Norwich Union Insurance Ltd. v Meisels & Anor [2006] EWHC 2811 (QB)

“6. With regard to the alleged non-disclosure or misrepresentation of material facts, the insurers must prove, this time to the simple civil standard, that the fact was material and that its omission, or the misrepresentation in relation to it, induced the contract. This involves both an objective and subjective test, although it is commonly accepted that if materiality is proved then there may be a rebuttable presumption (if I may use that expression) in insurers’ favour in respect of inducement. In this regard, I refer to the judgment of the House of Lords in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd. 7. The basic test of materiality is to be found in Section 18 of the Marine Insurance Act (1906), which says that: “Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk.”

“To my mind, this expression clearly denotes an effect on the thought processes of the insurer in weighing up the risk, quite different from words which might have been used but were not such as influencing the insurer to take the risk…. 10. Finally, because one of the matters upon which the defendants rely by way of non-disclosure is an allegation against the claimants rather than an unchallenged underlying fact, it is necessary to consider how, as a matter of law, such a situation should be approached. It is recognised that this is a difficult topic because (for example) as a matter of strict logic (albeit perhaps unrealistically) an undetected criminal should perhaps disclose his crime; whereas an accused but innocent man has no crime to disclose, yet the accusation still exists. That injustice might ensue is obvious and, as it seems to me, there is a need for some sort of balance to be struck. In this regard, I derive considerable assistance from the observations of Lord Justice Mance (as he was) in Brotherton v Aseguradora in which allegations against an insured were extant at the time of the placing. In material part, Lord Justice Mance said this: ‘However, the authorities grapple understandably with some hard cases. Firstly, what if, at the time of placing, the insured himself is under investigation for, or has been charged with, an offence which he knows that he did not commit, and of which he is subsequent to the placing indeed acquitted? Forbes J in Reynolds and Fisher J in Gate v Sun Alliance Insurance Ltd [1995] LRLR 385 (High Court of New Zealand) thought that this could not be material. May J in March Cabaret and Phillips J, as he was, in The Dora held, after hearing underwriting evidence, that it could be, on the basis, as Phillips J put it, that: ‘When accepting a risk underwriters are properly influenced not merely by facts which, with hindsight, can be shown to have actually affected the risk but with facts that raise doubts about the risk.’ I add however that, in this situation, the issues of both materiality and inducement would in all likelihood fall to be judged on the basis that, if there had been disclosure, it would have embraced all aspects of the insured’s knowledge, including his own statement of his innocence and such independent evidence as he had to support that by the time of placing. This might itself throw a different light on the answer to one or both of the issues of materiality and inducement. That would of course be a matter of fact and evidence.” 11. The parties are not agreed as to the proper meaning and interpretation of this passage. For the defendant, Mr Ecklund submits that the mere allegation (if, in itself, material) is enough regardless of the insured’s response and the evidence of innocence on which he may be able to rely. Mr Soole, for the claimants, submits that this is not correct and that the position must be judged by reference to all of the evidence available at the time of placing. In my judgment, Mr Soole’s submission must be preferred; for, otherwise, the words of Lord Justice Mance would add little or nothing to that which was already understood. This can have been neither the intention nor the effect. If that is correct then in the present case such an approach may well have an impact on all of the examples of non-disclosure as alleged; but I shall deal with this in more detail when considering each allegation in turn.” ‘However, the authorities grapple understandably with some hard cases. Firstly, what if, at the time of placing, the insured himself is under investigation for, or has been charged with, an offence which he knows that he did not commit, and of which he is subsequent to the placing indeed acquitted? Forbes J in Reynolds and Fisher J in Gate v Sun Alliance Insurance Ltd [1995] LRLR 385 (High Court of New Zealand) thought that this could not be material. May J in March Cabaret and Phillips J, as he was, in The Dora held, after hearing underwriting evidence, that it could be, on the basis, as Phillips J put it, that: ‘When accepting a risk underwriters are properly influenced not merely by facts which, with hindsight, can be shown to have actually affected the risk but with facts that raise doubts about the risk.’ I add however that, in this situation, the issues of both materiality and inducement would in all likelihood fall to be judged on the basis that, if there had been disclosure, it would have embraced all aspects of the insured’s knowledge, including his own statement of his innocence and such independent evidence as he had to support that by the time of placing. This might itself throw a different light on the answer to one or both of the issues of materiality and inducement. That would of course be a matter of fact and evidence.”

“…the issues of both materiality and inducement would in all likelihood fall to be judged on the basis that, if there had been disclosure, it would have embraced all aspects of the insured’s knowledge, including his own statement of his innocence and such independent evidence as he had to support that by the time of placing. This might itself throw a different light on the answer to one or both of the issues of materiality and inducement.”

“66. Mr Holland gave evidence for the claimants and Mr Smith for the defendants. I can ignore those points on which the defendants no longer rely, although during evidence Mr Smith was still exercised by at least one of those points. Looking then at the matters allegedly material and not disclosed, both were agreed that the dispute, in isolation with the Inland Revenue was (or may be) a material matter; but, as far as Mr Holland was concerned, the explanation given by Mr Meisels and Mr Vernett (his accountant) was acceptable and thereby rendered the dispute immaterial. Mr Smith did not agree. 67. As to the evidence of Mr Vernett, who is an accountant, he confirmed that, at the relevant times, his firm acted for Mr Meisels. He said that, typically, Mr Meisels, like many of Mr Vernett’s clients, would simply send, without consideration, correspondence from the Inland Revenue or Companies House for him to deal with. At the beginning of 2001 he received a notice of estimated assessment of corporation tax for Simon Tov Properties Limited in the sum of £52,500, together with a penalty of £10,700 and interest of £5,542 for allegedly late payment. As it was an estimate only, he suspected that was in order to prompt the company to finalise its accounts which had not been possible because of delays by third parties. The assessment did not represent the true position and, on the evidence before the court, in this he was correct because, notwithstanding a default judgment obtained by the Inland Revenue in May 2002, at a meeting in October 2002, Mr Newman of the Revenue was satisfied that nothing was due and the Inland Revenue has done nothing to execute its judgment and Simon Tov Properties was resolved [sic, it should probably read ‘dissolved’] some years ago. 68. For material purposes, I accept all of Mr Vernett’s evidence; but it is fair to add that the claimants cannot rely on this favourable resolution of the position just as the defendant cannot rely on the default judgment because both occurred after the relevant contracts of insurance had been concluded. What both parties can rely on, however, is the evidence as it stood at the time of the placing. As to this (and, as I have said, there is a fundamental difference of opinion between Mr Holland and Mr Smith), both are agreed that the test is that which would influence the prudent underwriter. Mr Holland says that this must be judged by reference to all of the evidence available at the relevant time; whereas Mr Smith appears to be of the view that only matters potentially unfavourable to the insured – namely, the allegation itself and, in particular, the imposition of a penalty – should be taken into account and that the materiality which this represents can never been neutralised, as it were, by evidence favourable to the insured. 69. To my mind, this is a surprising proposition because we are here concerned, in relevant respects, with an objective test – that of the prudent underwriter. I ask, rhetorically: why would a prudent underwriter only want to see part of the picture if, having seen all of the picture (if it is available), he realises that it is a picture which he does not wish to see at all and, therefore, not seeing it does not matter? If only part of the picture is available then the position can only be judged by reference to that part; but if it is all available then it is the complete picture by which the situation must be judged. Moreover, as the test is objective, the position must be judged objectively; so whether particular underwriters are more or less receptive is irrelevant. By definition, a prudent underwriter will respond to coherent and cogent evidence. 70. In the light of the evidence of both Mr Meisels and Mr Vernett, I am entirely persuaded that whatever the Revenue well [sic, it should probably read ‘were’] doing there was, in December 2001 and thereafter, coherent and cogent evidence in the possession of the claimants such as to neutralise the assessment, and, as it seems to me, a wrong assessment cannot, in itself, be material to a prudent underwriter. 71. All of the alleged non-disclosures on which the defendants rely really go to what is commonly called the moral hazard. I asked Messrs Hart and Schofield what they understood by that. Mr Hart referred to transparency obligations in law and the fulfilling of the contract by the insured in an honourable and decent manner. Mr Schofield, in the context in which he was asked, spoke in terms of the possibility of something potentially sinister, although the concept of moral hazard is clearly broader than this. It can obviously extend to poor or reprehensible conduct, or mismanagement short of conduct or circumstances suggesting the possibility of fraud in the realisation or presentation of any claim. Nevertheless, and however broad the approach to moral hazard, it is difficult to see why a demonstrably incorrect tax assessment should come within its compass, and, therefore, it is immaterial. This is the view of Mr Holland and I accept his evidence. I may add that I would have come to this conclusion even without his evidence. Any other approach would look to form and not substance, and I cannot think this to be right. In other words, one looks to the result, not the procedure. So merely because in isolation some fact might be thought to be material, it is not necessary to go through the procedure of disclosing all facts to demonstrate that the isolated fact is actually immaterial. If, at the end of the process, it is immaterial then it was immaterial from the outset. Whether or not any given insured, out of an abundance of caution, discloses a whole range of facts which he believes to be immaterial merely to ensure that there can be no subsequent argument of the type with which the court has been engaged in this case, does not alter the position. The undisclosed fact, in the context in which it exists at the time of placing, is or is not material. Clearly the larger the disclosure, on whatever basis, the smaller the room for subsequent argument, but this will not alter the inherent characteristics of the undisclosed fact. What was not disclosed in this case, for present purposes and on the evidence before me, was an unjustified claim for tax to which had been added a penalty and interest when none was due. In my judgment, that cannot be a matter which is material to the notional prudent underwriter whether or not one adds the adjective “reasonable”

“The assessments are estimated. The Companies accounts are being finalised and these should show no liabilities”

“If a company fails to comply with any provision of this section, every officer of the company who is in default is guilty of an offence unless he shows that he acted honestly and that in the circumstances in which the company's business was carried on the default was excusable.”

“15. … The insurance of the properties was placed through Clydesdale Bank, from which I draw the inference that they provided much of the financing for the various transactions and would themselves have looked into the claimants’ and their activities… 19. Mr Meisels went on to say that his business strategy was to set up companies for particular transactions and then allow them to be dissolved, generally for want of the filing of returns, once they had served their purpose. No doubt, this saves on expenses. Whilst this strategy may be unattractive and is certainly open to criticism in various contexts, there is no evidence before this court that the manner in which he conducted his business either involved dishonesty or mismanagement such as to expose insurers to risks that they did not anticipate or were not inherent in the contracts of insurance into which they entered. On the contrary, the claims record (which was not challenged) is modest and straightforward, and, apart from the one discrete matter, to which I shall come in due course, there is no evidence of exposure to financial pressure which might tend to lead claimants into relevant wrongdoing…. 72. Having dealt with the dispute over the Inland Revenue at some length, I can deal with the other allegations of non-disclosure relatively briefly because the legal principles and approach are the same. As to the business strategy of Mr Meisels whereby he set up companies for particular transactions and then allowed them to be dissolved (some 20 in all, I am told), as I have said, the manner in which he does this may be open to criticism in other contexts, and, to the extent that it is, I make clear that it cannot be condoned. It would be unfair to go further, however, because I have not received more than limited evidence; nor have I heard full argument on those matters; and it would be wrong to appear to prejudge something which may or may not engage further legal process. It is only this case with which I am concerned, and, in the context of this case, it is Mr Holland’s view that such matters would be immaterial to the prudent underwriter because the explanation offered by the claimants does not disclose that which he describes as “Phoenix companies” through the medium of which debts are not honoured and assets transferred to debt free companies; nor does it cast doubt on the efficacy or integrity of the claimant’s management in the context of property insurance. Once again, Mr Smith ignores the explanation and says, in effect, such a record is material regardless of any other factors. 73. Once more I prefer the evidence of Mr Holland, which, throughout, had about it, to my mind, a far greater degree of commercial realism without in any way departing from the basic legal test; namely, that which would influence the prudent underwriter.”

“16. Mr Meisels said that having completed his studies at Rabbinical College in 1995, he was gradually introduced into the family business, which, at that point, was run by his father. Like many family businesses, however, different members of the family may be asked to lend their name to whatever business or corporate structure may be thought suitable at any given time, and this Mr Meisels did for his father even before he became involved in the business. Mrs Meisels now does the same for her husband. Accordingly, as long ago as 1993, Mr Meisels, together with his two sisters, was a director of a company called Five Star Builders Limited. His mother was the company secretary. He knew nothing of the company or its business, however, as he was merely a nominee; that is, in effect, he merely lent his name to his father. The same (he says) is true of Regency Deals Limited and Pearl Star Limited, the former being wound up in 1992. He has no knowledge of these companies or their affairs, but Regency Deals appears to have been indebted to the Revenue in the sum of £25,000 at the time of winding up. This information is derived from the documentation provided by Companies House. In principle, Mr Meisels says the same of Invest Trust Limited, although documentation from Companies House again reveals that it went into creditors’ voluntary liquidation in June 1998. The principal creditor was Mr Meisels himself in respect of a director’s loan account of approximately £20,000. There has been no evidence as to how this loan was funded but, equally, there has been no suggestion of impropriety of any kind. The only other creditor was the Inland Revenue for the relatively small sum of £3,642. 17. In passing, it is a convenient moment to note that since Mr Meisels says he took over the business (which, by inference, is after 1998) and notwithstanding the numerous transactions, incorporations, liquidations and dissolutions over the years, there is no evidence before the court, save for one case with which I shall deal in due course, of any unpaid creditors, unresolved claims or financial mismanagement or instability of any kind. 18. It has been necessary for me to refer expressly to these companies because before their concession the defendants relied on the history of these companies in support of their submission that the claimants were guilty of misrepresentation and breach of warranty when, in the proposal form for the property owners’ policy, the claimants answered “no” to the question “Have you ever been declared bankrupt, the subject of bankruptcy proceedings or of any voluntary or mandatory insolvency or winding up procedures?”

“74. The absence of disadvantaged creditors in respect of the 20 or so companies to which I have just referred, does not extend to the further four companies of which Mr Meisels was a director or chairman and about which he knew nothing because, at the time, the business was that of his father and he was only a nominee. 75. I have already foreshadowed my view of this aspect of the case and so I shall deal with it very briefly. I have, of course, accepted Mr Meisels’ evidence in this regard; and thus, in so far as it is relevant, I find that these matters were never in his mind not merely that he was genuinely forgetful of that which he once knew. By way of recapitulation, the companies were Regency Deals Limited (dissolved in 1992), Five Star Builders (dissolved in 1993), Pearl Star (dissolved in 1998) and Invest Trust (also dissolved in 1998). According to the evidence, Regency Deals, on dissolution, owed £25,000 to the Revenue and Invest Trust owed £3,462 to the same creditor. I take it to be trite law ever since Carter v Boehm that an innocent non-disclosure of material fact remains a non-disclosure with all that flows there from, the innocence of the insured affording no protection. It is still necessary, however, for the insured to have known that which he did not disclose. He cannot disclose what he does not know. In this case, he did not know because, in summary, it is Mr Meisels’ evidence that he did not know any of the things on which the defendants rely. In view of the documentation and the evidence overall, this also requires him to say (as, in effect, he does) that at all material times – that is, in 1992, 1993 and 1998 – he was still in thrall to his father. Given Mr Meisels’ background and the nature of the business with which he is now concerned, I have no difficulty in accepting that this would have been the case. In a family business of this kind, the early and total dominance of the father, who is then gradually replaced by the son, is, if not invariable, at least commonplace, and this one knows simply as a result of one’s own experience of the human condition. If there were evidence to the contrary then this might be a different matter; but here there is none. 76. This does not finally dispose of this point because, whilst Mr Holland rightly observes that one cannot disclose that which one does not know (a view, I imagine, shared by Mr Smith, although it was not put to him in terms), Mr Smith goes on to say that if Mr Meisels were, in effect, in thrall to his father then this would be a failure by Mr Meisels to discharge his duties as a director and he should have been aware of the insolvencies. In other words, he is suggesting that Mr Meisels was conducting himself negligently and such negligence would be material to a prudent insurer. I do not recall this part of Mr Smith’s opinion being put to Mr Holland, but, as with the other questions of materiality I have dealt with thus far, the experts are here to assist the court but in a case of this kind I am able to reach a conclusion without merely having to choose between two competing expert views. 77. As this matter, like most with which we have been concerned, goes to moral hazard, and as Mr Smith, very fairly, accepted that the moral hazard must be relevant to the risk in the shape of financial integrity, management of the business (including maintenance of the property) and any potential for fraud (whether or not caused by financial stress), I do not accept that the breaches of duty to which he refers in this case, even if accepted, would be material to a prudent underwriter. As I have said, such an approach must be common to many close companies, and to say to immediate members of someone’s family that, for the purposes of a case of this kind, they were guilty of relevant wrongdoing some years ago in assisting in the family business in this way, would give rise, in my judgment, to well-founded astonishment. Plainly former breaches of duty as a director might become a material fact, depending on the circumstances of the case, but it does not do so in this case because I do not see how, in the mind of the prudent underwriter, that which (as I find) would involve little more than family loyalty and cohesion, would amount to a fact material to the moral hazard in respect of a placing not less than three years and up to nine years after the events on which the defendants rely. Accordingly, I reject Mr Smith’s evidence in this regard.”

“The several pages exhibited hereto …. are to the best of my knowledge and belief a full and complete statement as to the affairs of the above named company as at 3 March 1992 being the date of the resolution for winding up…”

“(1) Subject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract. (2) Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk…. (4) Whether any particular circumstance, which is not disclosed, be material or not is, in each case, a question of fact”

“78. As to Mr Meisels’ use of an alias in respect of two properties which he frequented and thus did not wish to be known as the landlord lest he be pestered by the tenants, I readily accept Mr Holland’s evidence in this regard to the effect that the use of this alias in isolation might be material but when conjoined with the explanation it ceases to be so. Mr Smith, once again, turns his back on a significant part of the picture. I shall only add that, contrary to his evidence, Mr Meisels, in fact, only used an alias in respect of one of the properties and that property appeared on the face of the schedule with the use of the alias as part of the portfolio as split between the two contracts of insurance. 79. In the result, I am not persuaded that, in the circumstances of this case, the facts to which the defendants refer are material or, as appropriate, were known such that they could be disclosed.”

“In all the circumstances I would summarise the relevant principles of inducement in this context in this way: (i) In order to be entitled to avoid a contract of insurance or reinsurance, an insurer or reinsurer must prove on the balance of probabilities that he was induced to enter into the contract by a material non-disclosure or by a material misrepresentation. (ii) There is no presumption of law that an insurer or reinsurer is induced to enter in the contract by a material non-disclosure or misrepresentation. (iii) The facts may, however, be such that it is to be inferred that the particular insurer or reinsurer was so induced even in the absence from evidence from him. (iv) In order to prove inducement the insurer or reinsurer must show that the non-disclosure or misrepresentation was an effective cause of his entering into the contract on the terms on which he did. He must therefore show at least that, but for the relevant non-disclosure or misrepresentation, he would not have entered into the contract on those terms. On the other hand, he does not have to show that it was the sole effective cause of his doing so.”