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Innocent Non-Disclosure Clauses: The limits of Insurer discretions

  • United Kingdom
  • Financial services disputes and investigations
  • Insurance and reinsurance
  • Financial services - Insurance market



The Commercial Court has recently confirmed that where an Innocent Non-Disclosure (“IND”) clause requires the insured to establish to the insurer’s satisfaction that it has not made non-disclosures and/or misrepresentations fraudulently, it will be implied into the clause that the insurer must exercise its discretion in a rational way[1]. In particular, when evaluating the evidence, the insurer should bear in mind that it “it is inherently more probable that a misrepresentation has been made innocently or negligently rather than dishonestly”. Insurers would be well-advised to consider this principle whenever assessing potentially fraudulent conduct by an insured and not simply when exercising a discretion under an IND clause.

The Facts

The case concerned a claim under the Third Parties (Rights against Insurers) Act 2010. The claimant had secured two judgments against the insured firm of surveyors in respect of certain negligent overvaluations. Insurers sought to avoid the policies in question on the grounds that the insured had dishonestly failed to disclose that it was acting for sub-prime lenders, which the insurer had defined to be any lenders other than high street lenders and building societies. The insured claimed to be proceeding on the assumption that the term “sub-prime” applied only to the residential market and it therefore continued to conduct commercial valuations for non-high street lenders and building societies.

The Clause

The relevant clause provided as follows:


(a)      In the event of non-disclosure or misrepresentation of information to Us, We will waive Our rights to avoid this [policy] 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…”

The Implied Term

HHJ Pelling QC reached the decision primarily by applying Braganza v BP Shipping Limited [2015] UKSC 17. The Supreme Court in that case confirmed that where a contract confers a power on one party to make decisions which affect the rights of both parties, a term will be implied that the power must be exercised in a way which is not arbitrary, capricious or irrational.

The Court rejected submissions that the Braganza principles do not apply to insurance and reinsurance contracts - indeed it held that an IND clause was a “classic example” of a clause intended to be caught by the decision.

Under Braganza, the implied term requires the decision-maker (a) not to take into account matters that it should not take into account and to take into account only matters which it should take into account and (b) not to come to a conclusion that no reasonable decision maker could ever have come to – the so-called “Wednesbury” test named after the Court of Appeal judicial review case from which it derived.

The extent of the Court’s review

The relevant line of authority clearly establishes that the Court will not substitute its own judgment for that of the contractual decision-maker – it will merely assess whether the decision was made in accordance with the Wednesbury test.

Further, the Court will not interfere where an error under the first limb (taking into account irrelevant considerations or failing to take account of relevant ones) would not have made a substantial difference to the result.

The IND Clause context

HHJ Pelling QC confirmed that, in applying the second limb (which bars a decision that no reasonable decision-maker could come to), it was necessary to consider previous direction from the courts that the “more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probabilities…[2].

Thus an insurer with a right to determine whether a non-disclosure or misrepresentation has been fraudulent under an IND clause should bear in mind that it is “it is inherently more probable” that it was innocent or negligent, rather than dishonest.

However, where (as is not unusual) the IND clause places the burden of proof on the insured to show that the disclosure was not fraudulent, the insurer does not need to go as far as to prove that there was a fraud in order to rely on the clause.

The decision

The judge held that the Insurer’s claims handler’s decision-making had not passed the Wednesbury test as he had failed to approach the decision with an open mind and had not considered that it was more likely that a non-disclosure or misrepresentation is negligent than dishonest.

In addition, the individual in question had failed to take into account a relevant consideration i.e. the fact the insured had notified a claim arising from a sub-prime commercial property valuation was not consistent with a desire to conceal that it was conducting that type of work in the first place.


In our experience insurers do not take lightly decisions to avoid policies containing IND clauses, not least because of the potential adverse reputational impact. On the other hand insurers do of course need to take action to deter fraud where appropriate.

The facts of this case do not reflect a gung-ho approach by the insurer, much less in circumstances where there has been little legal guidance until now. However, going forwards, insurers will need be wary of the need to take into account only material considerations when performing the assessment in order to ensure that their decision is defensible in the worst case scenario.

In particular, the decision-maker should not confuse whether the insured’s actions were “objectively justifiable with what his subjective but genuine belief was”, however misguided those actions may appear. In addition, those making the decision should not be influenced, even to a minor extent, by considerations that are immaterial to the insured’s honesty, such as the fact that its processes were shambolic. Nor should they ignore evidence consistent with an honest approach taken by the insured, although the courts are likely to accept that the weight ascribed to such evidence is a matter for the decision-maker.





[1] UK Acorn Finance Limited v Markel (UK) Limited [2020] EWHC 922 (Comm)

[2] Re H (Minors)(Sexual Abuse: Standard of Proof) [1996] AC 563