UK Acorn Finance Ltd v Markel (UK) Ltd

A contractual decision-maker entrusted to determine whether non-disclosure or misrepresentation was innocent must exercise that power rationally. The decision-maker must consider relevant matters, disregard irrelevant matters, and avoid conclusions that no reasonable decision-maker could reach. The court does not substitute its own decision.

Where the contract places the burden on the insured to establish innocence, the decision-maker must nevertheless recognise that innocent or negligent conduct is inherently more probable than dishonesty. Commercial decision-making need not replicate judicial investigation, and a meeting is not ordinarily required. However, material evidence inconsistent with dishonesty must be considered. Failure to apply that approach may invalidate an avoidance decision.

The claimant sought indemnity from its professional indemnity insurer for judgments obtained against its former surveyor and valuer. The insurer had avoided the relevant policies, alleging that risk-profile answers concerning work for non-high-street lenders and claims notifications were deliberate and dishonest misrepresentations or non-disclosures.

The policies contained an unintentional non-disclosure clause under which avoidance was waived if the insured established to the insurer’s satisfaction that the relevant conduct was innocent and free from fraudulent conduct or intent to deceive. The central issues were whether the clause conferred a contractual decision-making power, what legal standard governed its exercise, and whether the insurer’s avoidance decision satisfied that standard.

1. Construction of the clause. The words requiring the insured to establish innocence “to Our satisfaction” made the insurer the contractual decision-maker and placed the evidential burden on the insured. The court could not substitute its own view for the insurer’s conclusion.
2. Implied constraint. Applying Braganza v BP Shipping Limited [2015] UKSC 17, a term was implied that the insurer would not exercise the power arbitrarily, capriciously or irrationally. The insurer had to consider only relevant matters, disregard irrelevant matters, and avoid a conclusion that no reasonable decision-maker could reach.
3. The decision-maker had to assess the whole material, bearing in mind that innocent or negligent misrepresentation was inherently more probable than dishonesty. The contractual standard did not require the investigation expected of a court, and there was no general requirement for a meeting with the insured.
4. The insurer’s decision-making was materially flawed. The decision-maker failed to give proper weight to the notification of the Waterman claim, treated the police-investigation explanation as objectively inadequate rather than assessing whether it was genuinely held, and failed to consider the significance of the insured’s conduct concerning the ASTL panel. He also treated late notification of an unrelated Barclays claim as relevant to dishonesty.
5. Those errors permeated the decision and prevented the court from safely concluding that the outcome would have been the same had the correct approach been followed. The avoidance decision was therefore not sustainable.
6. The court invited submissions on the form of the resulting order.