Mutual Energy Ltd v Starr Underwriting Agents Ltd & Anor

In an insurance policy excluding avoidance except for “deliberate or fraudulent non-disclosure”, deliberate non-disclosure means an intentional failure to disclose information which the insured knew ought to be disclosed. It involves dishonest wrongdoing or culpability. An honest but mistaken decision that information need not be disclosed is insufficient.

The words must be construed in the context of the policy as a whole. Where the exclusion is broadly protective of the insured, the carve-out should not be interpreted so widely that it defeats the exclusion. Commercial common sense may assist construction, but cannot justify rewriting clear contractual language.

Mutual Energy Ltd owned the Moyle Interconnector and claimed under an insurance policy for cable failures. The policy acknowledged that adequate information had been received and broadly excluded avoidance, repudiation and other remedies, subject to a proviso for “deliberate or fraudulent non-disclosure”.

The defendants sought a preliminary ruling on whether they could avoid the policy on assumed facts that an insured or its agent knew information had not been disclosed but honestly and mistakenly believed disclosure was unnecessary. The central issue was whether “deliberate” non-disclosure required dishonesty or extended to an honest mistake.

1. Construction principles. The policy was construed by identifying what a reasonable person with the relevant background would understand the parties to have meant. The exercise was unitary and iterative, taking account of language, contractual context and the implications of rival constructions. Commercial common sense could assist, but could not be used to rewrite an imprudent bargain. The approach was summarised from Wood v Sureterm Direct Ltd & Capita Insurance Services Ltd [2015] EWCA Civ. 839.
2. Meaning of the proviso. “Non-disclosure” was shorthand for inadequate disclosure or breach of the insured’s legal disclosure obligation. “Deliberate” therefore meant an intentional act or omission accompanied by knowledge that the information ought to be disclosed. The phrase imported serious culpability and dishonesty. It did not cover an honest but mistaken decision that disclosure was unnecessary.
3. Contractual context. Clause 5 acknowledged receipt of adequate information, subject to the information not being materially misleading. Clause 6 was a wide exclusion protecting the insured and its agents from remedies arising from non-disclosure, misrepresentation, negligence and breach. Reading the proviso broadly would substantially negate that protection. The carve-out was properly given a narrow construction.
4. Business common sense. The defendants’ interpretation would produce an unbusinesslike result by penalising an insured for carefully considering disclosure and making an honest mistake, while treating inadvertent failure to consider information more favourably. It would also create an impractical distinction between deliberate breach and deliberate non-disclosure.
5. Authorities. The first-instance and appellate decisions in HIH Casualty and General Insurance Ltd v Chase Manhattan Bank and Others did not provide a clear answer, particularly because the House of Lords disagreed with the Court of Appeal on fraudulent non-disclosure. Other authorities concerning deliberate breach, contractual construction and limitation did not alter the conclusion.
6. Disposition. On the assumed facts, the defendants were not entitled to avoid the policies. An honest but mistaken belief that information did not need to be disclosed was insufficient.