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

Materiality for the purposes of an insurer’s duty of disclosure is assessed when the risk is placed, by reference to the information then available to the prudent insurer. Reports, rumours or allegations may remain material even if later proved false. Subsequent information cannot retrospectively alter the underwriting judgment or the materiality of circumstances known but not disclosed at the time of contracting. The issue remains one of fact for trial, ordinarily informed by evidence from experienced underwriters. A pleaded case that the allegations were unfounded was therefore legally irrelevant and was struck out.

The claimants subscribed to reinsurance of a Colombian bank’s banker’s blanket bond and professional indemnity insurance. They alleged that the defendants had failed to disclose contemporary press and television reports concerning alleged impropriety by the bank’s president and other senior officers, and sought declarations avoiding the contracts.

The defendants pleaded that the allegations were immaterial because they were unfounded, and proposed to adduce evidence concerning their truth. The issue at the restored case management conference was whether that issue was legally relevant and should proceed to trial.

1. Disposition. The allegation in paragraph 5(1) of the amended defence was struck out. Evidence directed solely to proving that the allegations against the bank’s officers were unfounded was consequently irrelevant.
2. Materiality under Marine Insurance Act 1906, section 18, concerns the effect which the circumstance would have had on the judgment of a prudent insurer when the risk was accepted. It is a question of fact for trial, assessed in light of evidence from underwriters familiar with the relevant market.
3. Information discovered after the contract cannot affect the underwriting judgment made at placement. Accordingly, if reports, rumours or allegations were material when the contract was made, they do not cease to be material merely because they are later shown to be false.
4. The same approach applies whether the information concerns the likelihood of physical loss or moral hazard. The insurer is entitled to assess reports and allegations using only the information available at the time, without hindsight.
5. The court rejected the approach in Gate v Sun Alliance Insurance Ltd, which assessed materiality with the benefit of knowledge of the full facts. It agreed with the reasoning in March Cabaret Club & Casino Ltd v The London Assurance, Inversiones Manria S.A. v Sphere Drake Insurance Co. Plc (The ‘Dora’) and Strive Shipping Corporation v Hellenic Mutual War Risks Association (The ‘Grecia Express’), and treated the earlier decisions concerning reports about the safety of insured property as proceeding on the same principle.
6. An alternative submission that later proof of falsity deprived the reinsurers of the right to avoid was not pursued in argument and was rejected for the reasons given in Drake Insurance Plc v Provident Insurance Plc.