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How to interpret questions on insurance proposal forms… and when they go wrong

September 2021
Andrew Jones

As Andrew Jones and Daniela Miklova report, the recent case of Ristorante Limited t/a Bar Massimo v Zurich Insurance plc [2021] EWHC 2538 is a useful insight into how the Court will interpret the questions and answers in insurers’ proposal forms in coverage disputes. It also shows how insurers can lose potential policy defences through the drafting of proposal form questions going wrong.

In Ristorante, the Claimant company was the owner of a restaurant. In January 2018, there was a fire at the restaurant, resulting in the Claimant seeking an indemnity under its insurance policy with Zurich for losses totalling some £633,000.

Zurich, however, avoided the policy on the grounds of material misrepresentation and non-disclosure.

The Proposal Form

Zurich relied on the Claimant’s answer to what was referred to as the “Insolvency Question” in Zurich’s online proposal form. This asked the Claimant to agree or disagree with the statement:

“No owner, director, business partner or family member involved with the business… has ever been the subject of a winding-up order or company/individual voluntary arrangement with creditors, or been placed into administration, administrative receivership or liquidation.”

The Claimant answered “Agree”, representing that the statement was true.

Eagle-eyed readers may have already noticed the problem with the Insolvency Question:

  • The first part of the Insolvency Question asks about owner/directors etc of the Claimant company– in this case, as would be common, these were all individuals.
  • However, all but one of the insolvency events in the second part of the Insolvency Question – winding up orders, CVAs, administrations and liquidations – are all insolvency events applicable only to companies. There was no mention of bankruptcy, which applies to individuals.

The three directors of the Claimant company had all been directors of other companies that had gone into insolvent liquidation.

The questions for the Court were, therefore:

  1. What was the proper interpretation of the Insolvency Question? Was it wide enough to include the liquidations of the directors’ other companies, or just limited to insolvency events of the directors themselves?
  2. If the Insolvency Question did not include the insolvency events of the directors’ other companies, had Zurich waived the need for the Claimant to disclose these by limiting the question to just the directors’ own insolvency events?

(1) Interpretation of the Proposal Form

The Claimant argued it had answered the Insolvency Question correctly and there was no misrepresentation because the question simply asked about the insolvency events of the owner/directors etc, and did not ask about insolvency events of any of their other companies. In the alternative, the Claimant argued its interpretation was objectively reasonable and therefore there was no misrepresentation.

Zurich argued this was an overly literal interpretation given the Insolvency Question was primarily concerned with insolvency events that could only affect companies, and the only sensible meaning was the question was therefore directed at the other companies in which the directors were involved. If that was correct, the Insolvency Question was clearly answered wrongly.

The Court provided a useful summary of the approach to interpreting proposal forms, in particular:

  • Like with all contractual documentation, interpreting proposal forms involves identifying the objective meaning of the words employed rather than the subjective intention or understanding of the parties.
  • If there is genuine ambiguity in a proposal form prepared by insurers, it will be resolved in favour of the policyholder.

The Court had regard to the context with the preceding questions and the fact that a company could be an owner/director of the policyholder and therefore be subject to the corporate insolvency events listed in the Insolvency Question. The Court ultimately concluded the clear objective meaning of the Insolvency Question was that it was directed only at insolvency events of the owner/directors personally and not to their other companies in which they had an interest.

The Court went on to say that, even if this was not the case, it would have accepted the Claimant’s alternative case that the Claimant’s interpretation to this effect was reasonable, and this therefore meant there was no misrepresentation.

Interestingly, the meaning of similar (unfortunately drafted) proposal form questions about insolvency has been considered in two previously reported cases, which the Court in Ristorante considered: Doheny v New India Assurance Co (2005) and R&R Developments v Axa Insurance UK plc (2010). In both cases, the directors of the policyholder had also been directors of other companies subject to insolvent events. One case went for insurers, and one went against:


Dohney:

“No director/partner in the business, or any Company in which any director/partner have had an interest, has been declared bankrupt, been the subject of bankruptcy proceedings or made any arrangement with creditors.”

As can be seen, this question referred only to an insolvency event, “bankruptcy”, which is only relevant for individuals.

However, the Court found a reasonable person would interpret “bankruptcy” in this question to mean insolvencies of companies, too, even though bankruptcy does not strictly apply to companies, given the reference to “or any Company in which the director/partner have had an interest”. Therefore, there did need to be disclosure of the insolvencies of the directors’ other companies. Avoidance upheld.

R&R Developments:

“Have you or any … Directors either personally or in connection with any business in which they have been involved … Ever been declared bankrupt or are the subject of any bankruptcy proceedings or any voluntary or mandatory insolvency?”

In contrast, the Court found this question did not require the disclosure of the other insolvency of the directors’ other companies, given the question was only directed at the personal insolvencies of the directors.


The Court found the Insolvency Question was more like that question in R&R Developments directed only at the insolvency events of the directors of the Claimant and not their other companies. The Court distinguished Doheny, given the question in that case had expressly also referred to “or any Company in which any director or partner have had an interest”.

The Court also dismissed an argument by Zurich that, given the Claimant retained an insurance broker to obtain the policy, the meaning of the Insolvency Question should be interpreted from the perspective of a reasonable insurance broker, who would understand the question was intended to be directed more widely. However, the Court dismissed this argument on the basis that there did not exist any evidence for how a reasonable insurance broker would interpret the question nor were there any authorities to support Zurich’s argument that the perspective of the insurance broker was the correct one.

(2) Waiver of the duty to disclosure

Even though the Insolvency Question was found to be directed only at the directors personally, the Claimant accepted that the previous liquidations of the directors’ other companies were material and, unless waived by Zurich, the Claimant still had a duty to disclose these. Such previous liquidations are a well-known moral hazard for property and business insurers.

The Claimant argued that, by limiting the question about insolvency events to those of the directors only, Zurich had waived the Claimant’s duty to disclose the insolvency events of the directors’ other companies.

This argument relied upon the principle that, if an insurer asks specific questions in a proposal form about a particular subject, it may be inferred that the insurer has waived its right to information on the same subject matter that falls outside of the scope of the specific question. A classic example is if a motor insurer asks a question of how many accidents the policyholder has had in the past three years, it implies it does not want to know of accidents more than three years ago and so has waived the policyholder’s duty to disclose such accidents even if they were material.

The Court accepted this principle applied to the Insolvency Question and, by Zurich asking only about past insolvency events for the directors personally, a reasonable person would understand Zurich did not wish to know about and thereby waived the Claimant’s requirement to disclose the insolvency events of the directors’ other companies. The Court found that the fact that the proposal form expressly warned that the Claimant was under an obligation to disclose material facts did not change this conclusion.

Comment

Firstly, this decision should serve as reminder of the importance of insurers carefully considering what information they do and do not want to know on particular subjects and ensuring the questions on their proposal forms properly address these. Otherwise, insurers may unintentionally waive material information which they still want to know for underwriting. Big, bold repeated warnings for policyholders to disclose all material facts will not save insurers in these circumstances.

Secondly, Doheny shows that all is not lost for insurers if the drafting of questions in a proposal form question does go wrong. The interpretation of proposal forms is very wording-specific. A Court may still be willing to depart from a pure, literal interpretation of the question. However, this will likely only be in the clearest cases. If there is ambiguity, it will be resolved in the policyholder’s favour.

Thirdly, although applicants must uphold their duty to disclose all material facts, this decision reinstates that it is not a policyholder’s duty to decipher what is required by questions which potentially have different interpretations. If the policyholder’s interpretation is reasonable, an insurer will not be able to avoid just because its own interpretation might also be reasonable.

Insurers should review their proposal forms regularly and ensure that questions reflect recent case-law developments. In Ristorante, the Court specifically said that the insurance market should be expected to know the decisions in Doheny and R&R Developments and the risks, therefore, of limited or vague questions. Don’t be the next reported case!

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