory duty by Mr Sandhu which breach of duty related to the Premises which were, with others, the subject of the Policy) there was a failure to make disclosure by the Pursuer et separatim the Pursuer misrepresented the position to the Defender. 

 

113.     On the evidence which is before the Court, it is clear that the non-disclosure, at least in relation to the refusal of Aviva to renew, the refusal of other insurers to quote, and the failure to disclose that the personal property portfolio was uninsured (both initially and then for a long period of time thereafter) induced the contract of insurance: see, for example, the witness statements of James Andrew Thornhill, Michael Robert Clothier and Brian Johnston, and the Defender's ‘Commercial Property Owners Underwriting Guide’ (7/53 of process), particularly: at page 7 which provides that for the purposes of the defenders' Commercial Property Owners policy Acceptable Risks are inter alia ‘properties owned by proposers, directors or partners who ... have not had a proposal for insurance declined, renewal refused, cover terminated, increased premium required or special conditions imposed by any insurer’ and at page 10 which provides that Unacceptable Risks are inter alia, ‘properties owned by proposers, directors or partners who ... have had a proposal for insurance declined, renewal refused, cover terminated, increased premium required or special conditions imposed by any insurer’ are ‘unacceptable risks’. Reference is also made to the said Underwriting Guide, page 15, Change of Ownership. Indeed, it is equally clear that Mr Sandhu would not have secured insurance cover from Catlin Insurance had he made proper disclosure to them: see the witness statement of Ersin Yildirim.

 

114.     There was, strikingly, no attempt to challenge the evidence of the Defender's underwriters regarding the question of inducement. To take the example of the refusal to renew by Aviva, it is perhaps not surprising that there was no challenge to that evidence - the Defender's underwriting guide could not have been clearer that the Pursuer was as a result of the refusal an ‘unacceptable risk’.

 

115.     The final question, therefore, is whether the Pursuer's non-disclosure and misrepresentation, which in fact induced the contract of insurance, were material.

 

116.     As to that, it will be recalled that the proper approach is for the Court to make its ‘own appraisal of the relevance of the disputed fact to the subject-matter of the insurance; it is not something which is settled automatically by the current practice or opinion of insurers’. (emphasis added)

 

117.     Fundamentally, on the proven facts of the case, there were several instances of non-disclosure and indeed the Pursuer positively misrepresented the position to the Defender (and, for that matter, to Catlin Insurance). The Court has before it evidence from a variety of sources to the effect that the Pursuer ought to have made disclosure of the true position because insurance underwriters ought to have been made aware of the true position regarding the matters in question.

 

118.     That evidence comes not just from the Defender's own staff, but also from another insurance underwriter (RGA Underwriting - see the Witness Statement of Ersin Yildirim) and indeed from the Pursuer's own brokers (see the Witness Statements of Tracy Ann Bramham, Lorraine Keenan and Stewart Roxburgh).

 

119.     One is not, therefore, dealing with evidence which comes solely from the Defender, and which might be said to be self-serving. Rather, there is a very substantial and consistent body of evidence that the matters which the Pursuer did not disclose were all material matters which ought to have been disclosed.

 

120.     Against this unanimous body of evidence (which is further supported by the Defender's skilled witness, Mr Emblin) there stands only the evidence of the Pursuer's skilled witness, Mr Broad.

 

121.     The views which Mr Broad expresses are conveyed in dogmatic and even intemperate terms (‘Covea are totally incorrect’; ‘totally unacceptable’; ‘totally inappropriate and in my opinion unreasonable’).

 

122      Mr Broad engages in inappropriate speculation as to the motivation of the Defender (‘I tend to agree with the comments of those representing the pursuers, pre litigation, that the approach of the defenders is to try to find any possible reason for refusing pay under the policy, and the remaining disputed reasons may have to be seen against the background above. I leave it to the court to decide of course whether the defenders' position is principled rather than based upon a simply commercial desire to avoid meeting obligations under the policy’ - 6/12 of process, page 4).

 

123.     Mr Broad's overall approach appears to be heavily influenced by his own views as to the proper interpretation to be placed upon the proposal questions, which approach is at odds with the substantive position in law - generally see section C, above.

 

124.     Overall, Mr Broad's evidence simply cannot be reconciled with the overwhelming body of evidence which is available to support the - it has to be said - rather obvious point that refusals of insurance, the existence of substantial uninsured periods, losses caused by fires which are believed/likely to have been caused by arson, and failures to make proper disclosures to other insurers, are all plainly matters of materiality for any insurer being asked to provide cover of the type which was sought from the Defender. Mr Broad simply provides no explanation for the fact that he is in a minority of one in his view that the matters which were not disclosed were not material. The ‘real world’ evidence of the other insurers, the Pursuer's own brokers, and the Defender (as supported independently by Mr Emblin) is all to the same consistent effect: any insurer in the position in which the Defender was ought to have been made aware of the matters in question, each of which was plainly material.

 

125.     For these reasons, it is submitted that the facts which were not disclosed, and the misrepresentation as to Mr Sandhu's insurance were all "material".

 

126.     It follows that, there having been a failure to make disclosure of material facts to the Defender, which induced the Defender (a) to amend the Policy on 12th March 2012, and (b) to enter into the contract of insurance by way of renewal on 19th January 2013 et separatim an actionable misrepresentation, the Pursuer is entitled to avoid both the amendment and the Policy ab initio. It thus follows that the Defender is under no obligation to indemnify the Pursuer. The Defender is entitled to be assoilzied from the conclusions of the Summons.”

 

Discussion
[115]    Before examining each of the individual alleged failures to disclose and misrepresentations there are I believe a number of preliminary matters upon which I require to comment.

 

Preliminary Issues
(I)        THE STANDING OBJECTION TO ADMISSIBILITY
[116]    With respect to the issue of materiality of non‑disclosure, the defenders sought to lead expressions of opinion from a variety of witnesses other than their designated expert, namely:  Mr Emblin.  These witnesses included members of their own staff and various insurance brokers.  An objection was taken in the course of the Proof on behalf of the pursuers to their giving such evidence.  The evidence was heard under reservation.  The objection was insisted upon in the course of submissions.

[117]    The position advanced on behalf of the pursuers was a short one:  the opinion evidence led with respect to materiality of non‑disclosure, except where given by Mr Emblin or Mr Broad, was not admissible as the persons giving it were either not independent or did not have the necessary expertise in order to give opinion evidence.  Accordingly the evidence did not satisfy the test for admissibility of opinion evidence as set out by the Supreme Court in Kennedy v Cordia.

[118]    The defenders reply was equally pointed and I have set this out in full earlier. 

[119]    So far as members of the defenders’ own staff or persons who were members of their staff at the material time are concerned, I am in no doubt that they could not give admissible evidence with respect to the issue of materiality in that they lacked the necessary independence to give such evidence.  They can of course give evidence on the separate and distinct issue of inducement.

[120]    So far as the evidence of the other witnesses, to whose opinion evidence regarding materiality objection was taken, they were all insurance brokers.

[121]    Guidance was given by the Supreme Court in Kennedy v Cordia as to the considerations which govern the admissibility of opinion evidence.  The considerations are four in number:

“(i) whether the proposed skilled evidence will assist the court in its task;  (ii) whether the witness has the necessary knowledge and experience;  (iii) whether the witness is impartial in his or her presentation and assessment of the evidence;  and (iv) whether there is a reliable body of knowledge or experience to underpin the expert’s evidence” (see:  at paragraph 44)

 

[122]    The two considerations of materiality in the instant case were these:

(1)        whether the witness had the necessary knowledge and experience?

(2)        whether there was a reliable body of knowledge or experience to underpin the evidence of the witness? 

[123]    What amounts to such a body of knowledge and experience obviously depends on the subject matter of the proposed skilled evidence. 

[124]    It was not contentious that underwriters and brokers are distinct professions. 

[125]    In the instant case, the question broadly before the court related to the issue of the duty on an insured to disclose all material facts.  In Pan Atlantic v Pine Top the House of Lords confirmed that the provisions of section 18(2) of the 1906 Act which provides:

“Every circumstance is material which would influence the judgement of a prudent insurer in fixing the premium, or determining whether it will take the risk”

 

is the test of materiality.

[126]    The test is accordingly directed to the actings of the prudent underwriter. 

[127]    As I understand it both of the two designated experts (Mr Emblin and Mr Broad) were put forward as experts on the basis of their knowledge and experience as underwriters. 

[128]    Given the above test it appears to me that the person with the appropriate knowledge and experience to give opinion evidence on this issue are persons who have:

(a)        knowledge and experience regarding the acceptance of risk;

(b)        knowledge and experience as to the terms on which risk is undertaken;

(c)        knowledge and experience in respect to the setting of premiums and how they may vary according to the risk being insured.

[129]    I consider that persons who have the above experience are underwriters.

[130]    With respect to the above matters and the fundamental question before this court the evidence of a broker is what was described by Lord Hughes in Myers & Ors v R [2015] UKPC 40 at paragraph 42 as mere anecdotal evidence in that:

·    a broker does not write the policy;

·    a broker does not decide the terms on which a particular risk is taken;

·    a broker does not set premiums.

·    a broker does not decide whether a particular risk will be taken. 

Accordingly a broker wholly fails to have the necessary body of knowledge or experience to give expert evidence with respect to the issues raised in this case.

[131]    I recognise that a broker may gain the most general of understanding as to what is the broad nature of information a particular insurer with whom that broker deals may wish.  However, that general understanding does not for the reasons above stated entitle a broker to give expert opinion on what is purely an underwriting issue.  A broker cannot give evidence with respect to what the prudent insurer’s views on materiality would be. 

[132]    Moreover, when the various witnesses evidence is examined I consider there is merit in Mr Smith’s submission that there was no real insight into how an underwriter might approach the matters which are said to be relevant in this case.  Their evidence lacked the necessary underpinning to express an opinion.  A good illustration of this was evidence of Tracey Branham, a broker, who expressed a number of opinions on materiality.  However, it was clear from her cross-examination that she did not have the necessary knowledge to give such opinions.  She was asked about a central issue in this case:  “Can’t say that an underwriter would consider a risk on domestic side would affect commercial risk?”  She answered “I am not an underwriter”.

[133]    On examination of the evidence of the various brokers they could give no reasoned basis for the opinions which they were expressing with respect to materiality other than that was the information which they would have provided.  Their expressions of opinion thus appeared to be ipse dixit.  Again it seems to me for that further reason their evidence was inadmissible. 

[134]    Overall, I was of the view that this evidence was inadmissible and therefore I upheld the objection made by Mr Smith.  Had I admitted this opinion evidence, I would for the foregoing reasons have attached little or no weight to it and it would not have affected my final position regarding the various detailed grounds for avoidance based on material non‑disclosure advanced on behalf of the defenders.

 

(II)       OBSERVATIONS ON THE TWO EXPERTS
[135]    In this case the evidence of the experts on the issues before the court was of considerable significance.  In particular I recognise that given the onus of proof, the primary question for the court is whether it should accept the evidence of Mr Emblin.  In those circumstances it is necessary for me to comment in some detail on their evidence.  As noted above the appropriate person to give opinion evidence on the issues before the court was an underwriter.  Looking to the evidence of the two experts it appeared to me that Mr Broad had considerably more underwriting experience than Mr Emblin.  Much of Mr Emblin’s experience in underwriting was in terms of binding authorities granted by underwriters, where he would not have been assessing risk.  Overall it appeared to me that Mr Broad had significantly more relevant experience and that this was one factor in my decision to prefer his evidence to that of Mr Emblin. 

[136]    A further reason for not accepting the evidence of Mr Emblin was this:  there was  a long section of evidence in the cross‑examination of Mr Emblin relative to what he defined as moral hazard where it appeared to me he was not willing to give a straight answer to counsel.  There was a series of questions about the necessity of dishonesty in order to denote moral hazard.  Mr Emblin in answers referred to integrity and truthfulness but would not use the word “honesty” in his answers.  It was only after some time that he eventually accepted counsel’s proposition that honesty and truthfulness meant the same.  It appeared to me that this passage of evidence undermined Mr Emblin’s position as an expert.  It looked as if he was not willing to concede something which he conceived in some way was against the interests of the defenders.  This passage of evidence was even odder given his definition of moral hazard in his own report at pages 496 and 497 in the Joint Bundle which referred to the concept of honesty.  This was a further factor which I believe undermined the acceptability of the evidence of Mr Emblin.

[137]    I gained the impression from the terms of Mr Emblin’s reports which were produced to the court and the way that he gave his evidence that what underlay much of his evidence was the assumption that Mr Sandhu had been dishonest in a number of respects.  I do not believe that on the basis of the information before him he was entitled to base his evidence on this assumption.  This was speculation on his part.  This in my view further undermined his evidence.

[138]    There was in addition, I believe some force in the point made by Mr Smith that there was on occasions a lack of reasoning in respect to the position of Mr Emblin on the issue of materiality and that on occasion the defenders’ counsel had to resort to leading questions to seek to deal with this lack of reasoning.  The leading of the witness seemed to me to be particularly noticeable at the start of re‑examination where counsel sought to widen out the witness’s evidence regarding his definition of moral hazard from the position he had taken in his report at pages 406/407 which also appeared to be the position which he finally came to during cross‑examination.  The leading questions were asked to widen his definition of moral hazard in order to cover poor management and carelessness or recklessness in the running of a business and it was only on these questions being asked that his definition widened.  This inconsistency in position and the necessity to lead tended to undermine his position as an expert witness whose evidence could be accepted.

[139]    An example of a failure to give reasons was this.  In re‑examination the issue of the relevancy of the arson incidents was looked at:

Mr Emblin was asked to consider:

Why (the arson incidents) were relevant to the issue of management?

He answered:

“Important issues of material disclosure”

He was then asked:

“How impact on the management of the business?”

He answered this question:

“Casts a shadow over it – question of materiality”

Mr Stephenson continued to try and get an answer to this question and then asked:

“What mean?”

This question was answered as follows:

“It would be a reflection on nature of risk (insurer) would be concerned about arson claim want to know how arson came about want to know a lot of details.”

I have taken the above from my note of the evidence.

[140]    There is I think no real answer to the question posed at the outset by counsel and thereafter repeatedly posed by him.  The answer is no more than that the failure to disclose is material but no reasons are really advanced why it is material.  Why, for instance, does it cast a shadow over the business;  that question was never answered.  This passage also evidences the circularity of certain of the answers given by Mr Emblin.

[141]    Mr Emblin relies on the Joseph Fielding case for the proposition that Mr Sandhu and the pursuers are essentially one and same and they should be treated as the same for insurance purposes.  For reasons I will detail later that case does not support such a proposition and again this undermines the acceptability of the various opinions he expressed.

[142]    Overall, I did not find Mr Emblin to be a satisfactory witness whose evidence could be accepted.  When I turn to look at the specific grounds for avoidance I will comment further on why I did not accept the evidence of Mr Emblin regarding these specific matters.

[143]    Mr Broad on the other hand I found to be a reasonably impressive witness giving evidence on the basis of substantial relevant experience.  His answers generally appeared to me to be soundly based and well-reasoned. 

[144]    He was particularly criticised by Mr Stephenson for certain views he had expressed regarding the defenders basis for avoiding the policy in one of his reports.  These comments are made in his report at page 85 in the Joint Bundle and come to this:  he tended to agree with comments of the pursuers solicitors that the defenders were looking for any reason to avoid the policy. 

[145]    As I understand it these comments were made in the context of the defenders’ original letter advising the pursers that they were going to avoid the policy.  In my view these comments could not be seen as being improper given the entire terms of the defender’s letter setting out their basis for seeking to avoid the policy.  This contained not just one but three grounds which were not supported by their own expert.  Moreover, the comments were made in circumstances where Mr Broad strongly disagreed with the position taken by the defenders on materiality.  Against that background I do not think that the observations of Mr Broad can properly be the subject of criticism as contended by Mr Stephenson. 

[146]    It was secondly suggested by Mr Stephenson that his evidence should be rejected as it stood alone.  I have said that the evidence of the brokers and those employed by the defenders when they were speaking with respect to the issue of materiality was not admissible.  Thus on this primary issue to which Mr Broad spoke he did not stand on his own against a significant body of consistent evidence.  Rather, on one side of the equation was his evidence and on the other side there was the evidence of Mr Emblin. 

[147]    It was also suggested by Mr Stephenson that Mr Broad did not understand properly the test which he required to apply when considering the issues he was addressing.  I did not believe that there was any merit in this submission.  It seemed to me that looking to his whole evidence including the terms of his reports, that Mr Broad well understood the tests he required to apply when giving his opinions with respect to the issues he was being asked to address. 

[148]    Mr Stephenson in his submission said the position of Mr Broad on the central issue of transference of moral hazard from Mr Sandhu to the pursuers was this:  Mr Broad refused “to accept that there was any connection so far as moral hazard was concerned, between the pursuers and Mr Sandhu trading as Sandhu Properties” I do not think that that is a fair characterisation of his position.  As I understood his positon it was rather this:  if dishonesty on the part of Mr Sandhu was established then that created moral hazard and this would transfer across to the pursuers in that Mr Sandhu was their controlling mind.  His position was not that no issue relative to Mr Sandhu could transfer to the pursuers.

[149]    That his position is as I have described it can be seen from his observations on the Joseph Fielding case at page 94 of the Joint Bundle paragraph 7.1

“Without wishing to over analyse the case, it is clear that it did not consider the issues arising in this case.  I note that the judge found that the case was about ‘moral hazard’ and concerned allegations (found to be correctly advanced) that the shareholders in a small company had sought to defraud not only the defendants, but had defrauded another insurance company previously.  I see no difficulty with that proposition:  where the ‘controlling mind’ of a company is a fraudster, then the moral hazard is such that virtually no insurer would be prepared to accept the risk.

 

As I understand it that was the position put forward by Mr Broad throughout his evidence.  His position was that the factors relied on by the defenders did not evidence dishonesty on the part of Mr Sandhu and therefore there was no moral hazard which would transfer to the risk that the pursuers presented.

[150]    Overall I did not find any of the criticisms of the evidence advanced by Mr Stephenson with respect Mr Broad to be of any substance.  For the foregoing reasons I found the evidence of Mr Broad to be acceptable and I preferred his evidence to that of Mr Emblin as regards all disputed matters.

 

(III)      THE EVIDENCE OF MR SANDHU
[151]    With respect to this witness, overall, I found him to be a reasonably straightforward witness and I gained no impression that he was seeking to lie on any material issue.  I regarded him as a credible witness.  I did not find him to be deeply unimpressive, the view advanced by Mr Stephenson.  I thought he was doing his best to tell the truth. 

[152]    Mr Sandhu (who was led by the defenders) was examined (very properly) in great detail by Mr Stephenson on matters which occurred some considerable time ago.  It was apparent that he could not clearly remember certain matters, there were matters upon which from time to time he gave somewhat inconsistent evidence and there were matters which having regard to the evidence of other witnesses (particularly the evidence of the brokers which was credible and reliable) was apparently wrong.  However, given the lengthy and detailed evidence which he was required to give and having regard to the substantial time since the events about which he was speaking I found it unsurprising that on occasions his evidence was inconsistent or that he could not remember or that he perhaps gave a wrong answer.  Had his evidence been entirely clear and entirely consistent on every issue I would have found that highly surprising and that would have tended strongly to suggest that the evidence given was not honest.  In summary, I felt on the core issues upon which he gave evidence the points made by Mr Stephenson, did not cause me to conclude that his evidence was dishonest or unreliable.  I will deal further with this issue when looking at his evidence in terms of the various detailed grounds for avoidance advanced by the defenders.  

 

(IV)      THE CASE AGAINST THE PURSUERS
[153]    A number of submissions were made with respect to the question:  what is the case which is made by the defenders in their pleadings?  At the outset, I accept, without difficulty the following general proposition that an innocent material failure to disclose or an innocent misrepresentation by an assured which induced a policy would entitle an insurer to avoid the policy.  The defenders rely on this proposition.  However, the pursuers’ core argument is that the actings of Mr Sandhu are only of relevance with respect to the insurance position of the pursuers if his actings bear on moral hazard which they define as requiring dishonesty.  It is in that context that Mr Smith submits that it is significant that the defenders do not plead dishonesty/fraud on the part of Mr Sandhu.  So far as the issue of what case is set forth in averment I am persuaded that Mr Smith is correct and that no case of dishonesty/fraud on the part of Mr Sandhu has been averred on behalf of the defenders.

[154]    Nor, did it seem to me that in the course of the cross‑examination of Mr Sandhu was it ever directly put to him that he had lied with respect to any of the matters in issue.  The significance of that averred position I will consider in terms of the detailed grounds advanced for avoidance of the policy. 

 

(V)       TRANSFERENCE
[155]    At the heart of this case there was the issue of transference:  whether the controlling mind of a company proposing for insurance and who personally trades in another capacity is for underwriting purposes required to disclose material facts in relation to the other business.  This is the positon of Mr Emblin and it is based on a consideration of the Joseph Fielding case (see:  page 496 of the Joint Bundle).  This was the sole authority to which I was referred on this issue.

[156]    Mr Smith argued that the Joseph Fielding case is not authority for that broad proposition.  I am persuaded by his argument.  On a proper analysis of the case the proposition that can be taken from the Joseph Fielding is this:  the affairs of the insured’s controlling mind may be relevant and may be material so far as the insured is concerned in circumstances where they demonstrate dishonesty and moral hazard.

 

(VI)      THE SUBSTANTIVE GROUNDS FOR AVOIDANCE

[157]    With respect to the specific matters which the defenders contended amounted to material failures to disclose or material misrepresentations, the first of these related to failure by the pursuers to disclose the insurance position in relation to Mr Sandhu’s personal portfolio. 

[158]    There were two branches to the argument under this head: 

(a)        A failure to disclose that Mr Sandhu had had insurance declined for his personal portfolio of residential property.

It is instructive to take as a starting point with respect to this branch of the argument the positon of Mr Emblin and this is perhaps most clearly articulated in one of his reports which is found at pages 496 and 497 of the Joint Bundle where he starts when considering this issue by saying this:

“In my opinion the prudent underwriter would consider the fact that any insured (or if a company, the company or their director) who had been declined insurance or where an insurer had refused to renew to be a material fact. 

 

This would affect the prudent underwriters approach to the acceptance of the physical characteristics of the risk, such as building construction, fire protections, tidiness of the premises, previous loss experience for example and also the ‘moral hazard’, if applicable.  (see g) below” (my emphasis)

 

[159]    There was a very significant difference between the personal portfolio of Mr Sandhu and the property that the pursuers were seeking to insure.  The former was residential property with largely DSS tenants occupying the same.  What was described by Mr Broad as distressed property, which would be very difficult to insure.  The latter was an almost entirely commercial portfolio. 

[160]    As I understood the evidence it was not a contentious matter that domestic and commercial property were rated in an entirely different way. 

[161]    Against that background I am unable to understand how the physical risk with respect to the personal portfolio could have any relevance, far less be a material consideration, with respect to the physical risk with respect to the pursuers commercial portfolio.  To take one example, which Mr Emblin uses, namely:  “building construction”.  I do not understand and I do not believe it was explained in the evidence of Mr Emblin in what way the “building construction” with respect to the domestic property could have any relevance to the physical risk with regard to the physical construction of the pursuers’ commercial properties. 

[162]    How, as asked by Mr Smith, could the factors set out by Mr Emblin regarding physical risk within the personal portfolio of Mr Sandhu shed any light on the physical risk associated with the separate commercial property?  I believe the answer to that question is that they could not.  In reaching this conclusion I prefer Mr Broad’s analysis of the position in his report at Joint Bundle pages 107/108 at paragraphs 1.4 to 1.9 to the view of Mr Emblin.  And for the foregoing reasons I find that the declinature of insurance with respect to Mr Sandhu’s personal portfolio is not a material factor so far as physical risk is concerned when considering the position of the pursuers. 

[163]    As regards moral hazard it is particularly noteworthy how Mr Emblin in his report at page 496 of the Joint Bundle commences his discussion of this issue, as I have earlier set out, namely the use of the phrase “if applicable”.

[164]    It is I think clear from the use of the words “if applicable” with respect to the issue of moral hazard that the mere declinature of insurance in relation to Mr Sandhu’s personal portfolio per se does not amount to a material factor which requires to be disclosed by the pursuers.  Rather before disclosure is necessary it has in addition to be shown that the reasons for the declinature amount to a moral hazard as defined by Mr Emblin at paragraph g). 

[165]    At paragraph g) Mr Emblin defines moral hazard in this way:

“g)       Any dishonest conduct by an insured is disclosable and is relevant to the prudent underwriter in his assessment of the risk as it goes directly to the moral hazard for which a prudent underwriter cannot ever properly rate the risk.

 

Facts may be material if they suggest that the integrity of the proposer for insurance is open to doubt, or that his motive in seeking cover is not really the prudent one of covering himself against losses which might occur in the ordinary course of events.  The phrase ‘moral hazard’ is used to describe circumstances, invariably involving dishonesty on the part of the assured, which give rise to concern that there will be dishonesty in the reporting and presentation of claims.  See MacGillivray on Insurance Law at 17.055.”  (my emphasis)

 

[166]    The reference to the definition of moral hazard in MacGillivary is the same as that contained in the Sharon’s Bakery case to which I was referred by Mr Smith.  I was referred to no other authority in which the concept of moral hazard was defined.  Mr Broad in his evidence spoke to the above definition. 

[167]    Paraphrasing what Mr Emblin says:  it is only where the integrity of the proposer for insurance is open to doubt or that the proposer is dishonest before moral hazard arises. 

[168]    I am not persuaded, given the evidence that I heard, that the declinature with respect to Mr Sandhu’s personal portfolio in any way reflects on the honesty or integrity of Mr Sandhu.  The evidence as a whole on this issue, for the detailed reasons advanced by Mr Smith, did not bear on the honesty/integrity of Mr Sandhu.  Rather, if anything it bore on the physical risk arising with respect to that particular class of property occupied by that class of tenant.  The other reason for refusal on the evidence related to the nature of the particular policy which Mr Sandhu held at that time the business.  There was no moral hazard which transferred from Mr Sandhu to the pursuers.  The declinature with reference to his personal portfolio had no relevance to the pursuers’ insurance position.  I am satisfied that it was not a material factor so far as the pursuers were concerned. 

[169]    (b) The second chapter under this head related to the failure of Mr Sandhu to insure his personal portfolio for a period of about nine months.

[170]    There appeared, within both his reports and in his oral evidence to be a number of bases put forward by Mr Emblin as to why this matter was material. 

[171]    At page 496 in the Joint Bundle he says this, failure to insure is material for these reasons:

“It may be that there is a simple administrative reason for the lapse in cover or it may reflect that cover has been unobtainable for some reason, for example the physical and/or moral characteristics of the proposed risk have proved to be unacceptable in the insurance market place.”

 

[172]    I conclude, first that the failure to insure the personal portfolio can have no relevance to the issue of physical risk with respect to the pursuers’ insurance position.  I have come to this conclusion for the same reasons that I rejected the argument that declinature of insurance on Mr Sandhu’s personal portfolio had relevance to physical risk with respect to the pursuers’ properties.  It seems to me that the reasons I gave for rejecting the argument in terms of the first chapter under this head are equally applicable to the second branch of the argument. 

[173]    Mr Emblin also relied on what he described as “the moral characteristics of the proposed risk” (see:  at page 496). 

[174]    My understanding of this point, as he developed this matter in his oral evidence, was that it was a reference to moral hazard. 

[175]    There are three matters which in light of the evidence require consideration under the heading of moral hazard. 

[176]    First if the reason for the failure to insure by Mr Sandhu was an administrative error.  I accept the evidence of Mr Sandhu that this was the reason.  This in my view does not reflect on moral hazard as defined by Mr Emblin in his own report, as earlier set out.  Such a mistake does not bear on the honesty or integrity of Mr Sandhu. 

[177]    Even, if one were to hold that moral hazard, as was sought to be advanced by the defenders in their submissions, could cover the way the controlling mind of a business had run the business, I remain of the view that a mere administrative error could not be said to bear on the way that the business was run to amount to a material factor requiring disclosure. 

[178]    Secondly if Mr Sandhu did not insure the business as “money was tight” this once again I believe does not bear on his honesty or integrity and therefore does not amount to a moral hazard.

[179]    Thirdly, I consider that leaving aside dishonesty in order to establish the failure to insure by Mr Sandhu as a material factor in the affairs of the pursuers, the defenders would have had to establish a deliberate unwillingness on the part of Mr Sandhu to insure his personal portfolio.  This, I believe flows from Mr Broad’s example of a possible moral hazard which fell outwith the category of dishonesty, namely:  where a proposer deliberately failed to install fire protection.  The defenders did not establish such deliberate unwillingness on the part of Mr Sandhu with respect to his failure to insure his personal portfolio.  I accepted his evidence at paragraph 53 of his affidavit that he was not “unwilling” to insure his personal portfolio.  With respect to this issue Mr Broad’s position, that this was not a material factor, was clearly to be preferred. 

[180]    The second factor put forward as amounting to material non‑disclosure was the alleged suspected arsons. 

[181]    Under this head the defenders argument in short was this:  there was a failure to disclose two incidents of arson with respect to Mr Sandhu’s personal property portfolio and this transferred across to the pursuers and therefore was a material failure to disclose with respect to the pursuers. 

[182]    First I observe that there was no suggestion of any complicity on the part of Mr Sandhu in relation to these fires.  Rather the evidence was that these were arson events resulting from the behaviour of vandals.  There was no evidence of any dishonesty or criminal behaviour on the part of Mr Sandhu regarding these matters.

[183]    Secondly, for the reasons I have already given, I cannot see how arson with respect to the properties in his personal portfolio could bear on the physical risk regarding the pursuers’ properties.  The two portfolios are too dissimilar for the reasons which I have earlier set out and the rating of risks in commercial and domestic property is entirely different.

[184]    Thirdly there was no suggestion that Mr Sandhu was the subject of a grudge.  I accept, if there had been evidence of that type, this could have reflected with respect to moral hazard.  It is I think a material factor in that someone who held such a grudge could set fire to parts of the property which fell within the pursuers’ portfolio, given the close connection between Mr Sandhu and the pursuers.  This was Mr Broad’s position and I believe it is correct.  In summary, there was neither a moral hazard or physical risk which would be relevant far less material which would transfer across to the risk the pursuers presented. 

[185]    Mr Stephenson made lengthy submissions as to precisely what Mr Sandhu knew about the cause of these fires.  Looking to the whole of the evidence I believe he knew with reasonable certainty that the fires were caused by arson but was not absolutely certain as to the cause.  Having said that, I believe his exact state of knowledge does not have any significance under this head.  I am persuaded that these two events neither singly or when taken together could be said to be material factors requiring to be disclosed with respect to the pursuers.  In the whole circumstances I do not find it established that the two arson events would have had any bearing on the assessment of physical risk or moral hazard  in relation to the pursuers.

[186]    Moreover, there was a body of evidence as set out by the pursuers in their submissions that the defenders were made aware of the fires although not that the most likely cause was arson.   Beyond that it appears that the evidence was to one effect that by being made aware of the fires:  this put the defenders on notice and if they were concerned at all regarding these fires then it was for the prudent insurer to have made further inquiries.  This was even the position of the defenders expert (see:  page 508 of the Joint bundle).

[187]    Further and in any event I believe that where there was sufficient information put before the defenders to put them on notice then if the fires gave cause for concern, they would have investigated the matter.  They did not carry out further enquiries, which is on the face of it a strong indicator that they did not consider the cause of the fires material.  If material, an insurer would not have overlooked it, as suggested by Mr Stephenson. 

[188]    Thirdly there was the alleged misrepresentation in December 2012.  This ground in substance came to this:  Mr Sandhu misrepresented:  (a) that he had never had insurance declined;  (b) that the properties have been continuously insured;  and (c) that there had been no losses in the previous three years.

[189]    I have said that I accepted the evidence of Mr Sandhu as credible, I accordingly accept that his answers to the questions posed were honest even if they were, on a sound construction of the questions, based on a misunderstanding on his part of the questions.  I accepted on the basis of the argument advanced by Mr Smith that the questions were ambiguous.  The test thereafter for the court is this:  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 (see:  R & R Developments Limited v AXA Insurance UK Plc [2009] EWHC 2429 (Ch) at paragraphs 10 and 11). 

[190]    I think that on the basis put forward by Mr Smith that the interpretation for which the pursuers contend is a reasonable and thus I am persuaded there was no material misrepresentation.

[191]    Beyond that, having accepted that the answers which Mr Sandhu gave were honest, I do not think that, even if the answers were wrong on a sound construction that they could amount to a moral hazard which would transfer across to the pursuers for the reasons which I have discussed earlier in this opinion.

[192]    It was argued on behalf of the defenders that, even if the answers to the questions on the part of Mr Sandhu were honestly made nevertheless a moral hazard arose.  The argument appeared to be that the moral hazard arose as the honest, if wrong answers would bear on his ability to run his business and thus be transferred to the pursuers.  I believe this argument has no merit.  I cannot see how an innocent mistake based on a reasonable construction of the questions bears in any way with respect to his ability to run a business and can somehow raise an issue of moral hazard.

[193]    Fourthly, the next issue was failure to disclose that Mr Sandhu was recorded as the designated premises manager of the premises, where he was not involved in the running of business being carried on therein.

[194]    The pursuers’ representatives were under the impression that this was no longer relied on, however, submissions with respect to this matter were contained within the defenders’ written submissions.  These submissions were made, although it was accepted by the defenders, that on the evidence led the defenders were not induced to offer renewal in this respect (the evidence of Mr Thornhill). 

[195]    It seems to me an odd position to advance that this factor was material given the accepted position on inducement.  I recognise that there are two distinct questions, first with respect to materiality and second with respect to the issue of inducement.  However I think given Mr Thornhill’s position it is not entirely easy to advance an argument that nevertheless the matter was material.  However, the defenders did advance this argument and I therefore require to deal with it. 

[196]    It appears to me that given Mr Thornhill’s position on inducement this is a clear pointer to this not being a material factor.  Moreover, the position of Mr Emblin with respect to this issue was most clearly articulated in one of his reports at page 508 of the Joint Bundle paragraph 10 where he was asked to clarify his position on the issue of the licence and what type of risk it gave rise to and why.  He answered the question in this way:

“If as a matter of fact Mr Sandhu is found by the court to have committed a crime or crimes then the commission of that crime or those crimes would be disclosable.  Whether they were material facts to be disclosed would be a matter for the court as there is no judicial finding by a court, as yet, as to guilt.”

 

The above position was repeated in a later report at page 554 of the Joint Bundle.  Again the core of his positon was the commission of a crime.

[197]    I have not been referred to:  (1) any conviction of Mr Sandhu arising from his said behaviour, (2) any criminal proceedings arising from said behaviour, (3) any criminal offence in terms of the Licensing (Scotland) Act 2005 of which Mr Sandhu could have been convicted arising from his said behaviour and (4) any offence at common law which he could have been convicted arising from the behaviour.  Accordingly given the defenders’ own expert’s evidence I do not understand how this could be regarded as material non‑disclosure.  In any event, without difficulty, I preferred the evidence of Mr Broad that this issue was of no consequence.  Moreover, given Mr Sandhu’s explanation of what in fact was happening regarding this issue (which I accepted) I do not see how the reasonably prudent insurer could have regarded this as material.  It did not give rise to a moral hazard arising from the running of the business by Mr Sandhu.

[198]    Overall, when considering the issue of materiality, I accept Mr Smith’s positon that the court considers not the bare fact, that founds the argument on non‑disclosure, but any other circumstances which would have been made known to the insurer to explain the fact.  That is I believe of some significance in the instant case, when consideration is given to the explanations which would have been forthcoming with respect to each of the matters  relied upon by the defenders which clearly showed these points were of no materiality.  

[199]    In summary for the foregoing reasons I do not regard any factor relied upon by the defenders as amounting to material failure to disclose or material misrepresentation and I do not accept the evidence of Mr Emblin for reasons I have set out.  On the other hand I did accept the evidence of Mr Broad with respect to the issues before the court for the reasons I have given. 

[200]    For these reasons the defenders’ case fails. 

 

Inducement
[201]    Although my decision on the issue of materiality of itself decides the case I require to consider the second question of inducement.

[202]    The starting point is the evidence of Mr Thomson, who according to the evidence would have been the first person to consider matters.

[203]    In terms of his evidence he considered the following matters individually would have caused him to decline the insurance:  the lack of cover of the personal portfolio;  the alleged misrepresentations to Discount Insurance;  and the licensing issue no longer relied upon by the defender.  However he also states the ultimate decision would in each case have been taken by his colleague James Thornhill.

[204]    It is noteworthy that he did not give evidence to the effect that the fire/arson issue was of relevance to his thinking.  I agree with Mr Smith that given the person who would first have considered the matter did not put forward the position that the fire/arson issue was a matter which concerned him so far as the issue of inducement was concerned, this factor necessarily falls away.

[205]    Mr Thomson, as he accepted, is only the starting point, the decision in the end of the day would have been one for his superiors.     The first person, higher in the chain of command, who the matter would have been referred to was Mr Thornhill.  He comments on a number of issues with respect to the question of materiality and therefore to some extent regarding inducement.  I believe the criticism of his evidence advanced by Mr Smith is well founded.  In addition he does not explain why if Mr Thomson did not consider the fires/arson issues as relevant why he did.  In any event given the line of authority within the defenders’ and Mr Thomson’s position that issue would not have been before him.

[206]    Again, I would observe that the decision did not finally lie with Mr Thornhill.  He in turn says that the actual decision would have been taken not by him alone but he would have referred it to Mr Nick Dinsdale and Michael Clothier.  Mr Dinsdale did not give evidence.  Mr Clothier stated that he would have regarded the claims experience of Mr Sandhu as a material consideration as well as the arson events.  Critically he does not explain why these matters would have been relevant in the context of a portfolio of properties at the bottom end of the housing market, or how they would have borne on any assessment of the risk posed by the pursuers.

[207]    Overall, I did not find the evidence on inducement acceptable.  For the above reasons I am not persuaded that any of the factors relied upon by the defenders induced them to enter into the contract of insurance.

 

Conclusion
[208]    For the foregoing reasons I find in favour of the pursuers.

 

Decision
[209]    I accordingly grant decree in terms of the first conclusion of the summons;  I sustain the pursuers first and second pleas‑in‑law;  and repel the defenders first to fourth pleas‑in‑law;  allow a Proof Before Answer on the issue of quantum;  and reserve all question of expenses.