Brotherton & Ors v Aseguradora Colseguros SA & Anor

In marine insurance, reports of specific allegations of corruption, fraud, official investigation or suspension may be material facts requiring disclosure. They are not necessarily mere rumour or gossip, particularly where the facts are known to persons presenting the risk. The statutory presumption of an insurer’s knowledge under section 18(3)(b) of the Marine Insurance Act 1906 does not apply where the insurer has made an inquiry and the facts were not actually known. A policy clause excluding claims arising from known circumstances does not, without more, remove the insured’s duty of disclosure, since the circumstances may affect the reinsurer’s assessment of moral hazard or the risk of further claims. A misrepresentation or non-disclosure induces a contract where it is an effective cause, even if it is not the sole cause.

The claimants were lead and following reinsurers of Colombian insurers whose policies covered losses suffered by a Colombian state-owned bank. They sought declarations that the 1997/1998 reinsurance and a two-month extension were validly avoided for material non-disclosure and misrepresentation concerning allegations against the bank’s president and other senior officers.

The dispute followed an earlier Court of Appeal decision concerning whether the reinsureds could adduce evidence of the truth of the media allegations. The trial issues included materiality, statutory presumed knowledge, the effect of a Discovery Limitation Clause, inducement, and whether following underwriters could avoid where the lead underwriter was entitled to avoid.

1. The claim succeeded. The reinsurers were entitled to avoid the 1997/1998 reinsurance and the subsequent extension.
2. The reports concerning the bank president’s suspension, alleged corruption and improper loans, arrest and official investigations were specific reports based on apparent facts. They were not loose or idle rumours. They were material because they might affect an underwriter’s judgment and suggested both potential claims and moral hazard.
3. Section 18(3)(b) of the Marine Insurance Act 1906 did not assist the reinsureds. The underwriter’s inquiry about the president’s absence meant that there was no room for the statutory presumption in the circumstances. In any event, a London reinsurer was not presumed to know everything that a local insurer might know, and was not thereby placed in the position of a Colombian direct insurer.
4. The Discovery Limitation Clause did not narrow the general duty of disclosure. The possibility that a claim might ultimately be excluded did not remove the need to disclose facts which could affect the reinsurer’s assessment of the claim, moral hazard or related losses.
5. Applying the inducement test in Assicurazioni Generali v ARIG [2003] Lloyd’s Law Reports 131, the non-disclosure and misrepresentation were effective causes of the lead underwriter’s decisions. The underwriter would probably not have written the risk in 1997 and would not have agreed the 1998 extension had the true facts been disclosed.
6. The following market was also entitled to avoid. Each following underwriter made its own decision, but the evidence showed that the leader’s participation and the assumption of a fair presentation were material to those decisions. The court’s conclusion was consistent with Aneco v Johnson & Higgins [1998] 1 Lloyd’s Law Reports 565, International Lottery Management Ltd v Dumas & Others [2002] Lloyd’s Law Reports 237 and International Management Group (UK) Limited v Simmonds [2003] EWHC 177 (Comm), and did not follow the contrary approach in Sirius International Insurance Corp v Oriental Assurance Corp [1999] Lloyd’s Law Reports 343.

• Court of Appeal: The reinsureds’ appeal against the earlier decision of Moore-Bick J was dismissed. The Court of Appeal struck out the pleaded denials of actual misconduct and held that evidence of the truth of the allegations was inadmissible for the issue then before it.
• High Court (Commercial Court): The present trial determined the claims for avoidance and held that the reinsurers succeeded.