UK Acorn Finance Ltd v Markel (UK) Ltd

Factual and Procedural Background

The claimant, a bridging finance lender primarily serving agricultural businesses, brought a claim under section 1(1) and (4) of the Third Party (Rights Against Insurers) Act 1930 to recover indemnity under professional indemnity policies issued by the defendant for the years 2013 and 2014. These policies insured Westoe 19 Limited (formerly Colin Lilley Surveying Limited) ("CLS"), a property valuation company. The claim relates to two judgments obtained against CLS for negligent overvaluation of agricultural properties between June 2010 and March 2012.

The defendant sought to avoid the policies in February 2016, alleging misrepresentations and non-disclosures by CLS, evidenced through risk profile documents submitted during policy renewals. The policies contained an unintentional non-disclosure clause, limiting avoidance rights to cases where misrepresentations were not innocent or free from fraudulent intent.

The trial occurred in December 2019, hearing evidence from witnesses for both parties, including directors of the claimant and CLS, underwriters and claims personnel of the defendant, and experts. The court assessed the factual disputes by testing oral evidence against contemporaneous documentation and admitted facts, following established case law principles.

The defendant provided professional indemnity insurance to CLS from 2003 to 2015, focusing on the renewal periods from 2011 onwards. CLS's insurance broker was Lycetts, who acted as agent for CLS. The renewal process involved submission and confirmation of risk profiles, which contained questions about CLS's lending institutions and valuation work, including inquiries about "sub-prime" lending defined by the defendant as lending institutions other than UK high street lenders or building societies.

CLS provided answers to these risk profiles and related inquiries, which the defendant contends were false or misleading, particularly regarding the nature of CLS's clients and whether it undertook sub-prime work. There were delays and inaccuracies in notifying claims to the defendant, and the defendant alleges deliberate and dishonest misrepresentations by CLS, leading to its decision to avoid the policies.

Legal Issues Presented

1. Whether CLS made any misrepresentations or non-disclosures to the defendant during the placement of the 2013 and 2014 policies.
2. Whether any such misrepresentations constituted warranties under the policies.
3. Whether the misrepresentations or non-disclosures were material and induced the defendant to issue the policies.
4. Whether the defendant waived any breaches of warranty by CLS.
5. Whether the defendant was entitled to avoid the policies under the unintentional non-disclosure clause, considering whether the misrepresentations were innocent or involved fraudulent conduct or intent to deceive.

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Court's Reasoning and Analysis

The court undertook a detailed factual and legal analysis of the misrepresentations and non-disclosures made by CLS in the renewal processes for the 2013 and 2014 policies. It found that CLS had misrepresented that all its valuation work was for UK clearing banks or building societies and that it did not undertake work for sub-prime lenders, as defined by the defendant. This was factually incorrect as CLS had carried out valuation work for entities outside this category.

The court rejected the claimant's contention that it was confused about the meaning of "sub-prime," finding that the defendant had clearly defined the term in correspondence and risk profiles, and CLS had understood that definition.

The policies incorporated the proposal as a warranty, meaning the representations were unconditionally guaranteed by CLS. The defendant's right to avoid the policies for misrepresentation or breach of warranty was subject to the unintentional non-disclosure clause, which required CLS to establish to the defendant's satisfaction that any misrepresentation was innocent and free of fraudulent intent.

The court examined the construction of this clause and concluded that the decision-making power as to whether misrepresentations were innocent rested with the defendant, subject to an implied term, derived from the Supreme Court's decision in Braganza, that the defendant must exercise this discretion rationally, not arbitrarily or capriciously.

Applying this framework, the court considered whether the defendant’s decision to avoid the policies was rational. It identified significant flaws in the defendant’s decision-making process, particularly the failure of the decision-maker (Mr McKechnie) to take into account relevant evidence consistent with CLS’s claimed understanding and honest belief, such as CLS’s notification of certain claims and conduct in seeking approval before joining a lending panel. The court found that the defendant failed to approach the dishonesty issue with an open mind and did not properly consider that misrepresentations were more likely innocent or negligent rather than fraudulent.

The court noted that the defendant also took into account irrelevant factors and failed to consider material ones, leading to a decision that no reasonable decision-maker could have reached. The court emphasized that the defendant’s decision-making was flawed, permeated by these errors, and could not be upheld on the basis that the outcome would have been the same if these errors had not occurred.

Finally, the court observed that although it was critical of the decision-making, this was not a personal criticism of Mr McKechnie, who was in a difficult position without appropriate training or guidance on such matters.

Holding and Implications

The court has not yet issued a final order but indicated that it would invite submissions on the form of the order following the judgment. The core ruling is that the defendant’s decision to avoid the policies was flawed and could not be upheld as rationally made under the terms of the unintentional non-disclosure clause.

IMPLICATIONS: The decision directly affects the parties by invalidating the defendant’s avoidance of the policies on the grounds presented. No new precedent was established beyond the application of existing principles concerning contractual discretion and the unintentional non-disclosure clause. The case underscores the necessity for insurers to exercise discretion in avoidance decisions with proper consideration of all relevant evidence and consistent with implied duties of rationality.