Brotherton & Anor. v Aseguradora Colseguros S.A. & Anor.

Materiality in insurance non-disclosure is assessed at placement by reference to information then known to the assured, including credible intelligence or allegations suggesting increased risk or moral hazard. The information need not later prove true. Avoidance additionally requires proof that the actual underwriter would have acted differently if informed. The assured cannot require a trial of the allegations’ truth to defeat avoidance. Rescission operates by the insurer’s act, and the formation duty of utmost good faith does not generally create a post-contractual unconscionability control on rescission.

London reinsurers sought declarations that they had avoided reinsurances of two Colombian insurers for non-disclosure of media reports and investigations concerning alleged misconduct by a bank’s officers.

The reinsureds admitted the reports and investigations but denied their materiality. They sought to rely on evidence that the allegations were baseless and politically motivated. On 26 February 2003, Moore-Bick J struck out defence paragraphs denying any proper basis for the investigations and relying on their alleged falsity. The reinsureds appealed with permission. The central issue was whether the truth of the allegations or the existence of actual misconduct could affect materiality or the validity of avoidance.

The Court of Appeal unanimously dismissed the appeal. Mance LJ delivered the leading judgment, with which Buxton LJ and Ward LJ agreed.

1. Materiality. Under the Marine Insurance Act 1906, materiality is assessed at the date of placement by reference to circumstances then within the assured’s knowledge. Information amounting to intelligence, including reports or investigations suggesting increased risk or moral hazard, may be material. The inquiry concerns what would influence the judgment of a prudent insurer. Loose or idle rumours may fall outside the rule.
2. Inducement. Materiality alone does not establish avoidance. The actual underwriter must also show that knowledge of the undisclosed information would have caused it to act differently, whether by refusing the risk or accepting it only on different terms. Expert evidence and the actual underwriter’s evidence remain relevant to those issues.
3. Later truth or falsity. The materiality and inducement inquiries must be conducted on the information available at placement. Later-discovered facts, including proof that allegations were false or that misconduct did not occur, cannot be used to require a trial of the allegations before avoidance can be effective. The reasoning in The Grecia Express supporting such a trial, and its related court-control and unconscionability strands, was rejected. Its distinct proposition that known facts suggesting a greater risk remain material was approved.
4. Rescission and good faith. Avoidance for non-disclosure or misrepresentation operates by the innocent party’s act independently of the court. The court has no general equitable power to reverse that act merely because later evidence would show the intelligence to have been incorrect. The duty of utmost good faith principally concerns contract formation. Recent authority limits any post-contractual duty to circumstances such as repudiatory breach or fraudulent intent.
5. Disposition. The struck-out defence paragraphs remained excluded, the appellants were debarred from adducing evidence on those matters, costs followed the event, and permission to appeal to the House of Lords was refused.

1. Court of Appeal (Civil Division): Appeal dismissed on 22 May 2003. The order striking out specified defence paragraphs was maintained and permission to appeal to the House of Lords was refused.
2. Queen’s Bench Division: Moore-Bick J, on 26 February 2003, struck out paragraphs denying any proper basis for the investigations and relying on the alleged falsity of the reports.