The Limits Of Contractual Discretion: UK Acorn Finance Limited V Markel (UK) Limited [2020] EWHC 922 (Comm)

• Published date: 30 July 2020
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Insurance, Litigation, Mediation & Arbitration, Financial Services, Contracts and Commercial Law, Insurance Laws and Products, Arbitration & Dispute Resolution, Trials & Appeals & Compensation
• Law Firm: 4 New Square Chambers
• Author: Melody Ihuoma

In UK Acorn Finance Limited v Markel (UK) Limited, HHJ Pelling QC applied the Supreme Court's decision in Braganza v BP Shipping Limited [2015] UKSC 17 in the context of an insurance dispute. The Judge found that an insurer had acted irrationally in concluding that misrepresentations made by the insured in risk profile documents were fraudulent. In particular, when exercising its contractual decision-making power, the insurer had failed to give due weight to the maxim that it was inherently more probable that any misrepresentation had been made negligently rather than dishonestly.

HHJ Pelling QC's decision is considered by Melody Ihuoma of 4 New Square.

THE FACTS

The Claimant brought a claim against the Defendant insurers under sections 1(1) and (1)(4) of the Third Party (Rights Against Insurers) Act 1930 (the "Act").

The Claimant sought to recover an indemnity with respect to two judgments it had obtained against Westoe 19 Limited (formerly Colin Lilley Surveying Limited) ("CLS"), a limited company whose business was property valuation.

The underlying claim concerned a number of valuations undertaken by CLS for the Claimant between 11 June 2010 and 30 March 2012, which the Claimant alleged had been negligent. Letters of claim were sent to CLS in 2013.

CLS was insured under professional indemnity policies underwritten by the Defendant in 2013 and 2014 ("the Policies"). However, by a letter dated 8 February 2016, the Defendant purported to avoid the Policies. Soon after, default judgment was entered against CLS in each of the claims brought against it.

The Defendant maintained that it was entitled to avoid the Policies as a result of misrepresentations and non-disclosures contained in or evidenced by risk profile documents generated by the Defendant prior to the renewal of each of the Policies and approved on behalf of CLS. In particular, CLS had failed to inform the Defendant that it had carried out work for subprime lenders (defined by the Defendant as institutions which were not high street lenders or building societies). Prior to the renewal of the policy in 2014, CLS notified the Defendant of a claim made against it by Waterman Capital, which was not a high street lender or building society, with respect to valuation work carried by CLS.

Under the Policies, CLS's representations took effect as warranties. Further, the Policies were each subject to an unintentional non-disclosure clause ("the UND"), and it was common ground between the parties that, therefore, the Defendant could avoid the Policies only if the misrepresentations were not innocent and free from any fraudulent conduct or intent to deceive.

THE TERMS OF THE POLICIES

The terms of the Policies were broadly the same in 2013 and 2014. Each policy contained a preamble that included the following statement:

"Underwriters having received a Proposal which shall form the basis of and be incorporated in this contract and in consideration of the Premium having been paid to Underwriters, We agree to pay or indemnify to the extent and in the manner herein provided subject to the terms, limitations, exclusions and conditions of this Certificate."

The Policies contained the following definitions:

""Assured/You/Your/Yours" shall (for the purpose of the General Exclusions, Claims Conditions, General Conditions and all other General Definitions) have the same meaning as that given in the applicable Insuring Clause under which payment or indemnity is being sought.

" Claim" shall mean

(i) any claim form, writ or summons or other application of any description whatsoever or counter claim issued against or served upon You, or

(ii) any communication or allegation communicated to You which might result in a Loss

. . .

"Our / Us We" shall mean the Underwriters

. . .

"Proposal" shall mean all information supplied to Us (whether by written, electronic or any other means) for the purpose of effecting this contract of insurance."

Under the Policies, an insuring clause provided: "We agree to indemnify You against Loss, arising from any Claim made against You during the Period of Insurance in respect of a Wrongful Act in or about the conduct of the Professional Services."

The UND provided as follows:

"(a) In the event of non-disclosure or misrepresentation of information to Us, We will waive Our rights to avoid this Insuring Clause provided that

(i) You are able to establish to Our satisfaction that such non-disclosure or misrepresentation was innocent and free from any fraudulent conduct or intent to deceive

(ii) the Premium and terms shall be adjusted at Our discretion to those which would have applied had such circumstances been disclosed

(iii) where You should have notified a Claim during a preceding Period of Insurance and the indemnity or cover to which You would have been entitled was in any way more...