R&R Developments Limited v AXA Insurance UK plc
In June 2006, the insured took out a Commercial Combined and Contracts Works insurance relating to a small development of two houses.
Included in the proposal was a document headed "Acceptance Criteria". This stated that the insurer's acceptance of the cover was subject to certain statements being true. There then followed a series of questions, beginning:
"Have you or any Partners or Directors either personally or in connection with any business in which they have been involved… (1) Ever been declared bankrupt or are the subject of any bankruptcy proceedings or any voluntary or mandatory insolvency?"
To this the insured answered "no".
The proposal, which was incorporated in and formed the basis of the policy, included a declaration signed on behalf of the insured that confirmed all material facts had been disclosed, that the answers given were true and complete and that the insured had not withheld any material information.
The insurer, however, claimed that the insured's answer to the question about voluntary or mandatory insolvency was a misrepresentation. One of its directors had been a director of another company which had been placed in administrative receivership and was still in administrative receivership in June 2006.
The court was asked to consider two issues: (1) whether the question related only to the insolvency of the insured or any of its directors or whether it extended to the insolvency of any company in the business in which they have been involved; and (2), whether administrative receivership was a form of mandatory or voluntary insolvency.
The insured argued that it was clear that the question was limited to the insured company and its directors alone. But if there were an ambiguity, it should be construed against the insurer ("contra proferentem"). If the answer, based on a reasonable interpretation of the question, was correct, there could be no misrepresentation.
The judge concluded that the question made it clear that the insurer only wanted to know about the insured and its directors, whether arising from their personal affairs or from any business in which they were involved. It did not extend to the position of any companies with which the directors were connected.
In the judge's view, the insurer's broader interpretation would have been both unreasonably vague and unreasonably wide.
"Whilst obviously there is no limit on what questions insurers may ask, where the scope of the intended questions is as wide as these insurers contend, they must ask them clearly and explicitly: no court is going to assist insurers with a benevolent construction of questions which (if that was indeed what was intended) were asked in a muddled and confusing manner".
The contra proferentem rule only applies if there is a genuine ambiguity. In such cases, the judge did not think it was necessary to consider in what sense the insured actually understood the question. The proper approach was to determine the objective meaning of the question, applying, if necessary, the contra proferentem principle.
In this case, the judge concluded there was no real ambiguity. Had he reached the opposite conclusion, however, the outcome would have been the same. The meaning the insured gave to the question was fair and reasonable and in answering "no", it had answered truthfully.
In any event, the judge was satisfied that an administrative receivership was not a "voluntary or mandatory insolvency" and so would not have been disclosable within the terms of the question. In his view, voluntary or mandatory insolvency referred to appointments made by the court under an insolvency regime, not to a remedy obtained by secured creditors without the court's involvement.
The judge was also unpersuaded that, in this instance, the insured had a wider duty to disclose information about the companies with which the director was involved.
A specific question asked by insurers can operate to waive the insured's duty to disclose material information on the same or similar matters which lie outside the limits of the question.
This insurer had had the idea of businesses with which the directors were involved in mind, but chose not to ask a question about the position of such businesses. The insured could infer from this that the insurer was not interested in the insolvency of any party other than the insured and its directors.
According to the judge's comments, if there is more than one reasonable interpretation of a question, the contra proferentem rule is triggered and the question will be construed against the insurer. So, if the answer given by the insured is true in relation to one of those meanings, the insured has answered truthfully – whether or not the insured actually understood the question in that way.
This approach goes against the standard text books, which suggest the insured's subjective understanding of the question is a relevant consideration.
Nevertheless, the decision is a reminder to insurers to make sure the questions asked in proposal forms are as clear and precise as possible, particularly when they include terms such as bankruptcy and insolvency, which may have a technical legal meaning as well as one that is more generally understood.
