This article was first published in Law Talk on 29 March 2014
A recent case confirms the centrality of inducement where material non-disclosure is an issue in a non-marine insurance context.
In Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd  1 AC 501, the House of Lords as it then was, redefined English law (for non-marine cases) so that any material non-disclosure would only lead to avoidance if it induced the insurer into entering into the contract. If inducement is not proved as a fact then the insurer may not rely on the non-disclosure to avoid the contract. Pan Atlantic was considered in a number of New Zealand cases, but not directly applied until Jaggar v Lyttleton Marina Holdings Ltd  2 NZLR 87.
That the non-disclosure induced the underwriter into entering into the contract is another way of saying the non-disclosure caused the underwriter to write the risk in the way that he or she did. It does not need to be shown that the risk would have been declined, but only that the insurer would have taken it into account.
What this means, in practical terms, depends on the risk in question. For consumer level insurance, the relevant underwriting practices will in effect be codified in a computer programme, with little or no discretion on the part of the operative considering a proposal. Whether the test is satisfied in this context can be ascertained very quickly. This may explain why non-disclosure cases with insurance at this level are now fairly rare.
For higher level commercial insurance, and certainly for reinsurance, an actual underwriter will actively apply his or her mind to whether to accept the risk and if so on what terms. The inducement requirement requires evidence from this person as to whether they would have taken the fact into account had they known the correct position. There will be therefore direct scrutiny of their decision-making process.
This kind of evidence was considered in New Zealand Local Authority Protection Programme Disaster Fund v New India Assurance Company Ltd  NZHC 1327.
LAPP is a charitable trust that maintains a disaster fund for the benefit of local authorities for loss and damage to certain infrastructural assets in the event of catastrophes such as earthquakes. The trust was established by a trust deed executed in 1993. A replacement trust deed which made some changes to the terms of the trust was entered into in 2007. The inducement topic concerned the changes to the trust deed.
Following the Canterbury earthquakes, LAPP sought summary judgment on of a sum of money from New India (a following reinsurer to a lead reinsurer) under the relevant insurance contract. It was incumbent on LAPP under the High Court Rules to satisfy the Court that New India had no reasonably arguable defence.
New India contended that material changes occurred when the plaintiff adopted the 2007 trust deed in place of the earlier 1993 deed without LAPP knowing. It argued that the provisions of the later deed removed or reduced restrictions on the amounts which insurers such as the defendant might have to pay out pursuant to reinsurance contracts. Therefore the terms of the 2007 deed ought to have been disclosed to the defendant. The failure to do so, it was argued, was a material non-disclosure which permitted the defendant to avoid the policy.
The New India witness deposed that he would have been concerned about the change in the deed because the terms of the 2010 policies meant that all loss settlements made by LAPP were unconditionally binding on New India provided that those settlements were within the terms of LAPP’s trust deed and the insurance contract. He stated that he would have wanted to satisfy himself that any change to the trust deed did not impact upon, or affect the trustees’ obligations under the deed.
The Court stated that it was reasonably arguable on the basis of the witness’s evidence that if he been told that there had been a change in the trust deed, he would have called for a copy of the original deed. This led to an inference that he may then have gone on to carry out a comparison of the two deeds, reached the view that the terms of the 2007 deed were comparatively disadvantageous, and either declined insurance or offered on different terms.
The Court stated that it was sceptical about whether the witness would have followed up in this way had he been advised that the trust deed had been changed. In simple terms, the witness appear to have said that at the relevant time he was content to leave such matters to the lead insurer. The Court stated that it understood his evidence to say that he was prepared to trust another insurer’s judgement on that issue because the particular structure adopted under the old arrangements had given him a satisfactory level of comfort. The Court then stated at paragraph 43:
If that is so, then when the subscription basis for insurance ended, taking with it the protection or assurance that Mr Balasubramanian took from it, one might have expected to see some evidence of him actively attempting to make his own judgement about what was in the trust deed. He could not have done that without calling for a copy of the current trust deed.
Nonetheless, this particular issue was not capable of being resolved in a summary judgment context. The Court went on to find, in any event, that the the changes to the trust deed were not material. It granted the plaintiff’s summary judgment application.
Inducement as a topic is sensibly the first port of call where material non-disclosure is considered to be an issue. From an insurer’s perspective, this should involve an interview with the underwriter, who will need to demonstrate how the company’s underwriting practices and procedures would have affected his or her judgment about the risk had the relevant facts been disclosed. Strictly speaking, the underwriter’s subjective opinion about the materiality of the fact is not relevant to this inquiry. From the insured’s perspective, it should look to focus on this issue as soon as possible. There will be cases where insurers, potentially for reasons of commercial sensitivity, do not wish to disclose their underwriting practices and may prefer to concede the point.