Insurance: ATE Insurers Avoid For Non-Disclosure And/Or Misrepresentation

Underwriters of an After-the-Event (ATE) insurance policy may be entitled to avoid for material misrepresentation and non-disclosure where the insured's claim is found to be based on dishonest evidence. So the court found in a recent case which saw the successful defendant in the underlying proceedings unable to rely on ATE insurance cover obtained by the claimant to cover costs which had been awarded in favour of the defendant.

The defendant claimed directly against the insured's ATE insurers for its costs under the Third Parties (Rights Against Insurers) Act 1930 since the original claimant had been wound up soon after judgment in the underlying action. The ATE insurers sought to avoid for misrepresentation and non-disclosure relying on the principle that the third party claiming direct against an insurer under the 1930 Act cannot be in any better position than the insured would have been had it claimed from the insurer. Specifically, the ATE insurers relied on the findings of the court in the underlying proceedings that the claimant's claim had been fraudulent, in the sense that the claimant knew that the claim was bound to fail and/or was based on dishonest evidence.

The defendant argued that any finding by the judge in the underlying proceedings that the claim was fraudulent should be disregarded. That was rejected by the court. It followed from this that the defendant's claim failed.

The court proceeded, however, to review the position in the event that the claimant had not presented a fraudulent claim but had during the placement provided dishonest evidence to bolster what they thought was a legitimate claim. The court held that in these circumstances, too, the ATE insurers were entitled to avoid. The court concluded that the ATE insurer had been induced by the misrepresentations/non-disclosures in the evidence presented to it to allow it to evaluate the claim and decide whether to underwrite the risk. The court rejected the defendant's argument that the ATE insurer had been negligent in its underwriting so that it would have had no regard to full disclosure and accurate representations. The court also rejected the contention that the ATE insurers had affirmed the policy by failing to avoid at certain points when it knew of the facts which gave rise to the right to avoid.

The decision is, on its face, limited to cases where there the insured has been dishonest in either presenting the claim to ATE insurers or in bolstering the...