Duty to Make Full Disclosure of Material Facts at Placement Re-affirmed by Court of Appeal

Profession:Reynolds Porter Chamberlain
 
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By Edward Mann and George Mortimer

First published in June 2003

In an important unanimous judgment the Court of Appeal has rejected the reinsureds'appeal in Brotherton v Colseguros, and confirmed that the duty to disclose material information must be assessed with reference to what was known to the (re)insured when cover was placed. Evidence not available at placement, which might call into question the accuracy or materiality of information not disclosed to the underwriter, will not be admitted when the court considers the validity of an avoidance of the cover.

The Court of Appeal also conclusively rejected the approach formulated by Colman J last year in The Grecia Express that the court may refuse to allow underwriters to avoid for non-disclosure if to do so can be shown, by reference to later events, to be unconscionable or unfair.

The Court of Appeal's ruling gives London market (re)insurers certainty that their decision to avoid, if it is based on evidence that the (re)insured was aware of material circumstances at placement which it failed to disclose or misrepresented, which made a difference to their assessment of the risk, will not later be overturned by the court.

Background

Ace Global Markets' Brotherton Syndicate 490 and other reinsurers had reinsured fidelity insurance for a Colombian bank. Reinsurers have avoided the reinsurance for non-disclosure of allegations of corruption involving the bank's president, widely reported in the Colombian media and issued proceedings seeking a court declaration that their avoidance is valid. The bank's Colombian insurers argue that the corruption allegations can now be shown to be unfounded and, relying on The Grecia Express ,have contended that the court should not allow the reinsurance to be avoided if it could be shown at trial that the allegations were untrue, even if the reinsureds did not know that they were untrue when they failed to disclose them at placement. Reinsurers have argued that what the reinsureds might be able to demonstrate now is irrelevant, if there was material non-disclosure judged by what was known to the reinsureds at placement.

Reinsurers therefore applied to the court for a ruling that retrospective "post placement" evidence be excluded from the trial. Reinsurers' application was heard in February this year. Moore-Bick J declined at first instance to follow The Grecia Express and held that post placement evidence was inadmissible. Moore-Bick J held that...

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