Not to Mention the Cavalry

Many insurance claims are straightforward and policyholders are often surprised by how quick and painless the process of making such a claim can be.

The policyholder's perception of straightforwardness and that of the insurer are not always perfectly aligned, however. Especially difficult are the situations where the insurer itself does not understood the cover that it has given. Frequently, we then see the illicit phenomenon of "underwriting at claim time" in which an insurance company tries to pretend, sometimes even to itself, that the cover was narrower than expressed in the words of the policy written by it.

There is rarely any excuse for an insurer which finds itself in this situation. Usually, it is not really the underwriting department's fault. A sales person will think up a policy "extra" to help to make the policy sell better but will fail to get his underwriting colleagues to price the cover properly, or will bully them into agreeing an "optimistic" price.

Not always though. Mr Roy Mura in this article brings to mind a class of coverage which often gives problems in an entirely predictable, and therefore inexcusable, way.

It concerns the word "household", one which to me is starting to sound archaic and even a bit quaint. What is a household these days, anyway ? Is it a nuclear family of two parents and 2.4 children ? How about a lodger ? The mother-in- law in the attached granny flat ? The adult son returned from a bad marriage ? The live-in girlfiend (that was originally a typographical error, but I decided that it might not be so inappropriate !) who turned up almost simultaneously ? The au-pair ?

Another question is whether it is misusing language to refer to some people as having a household at all. This aspect arose in the only reported decision from this side of the Atlantic on the interpretation of the word, English v Western[1940] 2 K.B. 156. Mr English - whose name paradoxically indicates that his family may well have been of Irish origin - had a motor accident in which his sister was injured. His insurer sought to avoid paying her compensation on the basis that the policy excluded liability for injuries to any member of the driver's household. The Court of Appeal, reversing the trial verdict, held that, as both siblings lived at home and were dependent on their parents, young Mr English had no household, properly speaking.

That was in 1940. You might think that nowadays any policy that offers coverage to members of a household would make plain what it includes and excludes. Some may do. Many others do not. Like Mr Mura, I cannot remember ever seeing a definition of the term "household" in a homeowners policy, or in any other policy for that matter. (And I have looked at quite a few in my time).

It is not that this vagueness has gone un-noticed. In Auerbach v Otsego Mut. Fire Ins. Co, the court observed that

the term "household" repeatedly has been characterized as ambiguous or devoid of any fixed meaning

In the U.S., the courts seem to have often engaged in a fairly protracted enquiry into what can have been the true intention of the parties when they agreed on the inclusion of the word in the policy. This surprises me, as my sense would have been that American judges were less sympathetic to insurers than their English counterparts in particular - it is generally otherwise with the Irish judiciary - and, in my view, the line likely to be taken both in England and in Ireland would be to emphasise the fact that nearly all insurance policies are not freely agreed as to detail, but are contracts of adhesion i.e. the policyholder essentially has to take them or leave them in their entirety. When courts encounter ambiguity in the wording of such contracts, they tend to give the "taker" the benefit of any doubt; this is known as the contra proferentem rule.

All the more reason for insurers to "tighten-up" their contract language. I hope that they have done so for the cover issued to the British royal family, at least.

Update on Friday, August 19, 2011 at 05:09PM by Fergus O'Rourke

Link to Roy Mura's post repaired

Update on Thursday, November 29, 2012 at 10:43AM by Fergus O'Rourke

Here is another ordinary, but crucial, word left undefined: this time it is "reside"

New Page on NT Cases

I have started today to build a new page here which will list all the relevant decided cases on the notification term in insurance contracts.

A Biter Bit

It is three years old now, but the decision in Dornoch Ltd & ors v Royal & Sun Alliance Insurance Plc(which I will call "the Coca Cola case") by the London Court of appeal is interesting for at least five reasons. (Hat-tip yet again to both Davies Laveryand Cameron McKenna).

First, it involved a dispute between a well-known insurance company and its own re-insurers.

Second, the dispute demonstrated that even an insurance company can nearly "come a cropper" in one of the many traps for the unwary in every contract of insurance.

Third, the dispute highlighted the difficulties that gave rise to the Contract Certainty project.

Fourth, it involved Coca Cola.

Fifth, it arose from one of those peculiarly American class actions by discontented shareholders unhappy at a loss in the value of their shares.

The insurer Royal Sun Alliance (RSA) provided cover to the Coca Cola Group in respect inter alia of claims that its directors or officers had misled investors. In turn, RSA re-insured its potential liability with Dornoch. The notification term ("NT")in RSA's contract with Dornoch required it to notify it by cable within 72 hours of "any loss or losses which may give rise to a claim". (Note that this language is unusual for a liability policy, which is what was involved here. More usual would be a reference to "circumstances which might give rise" or similar.) Compliance with this term was agreed to be a condition precedent to liability: in layman's language, the claim would not be payable if notification was late.

In October/November 2000, actions were commenced against Coca Cola and three of its directors in the U.S.. It was alleged that Coca Cola's financial well-being had been exaggerated, which had had the usual effect of pushing up its share price. Consequently, the claimant investors claimed to have bought their stock at inflated prices and that they suffered loss when the price fell again. The two actions were notified to RSA on 12 December 2000. On 19 January 2001 RSA informed the Reinsurers of the claims.

That looks pretty late, no ? Just imagine how a lay policyholder would struggle to get out of that one !

The reinsurers unsurprisingly - but incorrectly, as it turned out - believed that they had no liability. RSA disagreed and among the issues that were raised were:

* whose loss was relevant - that of the Coca Cola shareholders, of Coca Cola itself, or RSA's ?

* Had a loss actually occurred before January 19 2001 ?

* If not, did the possibility of a loss trigger the obligation to notify ?

* If it had occurred, when did the loss occur ?

(If you find these questions mind-numbingly boring, insurance coverage law may not be for you ! I find them fascinating, but then I have personal experience of how such issues can have real-world effects.)

Briefly, the result of the trial and appeal was a decision that there had been no notifiable loss, and that the effect of the NT wording quoted above was that there was no obligation on RSA to notify anything less than an actual established loss. Until the aggrieved shareholders proved their case, there was no actual loss established by anyone.

The re-insurers, not unreasonably, protested that to read the NT in this way was contrary to the purpose of such provisions, which is to give early warning of adverse developments. The Appeal Court per Longmore L.J. dealt briskly with this: It was not part of the Court's function to go out of its way to give a purposive construction to allow one party to take advantage of the draconian consequences of a clause where, if the parties had taken appropriate care with its wording, would probably have had very different requirements. Further, it is a well established principle that a party who relies on a clause exempting liability can only do so if the words are clear.

It was also significant, Longmore J. said, that the Reinsurers did not suggest that they had been prejudiced by the late notification. ( I may return to the implications of this observation in another post).

Once again, I recommend that you read the judgment itself - this one is relatively short and well-expressed.

Punitive Damages

I am personally familiar (but no longer involved) with an insurance claim where the policyholder was a pub owner who lived over the premises. One awful night, shortly after the owner retired to bed, it was burned to the ground. Luckily no-one was physically harmed.

The fire was caused by a cigarette butt which, still smouldering, came into contact with combustible refuse, which was not removed from the premises. (This happened before the "smoking ban").

Expert advice received says that the evidence is strongly suggestive of an accident. If the owner could be said to be responsible, it was more likely to have been through carelessness. As a means of deliberately starting a fire, the method was not one with great prospects of being successful.

Notwithstanding this, the insurance company not only refused to pay out for the loss, it accused the policyholder of deliberately starting the fire. There were other possible grounds for refusing to pay, and it was reasonable for the insurer to be suspicious, given that the pub business was not doing that well financially, but this was a very serious accusation with devastating consequences for a man already "on his knees".

I doubt if the accusation will be formally pleaded if the case is litigated, as the lawyers could face disciplinary action for putting their names to it in the absence of evidence, but the main damage is already done, and I hope that the insurers will be held to account for it.

The above thoughts were prompted by reading of a case with a similar set of circumstances in my native Ontario .(Hat-tip once again to Michael Thomas of Harper Grey, Vancouver).In that case, the insurer's unsupported accusation resulted in an award of additional punitive damages to the policyholder.

Unlike many Canadian and U.S. jurisdictions, awards of punitive damages are quite rare in Ireland, but may be given a boost by the Supreme Court's dicta in Frank Shortt's case. The court (per Murray C.J. and Hardiman J.) in the course of their judgments explaining a dramatic increase of the award of damages to Mr Shortt, surveyed the jurisdiction to award such damages in Ireland.

I recommend that you read the judgments in the Shortt case: you will benefit doubly if you are one of those deluded people who wants to give more and more power to the State in general and to the police in particular.

Your "Good Health"

On March 6, the Irish financial regulator issued a reminder to consumers about their duty to disclose when proposing for an insurance policy.

By one of those wonderful co-incidences, I read about it just after learning of what, at first sight, seemed a somewhat remarkable decision by the Privy Council in Zeller. There is a good summary of it hereby Davies Lavery, who were the first of several to inform me of the case.

I am generally pro-policyholder, but this one I had to read twice. Zeller was over 50, had had high cholesterol (and a family history of same), heart murmurs, and even elevated blood pressure. Yet he declared that he had never had health difficulties (apart from a thyroid problem). When, a short time after taking out the policy, he asked the insurer to pay for very expensive heart surgery, the insurance company wanted to not only refuse the claim but to avoid his health coverage policy ab initio. The insurer succeeded in the Cayman Islands Grand Court. The Islands' Appeal Court reversed by a majority, and the Privy Council (per Lord Bingham) decided that they were right.

It was held that Zeller honestly did not regard these problems as "heart trouble" or a "departure from good health". He had been aware that his cholesterol had sometimes been high, but there was some family history of it and he had been warned of the dangers and advised on diet and exercise. No medication or treatment had been prescribed. A heart murmur had also been detected on two previous occasions, and Mr Zeller had not thought his doctor was worried about them (the doctor had subsequently described the heart murmur as asymptomatic and not sounding significant).

Davies Lavery sum up:

The test was whether Mr Zeller's answers were true to the best of his knowledge and belief. On the issue of whether the heart murmur or raised cholesterol were a departure from good health they held that Mr Zeller did not need to answer yes. He had never taken medication, nor been treated in any other way, and he had not been off work for either condition. Overall, he had answered the proposal questions truthfully and therefore the insurer was not entitled to repudiate liability and the claim should be paid.

I would add that Mr Zeller was clearly entitled to regard himself as being in very good health, and he probably would not have abandoned his job in the U.S. and its associated health insurance, if there had been any doubt about it. (See paragraph 2 of the judgment).

The full report is well worth reading.

Finally, and remarkably, this is another case (to add to this one) where blatantly wrong recording of medical information nearly had disastrous consequences for the patient:

For reasons which are obscure, both Dr Coy and Dr Lamelas made reports in which they referred to Mr Zeller as having "a history of aortic and mitral valve regurgitation" and a "long history of known valvular pathology". These statements were not true and were corrected, but it appears that they prompted the insurer to make a detailed investigation of Mr Zeller's medical history before November 2001. It obtained from Mr Zeller's US doctor, Dr Pecsok, the notes which he had made at a number of consultations from 1997-2001 but which Mr Zeller had never seen. It read these notes as identifying five medical conditions: hypothyroidism, elevated cholesterol, heart murmur, elevated blood pressure and a fifth condition which has never been pleaded or relied on even though, as it seems, it featured in the insurer's decision to avoid. Mr Zeller's disclosure of his thyroid condition was noted, but the insurer's draft internal memorandum of its decision to cancel stated that had he disclosed conditions 2-5 his application would have been rejected. The view was expressed that "Mr Zeller was disingenuous in statements made on the enrolment form and he did not disclose medical conditions for which he was diagnosed and received treatment".

That is from paragraph 9.

Trap for The Unwary #24,534

"Life is just one damn thing after another" (Elbert Hubbard).

Nearly every insurance contract has a term ("the notification term"or "NT") which obliges the policyholder to promptly notify the insurer once there is even the possibility of a claim arising. It will usually read something like this:

The Assured shall give immediate notice in writing, with full particulars, of the happening of any occurrence likely to give rise to a claim

Such a straightforward sentence, one might think. And the requirement is not unreasonable:

The authorities concerning such clauses recognise that the purpose of [an NT] is twofold. First, it is intended to enable insurers to investigate potential claims at the earliest possible opportunity, before the trail of evidence goes cold, and to take, or require the assured to take, such steps as insurers think appropriate to minimise liability under the policy; see e.g. Pioneer Concrete (U.K.) Ltd v National Employers Mutual General Insurance Association Ltd [1985] 1 Lloyd's Rep 274 at 278, per Bingham J; Rothschild Assurance at 22, per Rix J; Friends Provident at paragraph 20, per Moore-Bick J; McAlpine v BAI [1998] 2 Lloyd's Rep 694 at 698, per Colman J; Clarke, The Law of Insurance Contracts, paragraph 17-4D4

(The quotation is from HLB Kidsons (A Firm) v Lloyds [2007] EWHC 1951 (Comm)[2007] which, on what has been my first reading, appears to be a model of clear judicial exposition. Take a bow, Gloster J.!)

However, human nature being what it is, and life being as Elbert Hubbard described, problems arise. In practice, the NT is, or is becoming, yet another hurdle at which policyholders with otherwise valid claims can fall.

In Layher, for example, the issue was how prompt did "immediate" notification have to be. The insurer argued that the notification should have taken place no later than 26th January 1990, even though accepting that the policyholder - a manufacturer of scaffolding components - did not have any knowledge of the incident (an alleged failure of scaffolding) giving rise to the claim at that date. I was reminded of Monty Python's Four Yorkshiremen, one of whom boasted that, in his impoverished youth, his routine obliged him to get up half an hour before he went to bed.

Other difficulties which have arisen with the NT have been whether a notification qualified to be described as such at all, whether one delivered to a branch of the insurer, or to an agent of the insurer, was effective, and whether an occurrence should really have been recognised as likely to give rise to claim (as in Coster).

In the latest case(a grateful hat-tip once more to Cameron McKenna ), a builder ("Kajima")did send a notification in what appeared to be good time, but it was deemed not to have been sufficiently detailed and only part of the builder's claim under the policy was successful.

Akenhead J., of the London High Court, sets out the opposing contentions thus:

In summary, the Claimant's case is that the investigation referred to in the notification led in time (after expiry of the insurance) to further investigations both by JRF's consultants and Kajima's own. Over the years which followed further defects and deficiencies were uncovered resulting in the discovery finally of defects which brought about the final settlement with JRF. Mr Williamson QC for Kajima effectively said that there was a "continuum" from 2001 onwards and the losses, costs and liabilities incurred by Kajima all in effect therefore arose from the notified circumstances. He argued that it mattered not that the defects uncovered as time went on were different from those which were or which gave rise to the specific notified circumstances. In the alternative, he argued upon a narrow basis that at the very least Kajima would be entitled to those losses which were attributable to the specifically notified circumstances.

Mr Catchpole QC and Miss Ansell for TUIC argued that the notified circumstances were relatively narrow. The 'investigation' referred to in the notification was clearly intended to be an investigation into the notified circumstances as opposed to some general investigation into the possible existence of other defects. They argued that the coincidental later discovery of other defects or damage had nothing to do with the originally notified circumstances directly and was not covered by the notification; alternatively such defects or damage and any claim arising from them did not arise from the notified circumstances.

While this was a case with what appear to me to be an unusual set of facts, it does seem odd that a policyholder might lose its cover through a failure, not to notify, but to draft its notification carefully enough.

The Woo Hoo-ha: Another Boring Insurance Story

I had originally planned to post an article of my own on the very strange story of Dentist Woo and the even odder decision of the Supreme Court of Washington State to let him benefit from his outrageous behaviour.It defeated my efforts to condense it better than David Rossmiller had already done, though, and I will therefore send you to him. (While you are there, have a look at his telling of the even more incredible, and still continuing, saga of Katrina/ Scruggs/Rigsby/Hood - I have left out some names - imbroglio. On second thoughts, maybe you should not: you may never be heard of again !).

Briefly, Dr Woo is (or perhaps was) a practical joker who has learned the hard way some of the limits that have to apply. He played a prank on a member of his staff while she was under general anaesthetic, and she was not amused. You may think that she was right. She certainly was successful in her claim against him, but Woo himself successfully obtained damages from his own insurer for wrongfully refusing to help him in dealing with her claim. Most of us would have guessed that he was in error as to the boundaries there as well, but you learn something new every day ...

Anyway, I was prompted to finally tell you about this by a Usenet article which suggested that one cannot claim against one's motor insurance policy for something arising from a breach of the law.

Is it just me or is this a very peculiar notion ? How many people think that if you break the law by driving without due care and attention and thereby collide with, say, a bus, you will not be able to claim for the damage ?

Not many lawyers think so, but you will find more who will say, straight-faced, that the insurance company can decline your claim because "it was your fault". Do they not know that their compulsory "professional indemnity" policy covers them for just that situation ? Or as David Rossmiller puts it, insurance isn't just for nice people. I would add that, while one has to show utmost good faith when proposing for insurance and to some extent when making a claim, it is not otherwise necessary to be pure of heart or to be of superhuman competence.

Insurance Companies and Advice

Along with many others who know the industry, David Rossmiller is upset about a Bloomberg story. He protests:

It's not up to your insurance company to make sure you have enough liability insurance to protect your assets if you hit someone with your car, or to make sure you buy enough property coverage to replace your jewelry, or to sit down at your table and make sure you understand you are not covered for earthquakes or floods. First, the law presumes that you the consumer know how much insurance you need, and if you don't get it, that responsibility is yours. Second, this is the theory of a standard-form contract -- the market eliminates the transaction costs of having to negotiate with every person in the world. In return for these savings, it is legally presumed you have read and understood the contract, whether you did or not.... So what's the problem ? The contract said what they would get, they just didn't read it.

Well, I can think of a number of problems with those protests:

• The process of dis-intermediation is now so advanced that, arguably, insurers cannot pretend that the policyholder is not in fact relying on them to do what the broker used to do i.e. advise on levels of cover;
• The insurer's duty of good faith arguably bolsters the latter argument;
• As lawyers, we often forget how arcane is even the simplest standard-form contract of insurance. Interpretation by an expert is the only reliable one;
• In theory, standard-form contracts and dis-intermediation benefit the consumer as well as the provider. In practice, the distribution of the benefits is very uneven, and the only casualties are found among consumers.

Are You Sure That You Do Not Have Cancer ?

"Life is a congenital condition", someone once said,"and it is terminal". If this were taken to a logical extreme, health and life insurance would become impossible. Sometimes, though, insurers like to test the logic.

Imagine it: you are in good health as far as you know, confirmed by the recent opinion of your own GP, and someone persuades you, as they do, that you need to buy some life insurance. So, you fill in the forms as diligently and honestly as you can, and the insurance company asks you to undergo a medical examination, which turns up nothing adverse. The policy is issued, but within weeks you have abdominal pains and before long you die of advanced pancreatic cancer.

"Wow, here is a great insurance coverage story" says Boston lawyer Stephen D. Rosenberg(from whom I learned of this case), and who would disagree ?

The life insurance policy contained a term - described as a condition precedent - under which the coverage only applied if the policyholder was in good health at the time of issuance. It was not in dispute that a)the policyholder did not know of his cancer and b) the cancer must have been present at the time of issuance. The life insurer sought to deny the claim, after his death, for the life insurance proceeds on the ground that the good health requirement was not met.

Mr Rosenberg hits it right on the head:

... what applicant would buy coverage, after being examined and having his medical records reviewed by the insurer prior to coverage being approved, if the coverage would vanish if, contrary to the knowledge of both the insurer and the insured, he was thereafter found to be terminally ill ?

The Massachusetts court agreed, but apparently had to discard precedent to do so, which is strange. It apparently invoked the "legitimate expectations of the insured" to do so, which is stranger still to a common-lawyer on this side of the Atlantic: over here, "legitimate expectations" has no place in contract law.

I doubt if the insurer would have succeeded over here, either, but to get the legal analysis right might pose problems.

Suggestions welcome !

Earthquake Cover

Last year, I wrote, more than semi-humourously, about my lack of earthquake cover. (In the meantime, my insurer has told me that I *do* have it - but that's not what the policy document says).

Per David Rossmiller , I now learn of another effort to justify the position:

... J. David Cummins and Neil A. Doherty of the Wharton School, University of Pennsylvania, explained this stuff a while back in a scholarly paper much better than I could, so I'll let them do the talking. Here's their explanation ...:

1) High-frequency, low-severity losses. These are losses that are numerous and small relative to industry resources. A good example is automobile collision losses. Although such losses may be considered a serious financial hardship to the individual insured, they are very small relative to the resources of the industry. Moreover, there are large numbers of such losses, most of which are statistically independent, meaning that the occurrence of any one accident is not usually associated with other, related accidents. For types of insurance where there are many statistically independent losses, insurers can exploit the statistical property known as the "law of large numbers.” The law of large numbers essentially says that when large numbers of statistically independent events are observed, the average loss becomes highly predictable. Or, in other words, the chances become small that the actual observed losses will deviate from expected losses by an amount which is large relative to the overall expected value of loss. This is the type of loss the insurance industry handles most effectively. By pooling together the losses of many individuals with statistically independent risk exposures, the industry is able to charge premiums which reflect the expected or average loss plus expenses and a relatively modest charge for risk bearing. The industry’s equity capital is more than adequate to absorb any adverse fluctuations in losses of this type.

(2) Low-frequency, high-severity losses. The second major type of loss is the type represented by large catastrophes, i.e., events that occur infrequently and are large relative to the resources of the insurance industry. This type of loss is much more difficult for the insurance industry to handle because the usual pooling mechanisms do not apply. The events are simply not sufficiently frequent for the law of large numbers to operate. For this type of loss, the insurer is essentially in the same position as the policyholder in the usual insurance transaction, i.e., the insurer faces a loss that amounts to a high proportion of its resources and that is highly uncertain or unpredictable. Low-frequency, high-severity losses cannot be handled effectively by the insurance industry acting alone. However, these losses can be diversified by pooling them with other economic events that are not usually the subject of insurance . . . .

I think that that confirms that it is most unlikely that I really have earthquake cover.

Norwich Union Initiative

I am not quite sure what to make of this.

Money Marketing reported last week that Norwich Union was writing to 5,000 holders of critical illness policies inviting them to rectify any failures of disclosure that they may have made when proposing for the policies.

On the one hand, as the insurer's spokesman said, those who deliberately with-held material information probably do not have any valid cover, and it has to be seen as a kindly gesture to offer them an opportunity to retrieve the situation.

On the other hand, some perfectly upright policyholders may be needlessly upset. Also - forgive my cynicism - I wonder how many will respond by volunteering information which was not with-held as a result of a failure of utmost good faith, but because the proposal form did not ask a clear enough question. Even more cynically, I suggest that some may give information which they did not have when they were proposing for the policy.

Dangerous Medical Records

The April/May issue of Ombudsman News, the bulletin from the UK's Financial Ombudsman Service ("FOS"), contains a case summary (ref. 61/04) of particular interest to me.

A claimant ("Mr L") under a critical illness policy was accused of reckless non-disclosure. Among other things, he had declared that he had not smoked in the 12 months prior to proposing for the policy (although he had been an occasional smoker of cigars just prior to that), whereas the insurer alleged that its investigations showed that he regularly smoked one cigar a day at the start of the 12-month period in question.

It turned out that the insurer's information came from Mr L's own medical records. However, his GP revealed to the FOS

that the computer system on which he entered details of patients' tobacco consumption was unable to record a minimum consumption of less than one cigar or cigarette per day

(emphasis added)

Before going any further, let me send my congratulations to the anonymous FOS case officer who got to the bottom of that story. More than one of his or her colleagues would have assumed that the medical records were more reliable than the policyholder, and would have quickly closed the case by rejecting the complaint.

By coincidence, a case in which I am currently advising raises similar concerns. The policyholder is accused of non-disclosure and I have just received copies of the evidence on which the insurer relies. All of that evidence consists of extracts from the "policyholder's own" medical records. (I put those words in quotation marks because, as is almost invariably the case, the policyholder had never seen these records before.) Some of the most crucial material is contained in a letter written by a specialist to the GP. The letter purports to briefly summarise the policyholder's recent history before going on to record the medical findings. It's unclear where the "history" is supposed to have come from, as it is inconsistent with other records. Despite that, it is what the insurer has chosen to "hang its hat on".

One wonders how often this happens without being discovered.

Drinking Problem ? Tell your Insurance Company

This is what utmost good faith requires, at least in British Columbia.

Michael Thomas of Vancouver firm Harper Grey summarises the factual background thus:

The Insured was a 52 year-old woman who had a long-standing problem with alcohol, but had never been diagnosed as being an alcoholic. She purchased a policy of travel insurance from the Insurer prior to travelling from her home in Vancouver to Denver, USA. At the time she purchased the policy, the Insured made a declaration that she was "in good health" and knew of "no reason to seek medical attention…".

The evidence adduced by the Insurer at trial showed that the Insured had been hospitalised the night prior to making the declaration after she had taken a prescription narcotic while in a state of a gross intoxication. The Insurer denied the Insured’s claim on the basis that she had failed to properly disclose the state of her health at the time the policy was purchased.

On those facts, the decision that the policyholder had failed to make full disclosure is understandable, even if not necessarily immune to criticism.

Note: Michael Thomas's RSS feed is accessible here

Norwich Union v Meisels

Many thanks to the good people at the Legal Practitioner/Consilio (home, by the way, of Charon Q.C.)for bringing this case to my attention.

It is an appeal by the insurance company against a London County Court decision that the policyholder was not guilty of non-disclosure or fraud. It looks very interesting because among the undisputed facts was an admission that the proposer incorrectly answered some questions about having been a director of companies that had been liquidated.

I have only just seen the report and now have to catch a train, so please feel free to beat me to a fuller consideration by reading the judgment here.

Update on Friday, May 16, 2008 at 03:17PM by Fergus O'Rourke

I hope that I am not being premature, but "the good people at Consilio" appear to have migrated to another home

Non-contestability

On an e-mail discussion list to which I belong, the question of whether insurance policies should have a "non-contestability clause" is the subject of lively discussion at present. If adopted, such a clause would require the insurance company to pay a claim immediately without question, with two provisos:

1.the insurer would have two years after acceptance of a proposal to confirm e.g. by investigating medical records, that full disclosure had been made

2. If evidence of fraud did emerge after payment had been made, the insurer could sue for return of the money

The context is that of insurance contracts where the policyholder's medical condition at inception is crucial to the terms of the contract. Such contracts would be health related in the main - critical illness and death (or life, as we prefer to say) policies.

The inclusion of a clause such as that discussed is attractive because of what occasionally happens.

Shortly after the policy is issued, the policyholder dies of a congenital problem, or visits the surgery and a cancerous lump is found. Naturally, the insurer is dismayed and suspects fraudulent non-disclosure of material information. Sometimes there has indeed been non-disclosure. Less often the non-disclosure is material and less often again the non-disclosure is wilfully fraudulent.

(I have no idea what the relative frequencies are. A contributor to the discussion, who is involved with claims, alleges that it is widespread in the UK, but in my experience just as central bankers are said to have forecast 7 out of the last 5 recessions, insurers "detect" 7 out of every 5 frauds).

Understandably, in such circumstances insurers feel it necessary to subject a claim to severe scrutiny. In practice, their stance is often, effectively and illegitimately, to oblige the claimant to prove that there is no fraud. This, of course, is impossible (proving a negative). Very often, payment is deferred for a long time, which causes immense distress to innocent claimants. Remembering that insurance contracts are supposed to bring about peace of mind, this is not satisfactory.

I have not made my mind up on where I stand on the issue of the proposed new term in these contracts. However, loth though I am to take the side of the insurance industry, it does seem to me to be a proposal that is likely to increase thier costs, both on the underwriting side and on the false claims side. I am yet to be persuaded that the gains for policholders are in reasonable proportion.

If you wish to join the discussion, you will have to persuade the list-owner that you are involved in the UK financial services industry in some way (journalists qualify, for example).For more information click here .

In accordance with the requirement of full disclosure of material facts, it is my unfortunate duty to tell you that the list has neither an archive nor (at present) a digest option. Also, list discipline is poor.

Deliberate or wilful acts: the case of Patrick v. Royal London

Policyholders are occasionally agreeably surprised to learn that they are in fact protected by their insurance, when something goes wrong expensively and "it was your own fault".

In fact, of course, one purpose of insurance contracts is precisely to offer protection against the unwanted and unexpected consequences of things that we do, even negligently: think of road traffic accidents. Experts, including lawyers, almost always carry insurance against their own negligence.

Insurers constantly worry, however, about what is quaintly referred to as "moral hazard" in connection with cover of this kind. Life is full of moral hazards, but the only one insurers have in mind is the risk that policyholders might be influenced by the fact of cover to do things they would not otherwise do and which might end up costing the insurers money.

For this reason, contracts often exclude from their scope the result of "deliberate" or "wilful"acts. The declared intention is to discourage policyholders from doing things which are purposefully harmful rather than accidental or a result of error. An example of the former might be a builder who, while erecting a building, deliberately damages the house next door because the owner is, say, a love-rival. When sued, he asks the insurance company to pay.

In practice, these situations are usually less clear-cut. It is surprising that there are so few reported cases on this aspect of the interpretation of insurance contracts. I suspect that this may be because, either on their own or with the encouragement of the insurer, policyholders decide not to claim when this exclusion is invoked.

 My favourite case is the Canadian one of the medical doctor who died after taking a drug over-dose.  The life insurance company tried to escape paying on the grounds that he had deliberately caused his own death, but were ordered to pay the claim by the court because the evidence was that it was likely that the overdose was accidental ! Read it here: http://scc.lexum.umontreal.ca/en/2003/2003scc16/2003scc16.html

The most recent case has been drawn to my attention by David Martin Clark (whose website http://www.onlinedmc.co.uk/insurance.htm I recommend to all those interested in insurance law).

The case is that of Patrick v. Royal London Mutual [2006] EWCA Civ. 421.  Mrs Patrick had a household insurance policy which included cover for accidental damage caused by her or any member of her family.  Her son lit a fire on a derelict premises which unfortunately consumed not only that premises but also a non-derelict property next to it.  The son, aged 11, testified that it had not been his intention to burn any building down, but simply to destroy the wooden structure he had built himself.  He claimed that he did not realise this could lead to the consequences that it did, and his testimony was accepted by the court.  On that basis, the English Court of Appeal held that the exclusion on Mrs Patrick's policy to the effect that the policy would not cover damage "wilfully" caused did not apply and the claim had to be paid.

Read the full judgment here: http://www.hmcourts-service.gov.uk/judgmentsfiles/j4172/patrick_v_rlmis_0306.htm

Insurance Law notes from earlier this year

(These notes were originally posted elsewhere on my website)

"Shop Around for the Best Insurance Cover"

For most people, in practice this means seeking the cheapest contract.

Like the related slogan, "cut out the middle man", this is one those phrases that can make you poor.

For some years now, I have sought to exploit this by promising to provide insurance at less than the cheapest quotation obtained elsewhere. There has been only one caveat: I will pay out no claims at all.

Perhaps unsurprisingly, I am still waiting for my first customer, and that is the way it will stay. Mind you, I have had to fend off some insistent people who seem to have some peculiar ideas of the purpose of having an insurance policy.

Insurance is arguably the most complex contract that we make on a regular basis. Even if all policies were the same - and they are far from being so - they would be difficult to understand, even for lawyers. (If it were otherwise, insurance premiums would be impossibly high). There is no insurance that covers everything that might happen to everyone. Even to benefit from the cover that is promised in a particular contract, a policyholder has to avoid some mistakes in starting the policy and making the claim.

It's not "rocket science" if you are careful and knowledgeable; but the same applies to rocket science.

Ideally, we should all use experts to select our insurance. They are called insurance brokers and their job is to ensure that we get the risk protection that we want at the best price.

Instead, in a crazy drive to be more "penny-wise, pound foolish", we gravitate to the lowest-price offer.

Sadly, the Irish Financial Regulator's presentation of its latest survey of consumer insurance costs feeds this further. That is not the intention, but it is an entirely predictable result. Few members of the audience, and probably none of those consumers who need to do it, will access the full report (at www.ifsra.ie) which is commendably clear on the proper weight to be given to price.
(I have no family, personal, social, commercial or professional  connections to any insurance brokers).

Posted on Saturday, March 11, 2006 at 10:52AM

An Exception to Uberrima Fides

My attention has recently been drawn (by the excellent Cameron McKenna website www.lawnow.com) to a decision of the English High Court which confirms that, in certain well-defined circumstances, a failure to disclose the real identities of those seeking insurance does not amount to a breach of  the duty  of utmost good faith. The case is Talbot Underwriting v. Nausch Hogan & Murray [2005] EWHC 2359 (Comm) and is available on www.bailii.org.

The exception is known as the "undisclosed principal" one, and I have to admit that it was new to me. I am still studying the decision, and I expect that I will have more to say about it in due course.

Posted on Sunday, March 5, 2006 at 09:34AM

I wrote a few weeks ago about the English case of Talbot V NHM & Others.David Martin-Clark , whose website is a very useful compendium of insurance law cases from the UK and Commonwealth, has now added a fairly full note on it. Understandably, because the decision was that the undisclosed principal exception did not apply in the particular case, there is not much on that point itself. I will therefore probably return to it here in a future note.

Posted on Wednesday, April 26, 2006 at 02:30PM

Damn Lawyers Again

I had occasion to examine my household insurance policy recently and was a little surprised to note that damage from earthquakes is excluded from the cover. I have not done anything about it yet and perhaps there is nothing that I can do.

I still find it a bit odd, though, and disconcerting: Cork is not entirely immune from seismic activity. Looked at from the other side, why does the insurer exclude it ? Does the industry know something that I don't ? (What a thought ! With such ramifications ! I must return to it some day). Surely offering the cover is an easy way to make money ?

It got me thinking about what went into the insurance company's decision to exclude earthquake cover and how I could persuade them to offer it to me. And then, the other day, serendipity intervenes and I find the following imaginary dialogue from Ron Baker at www.verasage.com.  He is actually having a tilt at the way (some) lawyers price their services. (The sentence which I have underlined is a gem):

Insurance Company Agent (ICA):  "Good afternoon, CSAA, how may I help you."

Ron: "Hello, this is Ron Baker and I am interested in earthquake coverage for my home."

ICA: "Excellent, Mr. Baker. I see you've been a customer with us for nearly 30 years. We will take excellent care of you, as we have in the past."

Ron: "Great. How much would the standard earthquake coverage premium be for my home ?"

ICA: "Before I answer, Mr. Baker, I need to ask you if you are aware of the fact that our company was recently acquired by a consortium of lawyers and CPAs ?"

Ron: "Uh, no, I wasn't aware of that. Congratulations, I think."

ICA: "Thank you. You see, at their recent partnership retreat they had what's known as a BFO (Blinding Flash of the Obvious). You see, Mr. Baker, we really don't know how much it is going to cost to insure your home against an earthquake. There are far too many risks and uncertainties in this line of business. We don't know how big the next quake will be, where it will hit, or what the damage will be to our policyholders homes. How could we possibly give you a fixed price under these conditions, which is what our new owners asked themselves during the retreat. I think you agree that is certainly a conundrum, no ?"

Ron: "I guess, but how I am suppose to know if I can even afford this extra coverage ? How can I make a prudent and informed buying decision on the value of the coverage if I don't know the price ?"

ICA: "I understand the question, Mr. Baker, and it's a good one. In fact, I've been getting it all week from our policyholders. Our new owners answer is that it would not be fair to charge you a premium that exceeded the actual damages, plus a normal rate of profit of course, including the time value of money. Nor would it be fair to charge you a premium that did not cover the actual damages, plus a normal rate of profit, of course. So you see, we simply can't give you a price for your earthquake insurance. There are just too many variables. Does that answer your question ?"

Ron: "Not really. I can't really make a decision about this until I know the price."

ICA: "Well, Mr. Baker, I understand your dilemma, but I don't think you're viewing this from our perspective. The new way it works is as follows: We put your name on the earthquake insurance list, along with the date you decided to opt for coverage. Heaven forbid, if an earthquake were to strike, and your home is damaged beyond the deductible, you will submit a claim. We will aggregate all the claims we receive, tally them up, then divide by the number of policyholders on the list, adjusted by a complicated equation for time. We will then simply send you a bill for the retroactive costs since you've been covered, adding a normal profit and the time value of money, of course."

Ron: "How do I know that your costs will be accurate ?"

ICA: "Mr. Baker, I'm not sure I appreciate the tone of that question. We here at CSAA are very fastidious and ethical. Our costs accountants are excellent CPAs, who will carefully, and accurately, keep track of all outflows. I really think you must put yourself in our shoes. There is simply no other way to give you a fair price, wouldn't you agree ?"

Ron: "But I know the price of everything else I purchase before I buy for it."

ICA: "Well that may be true for commodities like groceries and clothing, but it's certaintly not true for law, accounting, and other professional services, is it now, Mr. Baker ?"

Ron: "Touche."