The Inexorable Rise Of Inducement

If an assured fails to disclose material facts or makes a material misrepresentation when negotiating an insurance policy, the insurer may avoid that policy ab initio. The effect of avoidance is that all unpaid claims on the policy become irrecoverable and all past claims (and, in the absence of fraud, the premium) must be returned.

In looking at the Marine Insurance Act 1906, one could be forgiven for thinking that material non-disclosure or misrepresentation are all that an insurer needs to prove in order to avoid the contract. However, since the landmark House of Lords decision in Pan Atlantic v Pine Top [1994] 2 Lloyd's Rep 427, it has been clear that the insurer must also show that its actual underwriter was 'induced' to write the policy by that non-disclosure or misrepresentation. In this article we consider the key elements of the inducement requirement.

The test of inducement

The test of inducement is whether the insurer would have underwritten the risk on precisely the same terms as those which he did, had the assured made full and accurate disclosure of all material matters. The non-disclosure or misrepresentation need not be the sole cause of the inducement but it must be an effective cause of the insurer entering into the contract (Assicurazioni Generali v ARIG [2003] Lloyd's Rep IR 131).

A presumption of inducement?

It is sometimes suggested that inducement may be presumed once the materiality of any non-disclosure or misrepresentation has been proven. In Assicurazioni, however, the Court of Appeal held that "there is no presumption of law that an insurer or reinsurer is induced to enter into the contract by a material non-disclosure or misrepresentation. The facts may, however, be such that it is to be inferred that the particular insurer or reinsurer was so induced even in the absence of evidence from him." In other words, it is not a universal inference but will depend on the facts.

Proving inducement

In the absence of any presumption, the question of how inducement may be proved has become increasingly pertinent. The Court of Appeal ruling in Laker Vent v Templeton [2009] Lloyd's Rep IR 704 indicates that an insurer will not be excused from proving inducement simply because it is in dispute with the individual underwriter who wrote the risk. Here, the former underwriter had not given evidence at trial; he had already left the company and was in dispute with it. The trial judge decided that he was not prepared to speculate...