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“But for” Causation Again – Proof of Inducement in Non-Disclosure Cases - Zurich v Niramax [2021] EWCA Civ 590

  • United Kingdom
  • Insurance and reinsurance
  • Litigation and dispute management

28-05-2021

Introduction

The recent Court of Appeal case of Zurich Insurance Plc v Niramax Group Limited [2021] EWCA Civ 590 confirmed that an insurer cannot rely on the “but for” test alone to establish that it was induced by a material non-disclosure.  Instead, it is necessary to demonstrate that the material non-disclosure was the ‘efficient’ cause of the difference in policy terms that would have been offered by the insurer in the counter-factual.

The Court also cited the recent Supreme Court business interruption test case of Financial Conduct Authority v Arch Insurance (UK) Ltd [2021] UKSC 1 in observing that the efficient cause test can still be satisfied yet the ‘but for’ test is not, albeit that this was not such a case.

Background

In 2015 the respondent, an operator of several recycling facilities, sought to renew an existing insurance policy covering equipment at its site in Hartlepool, as well as to extend cover for newly-installed equipment at the same location.  However, it did not disclose that another of its insurers had imposed a number of risk mitigation requirements at the same facility, not all of which the insured had complied with.  

It was a key part of the factual background that the appellant insurer had mispriced the policy due to a technical error by a junior underwriter before it was entered into in December 2015.

The appellant insurer subsequently sought to avoid the policy on the basis of material non-disclosure, following which the insured commenced proceedings for a declaration that the purported avoidance was not valid.

In the Commercial Court, Cockerill J held that while the undisclosed facts were material,  inducement was not established.  The Court found that had the true facts been disclosed, it would have been referred to the senior underwriter, who would have corrected the pricing mistake but would still have written the risk for a number of reasons, including the parties’ long-standing relationship and the fact that most of the risk requirements had actually been complied with.

The insurer appealed the Judgment on the basis that in order to establish inducement it was only necessary to show that the policy terms would have been different “but for” the non-disclosure.  Thus it argued to the Court of Appeal that it had established inducement since the Commercial Court had found that the pricing error would have been corrected had there been no non-disclosure.

Court of Appeal Decision

The Court of Appeal rejected the appellant’s argument.  It confirmed that the non-disclosure must have been an “efficient cause” of the difference in terms rather than merely a “but for” cause. In doing so, the Court clarified that there must be some effect which the undisclosed or misrepresented facts have on the mind of the underwriter, citing Pan Atlantic Insurance Ltd v Pine Top Ltd [1995] 1 AC 501, amongst other cases. 

The Court revisited the principles of inducement as espoused by Clarke LJ in Assitalia v Arig, namely:

“(i) In order to be entitled to avoid a contract of insurance or reinsurance, an insurer or reinsurer must prove on the balance of probabilities that he was induced to enter into the contract by a material non-disclosure or by a material misrepresentation.

(ii) There is no presumption of law that an insurer or reinsurer is induced to enter in the contract by a material non-disclosure or misrepresentation.

(iii) 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 from evidence from him.

(iv) In order to prove inducement the insurer or reinsurer must show that the non-disclosure or misrepresentation was an effective cause of his entering into the contract on the terms on which he did.  He must therefore show at least that, but for the relevant non-disclosure or misrepresentation, he would not have entered into the contract on those terms. On the other hand, he does not have to show that it was the sole effective cause of his doing so.” (our underlining)

The insurer sought to rely on the reference to the “but for” test in sub-paragraph iv) of the above extract as establishing the relevant causation standard.  However, the Court of Appeal stated that such reliance was misplaced, since the words “at least” demonstrated only that the ‘but for’ test would generally need to be satisfied if the efficient cause test was to be met.  

The Court also noted in passing that (exceptionally) the efficient cause test could sometimes be met where the “but for” test was not – it cited the FCA Test Case in support.

The outcome was thus that the insurer had no entitlement to avoid the policy.

Commentary

This case is a helpful reminder of the need for an insurer to prove inducement even where materiality is established.  Proof of materiality and inducement do not always go hand in hand, especially in cases such as this one where the Court had found there was a long-standing relationship between the insurer and the insured which meant the underwriter would likely to have taken a lenient approach had full disclosure been made.

It is also noteworthy that the case pre-dated the application of the Insurance Act 2015.  The Act provides that inducement is a gateway to the menu of proportionate remedies which depend upon what the underwriter would have done if there had been no breach of the duty of fair presentation. 

Interestingly, the Act expresses inducement in terms of a “but for” test without expressing (as this case did) that the test is the minimum standard, or indeed that sometimes such a test may not be appropriate in the inducement context.  However, there would have been no entitlement to avoid under the Act either because the insurer could not show that it would not have entered into the policy at all had there been no breach (albeit that proportionate reduction of the claim would have been applicable based on the higher premium that would have been charged). 

The case also highlights that distinctions sometimes exist between the “but for” and “efficient cause” tests of causation, if that were at all necessary in light of the FCA Test Case.  Thus, more generally speaking, causation remains a subject that should be approached with care from the outset, rather than as an after-thought only after all other elements of a good claim or defence have been established.