Drake Insurance Plc v Provident Insurance Plc

An insurer seeking to avoid a policy for material non-disclosure must prove that the non-disclosure induced it to contract on the relevant terms. The counterfactual inquiry considers what probably would have happened following proper disclosure.

An election to avoid must be communicated unequivocally. The whole course of communications and conduct may be considered where the purported election forms part of a continuing contractual relationship.

An insurer that reasonably settles the insured’s full liability under an express reservation of rights is not necessarily a volunteer as against a co-insurer. A rateable proportion clause does not, by itself, extinguish the equitable right to contribution. Clear notice that payment is made under protest pending resolution of the insurers’ dispute may preserve that right.

Two motor policies covered the liability arising when a named driver injured a motorcyclist. Provident purported to avoid the vehicle owner’s policy because he had not disclosed a speeding conviction. Had an earlier accident been correctly classified as a no-fault accident, disclosure of the conviction would not have increased the premium.

Drake indemnified the driver by settling the injured motorcyclist’s claim for £1.2 million plus costs. It repeatedly disputed Provident’s avoidance and reserved its right to seek contribution. Moore-Bick J, in a decision reported at [2003] 1 All ER (Comm) 759, held that Provident had validly avoided, had not waived avoidance or reinstated the policy, and that Drake had paid as a volunteer because of its rateable proportion clause.

The appeal concerned inducement, utmost good faith, unequivocal avoidance, and Drake’s entitlement to equitable contribution.

1. Appeal allowed unanimously. Provident remained bound by its policy, and Drake was entitled to an equitable contribution of 50 per cent. The members of the court reached that conclusion through partly differing reasoning.

2. Rix and Clarke LJJ held that Provident had not proved inducement. Under Pan Atlantic, an insurer relying on non-disclosure must show that disclosure would probably have caused it to contract on different terms. Disclosure of the speeding conviction would probably have led the broker and insured to discuss the earlier accident. Its no-fault status would then have emerged, leaving the premium unchanged. The legal burden rested on Provident: [2003] EWCA Civ 1834, paras 60–64 and 131–137. Pill LJ disagreed with this ground because the point had not been developed through evidence and argument at trial.

3. All three Lord Justices held that Provident had not unequivocally avoided the policy. Although its letter stated that the policy was avoided, Provident subsequently issued a certificate and amendment schedule, continued collecting premiums and deliberately administered the policy as subsisting. The election had to be assessed objectively from the whole course of the continuing relationship, rather than from the avoidance letter alone: paras 94–104, 146 and 183.

4. The court considered the insurer’s reciprocal duty of utmost good faith. Rix and Clarke LJJ expressed the view, without resting their decisions upon it, that avoidance would lack good faith if the insurer knew or deliberately shut its eyes to the fact which removed the asserted basis for avoidance. Pill LJ went further. He held that Provident’s knowledge required it to make a simple inquiry before exercising the drastic remedy of avoidance, and that its failure to do so breached the duty of good faith: paras 79–93, 143–145 and 165–178.

5. Drake was not a volunteer. It had consistently informed Provident that liability was disputed, that it would indemnify the driver responsibly under protest, and that it would pursue contribution. Its payment before resolving the insurers’ dispute did not destroy the equity which otherwise required the common liability to be shared. Legal & General was distinguishable because no comparable reservation or protest had been considered there: paras 123–128, 147–158 and 185–190.

6. Clarke LJ additionally held that, as between the insured and Provident, the binding arbitration award meant that there was no other existing insurance for the purposes of Drake’s rateable proportion clause. Drake therefore owed its insured a full indemnity. The clause did not make payment of the second half voluntary: paras 149–156.

• Court of Appeal (Civil Division): Allowed Drake’s appeal unanimously. It held that Provident remained bound by its policy and that Drake was entitled to a 50 per cent equitable contribution: [2003] EWCA Civ 1834.
• Commercial Court: Moore-Bick J held that Provident had validly avoided its policy, had neither waived avoidance nor reinstated the policy, and that Drake’s excess payment was voluntary. The decision, reported at [2003] 1 All ER (Comm) 759, was reversed.
• Arbitration: An arbitrator had determined that Provident was entitled to avoid its policy. The award bound the insured and Provident, but did not determine the dispute between Drake and Provident.