HIH Casualty and General Insurance Ltd & Ors v Chase Manhattan Bank & Ors

The House considered the construction and effect of a "Truth of Statement" clause in high-value film-finance insurance policies and whether it prevented insurers from avoiding the policies or claiming damages for misrepresentation or non-disclosure by the broker (Heath North America & Special Risks Ltd) acting on behalf of the insured bank (Chase). The court applied established insurance law principles (notably the Marine Insurance Act 1906, ss.17-20 and s.84) and the rules on exclusion clauses, concluding that the clause absolved Chase of any duty of disclosure and protected it against avoidance or claims based on innocent or negligent misrepresentation or non-disclosure by the broker. However, the clause did not, on its proper construction, bar the insurers from avoiding the policies or claiming damages where the broker’s conduct amounted to fraudulent misrepresentation or fraudulent (dishonest) non-disclosure. The House therefore allowed the insurers a remedy only to the extent that the pleaded facts amounted to fraud by the broker; other claims based on negligence or innocent conduct were excluded by the clause.

This litigation concerned film-finance "time variable contingency" insurance taken out for the benefit of a lending bank (Chase) and placed by a broker (Heaths) pursuant to arrangements involving film producers and an intermediary risk manager. Insurers repudiated liability for several claims, alleging that Heaths made material misrepresentations and concealed material facts either fraudulently or negligently. Chase relied on the policy's Truth of Statement clause which (in key parts) (i) waived any duty on the insured to make representations or disclosures, (ii) stated that the insured would have no liability for information provided by other parties, and (iii) provided that information provided by or non-disclosure by other parties (including Heaths) would not be a ground for avoidance.

Procedural posture: Longmore J ordered a preliminary issue to be tried in the Commercial Court, Aikens J gave initial answers, the Court of Appeal gave different answers ([2001] 2 Lloyd's Rep 483) and the matter reached the House of Lords on appeal.

• Nature of relief sought: insurers sought declarations that the policies were avoided or rescinded and sought damages from Chase for misrepresentation and non-disclosure; Chase sought a declaration that the Truth of Statement clause prevented avoidance or damages.
• Issues framed by the court: whether, on the pleaded facts assumed true for the preliminary issue, the insurers were entitled (a) to avoid/rescind the contracts of insurance and (b) to damages from Chase for misrepresentation or non-disclosure by Heaths.
• Reasoning and outcome in brief: the House construed the clause against the background of ss.17–20 and s.84 of the Marine Insurance Act 1906 and relevant authorities on exemption clauses. The court held that phrase [6] relieved Chase personally of any disclosure obligation but did not negate the broker’s independent duty under s.19. Phrases [7] and [8] were construed as broadly protecting Chase from avoidance and damages arising from innocent or negligent statements or omissions by others, but not as excluding the insurers' ordinary remedies where the broker's conduct was fraudulent or where dishonest concealment gave rise to a fraudulent misrepresentation. The House therefore answered the preliminary issues by allowing avoidance and damages only if the insurers could prove a case of fraud by Heaths; negligent or innocent breaches were not sufficient.

The court emphasised that, while parties can allocate commercial risks by contract, an intention to exclude the ordinary consequences of an agent's fraud must be expressed clearly and unmistakably; absent such language the usual rule that fraud vitiates applies.

The House allowed the insurers' appeal in part and dismissed Chase's cross-appeal. The Truth of Statement clause relieved Chase of any duty to make representations or disclosures and protected it against avoidance or damages for innocent or negligent misrepresentation or non-disclosure by its placing broker. However, the clause did not preclude the insurers from avoiding the policies or claiming damages where the broker's conduct amounted to fraudulent misrepresentation or fraudulent (dishonest) non-disclosure; such fraud still entitled the insurers to rescind and to seek damages. The insurers therefore succeed only to the extent that the pleaded facts establish fraud by the broker.

Preliminary issues directed by Longmore J in the Commercial Court; judgment at first instance by Aikens J (reported at [2001] 1 Lloyd's Rep 30); reversed in part by the Court of Appeal ([2001] 2 Lloyd's Rep 483); appeal to the House of Lords allowed in part ([2003] UKHL 6).