Objective test of materiality
30 September 2015
Insurers avoided a public liability policy for material non-disclosure and misrepresentation by the insured. In T Brit UW Ltd v F&B Trenchless Solutions Ltd  EWCA 2237 (Comm), 31 July 2015, the court emphasised that the subjective views of the insured, or the underwriter, are not relevant when assessing the materiality of a fact, and that the test for materiality is objective.
This case concerned an insurance policy for a "micro-tunnel" under a railway line. The insured is a specialist tunnel construction company, F&B Trenchless Solutions Limited (F&B). Tunnelling beneath railway lines typically causes the overlying track to "settle", or lower slightly. Network Rail guidelines require all estimates for under-track tunnel crossings to show no more than 5mm of track settlement.
F&B, who carried out the works, were aware of the 5mm requirement in the Network Rail guidelines, and expressly estimated that settlement as a result of the work would be 2-4mm.
Tunnelling commenced on 11 June 2013, and during July 2013 F&B became aware of track settlement up to 18mm, well in excess of the estimate, and the Network Rail guidelines. On 8 August 2013, a void appeared in a road close to the line under which the micro-tunnel was being constructed. F&B visited the site and inspected the void, but concluded that the cause was work that had been done by Severn Water in that area, not the micro-tunnel.
On 19 August 2013, F&B renewed its public liability insurance with Brit UW Ltd (the claimant). The risk details that F&B provided to its broker confirmed, amongst other things, that F&B did not, and would not in the future, carry out works underneath active rail lines. The railway line had been closed by Network Rail on 19th July 2013, some time after the work had begun, in order to enable re-signalling work to be carried out, but the line was reopened to freight trains on 26 August 2013.
On 27 August 2013, a freight train derailed whilst passing over a level crossing in the area where the micro-tunnel had been constructed. It was common ground that the derailment was caused by severe settlement of the railway tracks. F&B sought cover under its policy for liability incurred as a result.
The principles governing non-disclosure and the duty of utmost good faith in respect of insurance contracts are well established. Information is "material", and must be disclosed prior to policy inception, if it would influence the judgment of a hypothetical "prudent insurer" in fixing the premium or determining whether to take the risk. It is not settled by current practice or the subjective opinion of a particular insurer. A material non-disclosure by the policyholder allows an insurer to avoid the policy.
The principles governing misrepresentation are also well established. A material misrepresentation made by the insured to the insurer prior to policy inception also entitles an insurer to avoid the policy. "Materiality" has the same meaning as for non-disclosure. If it would influence the judgment of a hypothetical "prudent insurer" in fixing the premium or determining whether to take the risk, it is material.
The judge held that F&B's failure to disclose the settlement of the rail lines, and the appearance of a void in the nearby road, were material non-disclosures. The settlement was significantly in excess of the 2-4mm estimate, and in excess of the 5mm allowed by Network Rail in its guidelines. The degree to which actual track settlement deviated from expected track settlement would have been important to a prudent underwriter, and no-one knew when it would stop increasing.
Second, and separately, the exposure of the insured to a claim arising from the void in the nearby road was evident from the moment it appeared, absent a full investigation ruling out liability on the part of F&B (which was not conducted).
The court made clear that F&B's own subjective view of the importance of these issues did not relieve them of materiality. The question was whether, on an objective assessment, the facts that F&B knew were themselves material.
Similarly, the statement that the line was inactive was a material, and false, representation. The expert evidence was unanimous that a prudent underwriter would be likely to consider that tunnelling under active railway lines would attract a higher excess or premium than tunnelling taking place under inactive lines. The risk was presented as a good one – namely that F&B would not be tunnelling under active rail lines. If that had not been the case, on an objective basis it would have made a difference to both the terms on which the insurance was written and the premium, and the insurer was entitled to avoid the policy.
Comment: Under the Insurance Act 2015, which comes into force in August 2016, insurers' ability to avoid policies in circumstances such as these will become more constrained. A negligent non-disclosure or misrepresentation that, if made, would only have resulted in an increase of the premium, or a change in the terms, will no longer give rise to the right to avoid. The insurer will be entitled to a reduction in the claim, proportionate to the increase in the premium, or to the benefit of the improved terms. The remedy of avoidance is limited to cases of deliberate or reckless nondisclosure or misrepresentation, or to instances where the facts, if known, would have led the insurer to decline the risk altogether. Thus, the Insurance Act 2015 rebalances risk on policy renewal significantly in favour of the policyholder, and will make the draconian remedy of avoidance even rarer.